10.

1 HSC Topic One The

Global Economy
The focus of this study is the operation of the global economy and
the impact of
globalisation on individual economies.

10

Content: Economics HSC Course

10.1 HSC Topic One The Global Economy

25% of indicative time
The focus of this study is the operation of the global economy and the impact
of globalisation on individual economies.

Outcomes
A student:
H1
demonstrates understanding of economic terms, concepts and
relationships
H2
analyses the economic role of individuals, firms, institutions and
governments
H3
explains the role of markets within the global economy
H4
analyses the impact of global markets on the Australian and global
economies
H5
discusses policy options for dealing with problems and issues in
contemporary and hypothetical contexts
H6
analyses the impact of economic policies in theoretical and
contemporary Australian contexts
H7
evaluates the consequences of contemporary economic problems and
issues on individuals, firms and governments
H8
applies appropriate terminology, concepts and theories in
contemporary and hypothetical economic contexts
H9
selects and organises information from a variety of sources for
relevance and reliability
H10 communicates economic information, ideas and issues in appropriate
forms
H11 applies mathematical concepts in economic contexts

H12

works independently and in groups to achieve appropriate goals in set

timelines.

Content
Students learn to:
Examine economic issues

examine the effects of globalisation on economic growth and the quality

of life, levels of unemployment, rates of inflation and external stability

assess the potential impact on the environment of continuing world

economic development

investigate the global distribution of income and wealth

assess the consequences of an unequal distribution of global income and

wealth

discuss the effects of protectionist policies on the global economy

Apply economic skills

analyse statistics on trade and financial flows to determine the nature and
extent of global interdependence

assess the impact on the global economy of international organisations

and contemporary trading bloc agreements

evaluate the impact of development strategies used in a range of

contemporary and hypothetical situations.
Students learn about:
International economic integration

the global economy

Gross World Product

globalisation
trade in goods and services
financial flows
investment and transnational corporations
technology, transport and communication
international division of labour, migration

the international and regional business cycles

Trade, financial flows and foreign investment

the basis of free trade its advantages and disadvantages

role of international organisations WTO, IMF, World Bank, United

Nations, OECD

influence of government economic forums G20, G7/8

trading blocs, monetary unions and free trade agreements

advantages and disadvantages of multilateral (EU, APEC, NAFTA,
ASEAN) and bilateral agreements
Protection

reasons for protection infant industry argument, domestic employment,

dumping, defence

methods of protection and the effects of protectionist policies on the

domestic and global economy tariffs, subsidies, quotas, local content
rules, export incentives
Globalisation and economic development

differences between economic growth and economic development

distribution of income and wealth

income and quality of life indicators

developing economies, emerging economies, advanced economies

reasons for differences between nations

effects of globalisation

trade, investment and transnational corporations

environmental sustainability

the international business cycle.

Case study
Undertake a case study of the influence of globalisation on an economy other
than Australia, including an evaluation of the strategies used to promote
economic growth and development in this economy.

Outcomes
A student:
H1 demonstrates understanding of economic terms, concepts and
relationships
H2 analyses the economic role of individuals, firms, institutions and
governments
H3 explains the role of markets within the global economy
H4 analyses the impact of global markets on the Australian and
global economies
H5 discusses policy options for dealing with problems and issues in
contemporary
and hypothetical contexts
H6 analyses the impact of economic policies in theoretical and
contemporary
Australian contexts
H7 evaluates the consequences of contemporary economic
problems and issues
on individuals, firms and governments
H8 applies appropriate terminology, concepts and theories in
contemporary and
hypothetical economic contexts

H9 selects and organises information from a variety of sources for

relevance and
reliability
H10 communicates economic information, ideas and issues in
appropriate forms
H11 applies mathematical concepts in economic contexts
H12 works independently and in groups to achieve appropriate
goals in set
timelines.

Content
Students learn to:
Examine economic issues
examine the effects of globalisation on economic growth and the
quality of life,
levels of unemployment, rates of inflation and external stability
assess the potential impact on the environment of continuing
world economic
development
investigate the global distribution of income and wealth
assess the consequences of an unequal distribution of global
income and wealth
discuss the effects of protectionist policies on the global economy
Apply economic skills
analyse statistics on trade and financial flows to determine the
nature and extent of global interdependence
assess the impact on the global economy of international
organisations and contemporary trading bloc agreements
evaluate the impact of development strategies used in a range of
contemporary and hypothetical situations.

Students learn about:

Terms:
Debt relief
Brain drain

Middle-income

The partial or total forgiveness of debt or the slowing

or stopping of debt growth
A problem in smaller advanced economies and
developing countries in which the skilled and educated
tend to migrate overseas in seek of more employment
opportunities
Where manufacturers find themselves unable to

trap

compete with low-income countries with lower costs of

labour and also with advanced economies in highervalue products
Transition of moving from resource-driven growth that
is dependent on cheap labour and capital to growth
based on high productivity and innovation. Requires
investment in infrastructure and education

International economic integration

the global economy
Post-Great Depression: a reduction in international economic links
as a reaction to the fear of financial contagion. Autarky was a
common government objective e.g. Nazi Germany, Maos China in
the 1950s
The 1970s saw a return to globalisation
Flows of goods, services and factors of production between
countries on global markets
Increased interdependency between nations
Growth in the size and number of transnational
corporations
Ceteris paribus:
All things being equal
Five sector circular flow of income model:

Equilibrium:
o Leakages = injections
o S+T+M=I+G+X
Disequilibrium:
o Leakages injections
o S+T+MI+G+X
Leakages > injections
S+T+M>I+G+X
Causes a recession or contraction in overall
economic activity
o Fall in levels of:
Income
Output
Expenditure
Employment
Leakages < injections
S+T+M<I+G+X
Causes a boom or expansion in overall economic
activity
o Rise in levels of:
Income
Output
Expenditure

Employment

Flows:
Real flow
o Flows of goods and resources

Money flow
o Income earned by households
o Expenditure by households on goods and money flows

Equilibrating mechanisms:
When S + T + M < I + G + X
o As household income increases:
Households have a higher marginal propensity to save
(saving in the financial sector will increase)
Taxation will increase
Spending on imports will increase
o This results in a rise in leakages until they equal injections and a
higher level of equilibrium is the result
When S + T + M > I + G + X
o As household income falls:
Households have a lower marginal propensity to save
(saving in the financial sector will decrease)
Taxation will decrease
Spending on imports will decrease
o This results in a fall in leakages until they equal injections and a
lower level of equilibrium is the result
The circular flow of income:

Expenditu
re

Productio
n

Income

Exchange rate:
The price of one countrys currency expressed in terms of another
countrys currency. It is the rate at which one currency can be
exchanged for another
E.g. the higher the exchange rate for one euro to one yen, the lower
the relative value of the yen. The exchange rate for euros to yen
may be 1.3, meaning it takes 1.3 yen to equal a euro in value.
Exchange rate=

Country A
Country B

Terms of trade:
Is the quantity of imports that can be purchased through the sale of
a fixed quantity of exports
Calculated by:
terms of trade=

Price of exportable goods

Price of importable goods

Is influenced by the exchange rate because a rise in the value of a

countrys currency lowers the domestic prices for its imports but
does not directly affect the price of the commodities it produces (its
exports).

Gross World Product

Gross World Product (GWP): the sum of total output of

goods and services that have been produced by all individual
economies in the world over a period of time
o An indicator of total production in the global economy
o GWP growth was 2.7% for 2011 and 2.5% (est.) for 2012
o The 2011 estimate was US $78.95 trillion
o It is indicated by Gross World Product
o Production is dominated by a few countries

Calculating real GDP:

Real GDP=

nominal GDP of current year

CPI of base year
CPI of current year

E.g.
Year

Nominal GDP
($million)
700
1000

1 (base year)
2

Consumer Price
Index (CPI)
220
310

1000
220=709.7 $ million (1 d . p )
310
real GDP=709.7 $ million ( 1 d . p )

Calculating real GDP growth:

Percentage change formula:
Real GDP growth=

Real GDP previous yea r ' s real GDP

100
Previous yea r ' s real GDP

E.g.

Year
1
2

Real GDP ($million)

600
800

800600
100
600

33.3 (1 d . p)

To calculate the real GDP growth from the first table, the real
GDPs of both years must first be found before using the
percentage change formula

globalisation

Definition: the breakdown of man-made and natural barriers

to the movement of labour, investment, technology, finance
and trade allowing an increase in cross-border transactions. It
involves the integration between different countries and
economies and the increased impact of international
influences on all aspects of life and economic activity
The differences between countries tend to diminish. They
homogenise.
Types of globalisation, resulting from liberalisation:

Liberalisation/ deregulation: a relaxation of government restrictions

o Political

Attempts to bring greater understanding between

nations so that differences may be resolved
peacefully through such organisations as the UN
Political interrelations between nations are
required due to closer economic integration
o Technological
Technology allows for easier communication
between nations and provides people with a global
perspective
o Cultural
Cultures spread beyond national boundaries and
this brings a greater awareness of other nations.
This may be referred to as multiculturalism. There
is also the effect of the eroding of traditional
cultures due to western-dominated globalisation,
for they are influenced by western culture
(Westernisation) and increasingly Asian culture
(Asianisation)
Global consumer cultures are emerging in which
tastes are influenced by global trends e.g. heavymetal related attire in the 1980s
These are largely facilitated by the increases
in communication and transport
technologies. They allow greater integration
between different cultures
These increase both imports and exports, for
foreign products are accepted into domestic
markets and it allows exporters to capitalise
on the trends of the world market
o Economic
The increased movement of goods and services,
investment and finance and productive resources
between nations
Factors driving globalisation
o Trade liberalisation
International trade has expanded as a result of
reduced tariff barriers. Although some producers
oppose reduced tariffs for the protection they
give, the WTO strongly supports trade
liberalisation and free trade, believing that it
results in the best outcome overall.
o International trade agreements
o Increased size of the market
Economics of scale
Globalisation allows industrialised nations
such as the US and Western Europe to find
new markets, especially in developing
countries

Economics of scale a large market allows

producers to benefit from mass production
and specialisation
o Pressure to reduce production costs
o Increased business concentration
Globalisation has been driven by global
corporatisation
These multinational corporations operate in
dozens of countries around the world
Mergers and acquisitions have fostered this trend
o The power of global finance
International and economic integration
Definition: The flows of trade, investment, finance, labour, ideas
and technologies that occur between nations in the world
The world has become integrated. Countries depend on each
other
Economies are closely linked

Composition of trade: the mix of goods and services that nations

exchange with each other

trade in goods and services

Effects of globalisation on trade flows:
Composition and value
2008 trade was 44 times larger
than in 1970 (since the sharp
reduction of tariffs)
GFC caused 2% fall in trade
value

Economic and social conditions

have changed composition:
Agricultural trade less
important
Minerals (e.g iron ore) and
services (e.g. tourism)
increased
ETMs (e.g. computers
increased

Direction
Trade Blocs encourage trade
between members (a criticism)
Regionalism:
North America
EU
South East Asia (China,
Korea, Japan + ASEAN)
APEC (Pacific Rim)
Shifts in political power
(America China)
BRICs and developing countries
increasing in share of trade

STMs (e.g. steel)

Australia has a low trade dependency (imports + exports as a

percentage of GDP) of just 37% as of 2010, though this was a rise
from 28% in 1980. Due to:
Geographical isolation
Isolationist and protectionist policies of historical Australian
governments
The GFC had a large impact on trade dependant nations. That
neither Australia or its main trade partner China are trade
dependant allowed them to largely avert the crisis

financial flows
Financial flows:
Definition: money flows around the world for currency
exchange and investment. Includes bank lending around the
world
Foreign exchange market (FOREX): The global market for
trading of currencies
Purchasing power parity (PPP): A measure of the relative
power of currencies, estimating the amount of adjustment
needed on the exchange rate between the two currencies in
order for the exchange to be equivalent to each currencys
purchasing power. It asks how much would needed to
purchase the same goods and services in two countries.
Money moves faster than people or goods
Technology links global financial markets linking savers and
borrowers
Speculators: undertake short-term investments in financial
assets (buy low, sell high)
o 95% of foreign currency transactions are related to
speculation
International Monetary Fund: responsible for stability of
the global financial system
Causes of growth in financial flows:
Reduction in man-made barriers
Reduction in natural barriers
Financial deregulation
Technological
o E.g. reductions in
improvements
o Electronic
limits on bank
lending and
transaction
international capital
settlement
movements (Australia
o Computerised record
1980s)
keeping

o E.g. introduction of a
floating (flexible)
exchange rate
(Australia 1983)
o An exchange
rate regime
where its
currency is set
by the FOREX
market
o Deregulated the bank
sector resulted in the
GFC however

Effects of globalisation on financial flows:

Composition and value
Direction
Exponential growth in
Finance is centred in global
value and number of
cities e.g. New York,
transactions
London, Tokyo
Portfolio investment
Trade blocs and regionalism
(bonds, derivatives, shares
redirect finance within
worth <10% of a
regions
company) has increased in
o Economic
proportion
regionalism/ trade
blocs: agreements
Foreign Direct
between countries in
Investment (>10% of a
the same geographic
company) has fallen as a
region to facilitate
proportion
the free flow of goods
Larger proportion of a
and services
population now owns
Shift to investment in and
shares and other
by emerging economies
investments
(BRIC)
(superannuation,
pensions, mutual funds)
Trade surpluses build pool
of funds for investment
(e.g. Chinese government
in US government bonds)

The level and direction of global financial flows are the main
determinants of exchange rates
The fastest growing are interest rate, currency, equity and
commodity derivatives
Interest rate and currency derivatives equal over 95% of
derivatives traded
Only 1% of ER market transactions are payments for trade
The impact of financial flows on the global market can be
evidenced in the sub-prime mortgage market disaster in the
USA in 2007-08, which resulted in the Global Financial Crisis

International financial flows have been increasing rapidly since

the 1970s:
o International trade has expanded at around twice
Australias rate of growth in real GDP
o International direct investment grew at around three
times the rate of real GDP growth prior to the 2000s
o International equity investments have grown at almost
10 times the rate of growth in real GDP
Due to Australias reliance on continual financial inflows, the
government must exercise a financial discipline which is the
consideration of policies in global context, not just in relation
to national interests. This is due to the need to respect
international investor confidence and sentiments (especially if
they be animal spirits) and also the political ties with other
countries

investment and transnational corporations

Investment and transnational corporations:
Net investment: A measurement of a companys investment
in capital, found by subtracting non-cash depreciation from
capital expenditures.
Calculated as:
Net investment=capital expenditurenon cash depreciation

o Capital widening/ deepening: an increase in capital

per worker
Transnational corporations (TNCs): Global companies that
dominate global product and factor markets. They are often
owned by people, have production facilities and sell their
products in more than one county
o Account for 10% of GWP
o Boost trade, economic growth and increase
interdependence between countries
E.g TNCs attracted to relocate production to
Chinas special economic zones (SEZs)
Causes of growth in TNCs and investment
Reduction in man-made barriers
Reduction in natural barriers
Financial deregulation and
Advances in technology
capital (money) flows
and communication
Removal of trade barriers
Decreases in transport
costs
Active government

Similar business practices

encouragement of foreign
investment (e.g. Chinas
Improved cultural
SEZs)
understanding
Effects of globalisation on TNCs and investment

Composition and value

FDI flows have increased
due to number and
importance of TNCs
o 1970 FDI flows were
$13 billion
o 2007 FDI flows were
$1.8 trillion
Growth in portfolio
investment flows has
outstripped FDI

Direction
Trade blocs and
regionalism redirect FDI
flows
Rise of emerging markets
(esp. China and India) has
attracted FDIs
TNCs attracted to new
markets to sell their
products and also the
growing supplies of the
factors of production

Global investment flows

o Flows of capital refer to the flows of savings used for
investment around the world
o The rate of expansion compared to the growth in world
GDP:
Trade
Twice the rate
Direct investment
Three times the rate
Portfolio investment
Ten times the rate

Intra-company trade:
Much international trade occurs between businesses that are
owned by each other
Transfer pricing (prices charged in intercompany
transactions) is a concern due to the opportunities for tax
aversion

technology, transport and communication

Technological improvements have been the driving force

behind globalisation. They have reduced the speed and cost of
communication and transport which are the links between
countries that facilitate globalisation
Transport:
o Containerisation has reduced labour handling costs
and transport times
o The improvements in aviation technologies since the
1950s have greatly increased the prevalence and
importance of air transport to international transport
o Reduced the costs of using foreign factors of production.
This has reduced the cost of inputs into the production

process contributing to lower prices and higher output,

resulting in higher economic growth
Communication:
o Cost of global communications is falling due to the
Internet, mobile phones
o It is becoming easier and less costly for business to sell
globally (e.g. the internet)
o Improving access to information for individuals
(household consumers), firms and governments
However, tighter property rights (usually held by TNCs) can
increase the price of technological transfer. E.g. Apples
patents
The international trade of ETMs increased from 33% of goods
in 1976 to 54% in 1996
The demand for commodity and fuel resources is also for
purposes of technological and transport improvement. China
has been a large demander of these for its process of
industrialisation

international division of labour, migration

Global labour flows

o There are 3 types of labour flow:
1 Immigration
2 Temporary guest workers
3 Illegal immigrants
o Labour is not as mobile as other global flows and are
thus less globalised due to:
Language barriers
Family and social bonds
Immigration restrictions
Governments show resistance towards the
flows of labour across national boundaries
due to the fear of:
o Brain drain
o Market flooding, resulting in
unemployment for current labourers in
country
Terrorism fears
Skills barriers
Educational barriers
Cultural barriers
o However 3% of the worlds population have migrated to
work (World Bank, 2010) and this trend is increasing
Migration: the movement of people between
countries on a permanent or long-term basis
60% of these to advanced economies

Skilled workers (e.g. finance, IT) are

rewarded well
Unskilled workers (e.g. manual labour) fill
the jobs that native citizens do not want to
do
Brain drain is a problem for smaller advanced
economies and developing economies in which the
skilled and educated tend to migrate overseas to
in seek of more employment opportunities
o The number of workers that work outside their country
of citizenship is 1.5% of the worlds workforce
o There is an increased use of outsourced work to nations
of lower wage costs (e.g. Telstra call centres based in
India)
International division of labour: The allocating of the tasks
involved in the production process to different areas in the
world. This results in the specialisation of the labour forces
of these countries to their role in production
o E.g. the iPhone is designed in the USA, the components
are manufactured in many countries and it is assembled
in China
This is an example of a global supply chain
o Generally, low income countries produce manufactures
which are labour-intensive as opposed to capitalintensive or requiring skilled labour. These are usually
STMs
o High income countries have the capital and facilities to
train the skills to produce ETMs
Labour intensive jobs are allocated to low wage countries. This
results in offshoring and outsourcing
The production process moves to the most efficient location
(comparative advantage)
Jobs move with production
Causes of globalisation (internationalisation) of labour
markets:
o Note: These causes and effects are the same as
investment and TNCs
Reduction in man-made barriers
Reduction in natural barriers
Some relaxation of
Transport is cheaper
migration rules
English language is
o E.g. movement within
common and widespread
the EU over this issue
in use
Harmony of laws and
business practices
Recognition of international
qualifications (e.g. APEC
countries)

Barriers remain: political

and cultural
Note: These causes and effects
are the same as investment and
TNCs

Movement of labour between nations is of the types:

Immigration legally approved changes in permanent
residency
Guest workers long term workers
Refugees those with rights to seek sanctum in another
country
Illegal entrants

the international and regional business cycles, trade, financial

flows and foreign investment
Features of the fiscal cycle:
Upswings: increasing of the economic growth rate
Downturns: slowing of the economic growth rate
Booms: periods of rapid economic growth
Recessions: negative economic growth
Depression: an extended period of negative economic
growth
An international year on year recession as happened in 2009 has
only happened once in the last 60 years

The international business cycle

o Increased synchronicity
i Though timing differences still exist.
This reflects the manner in which
financial contagion or positive
economic effects spread throughout
the economy. For example, America
was the first to be effected by the
GFC, followed by its trade partners,
lenders and borrowers
o Greater specialisation and lower economic
barriers. Higher integration
o Globalisation has caused the economic
performances of individual economies to
become more closely tied to the
international business cycle
o The economic strength of big economies
spreads across the world
o Power of USA and China in driving cycle
o Greater volatility and deeper recessions as
seen in the GFC and its consequences
o Affects world output, trade and investment
flows
o Statistics:

i 2004 2007 world GDP averaged 5%

ii 2009 world GDP contracted by 0.6%
iii -3.2% for advanced economies
iv 2010 4% growth
v 2011 2.7%
vi 2012 2.5%
vii Below trend, slowing slightly
o Factors affecting the international business
cycle:

Strengthening
Trade flows
Investment flows and
investor sentiment
Transnational corporations
Financial flows
Technology
Global interest rates
International organisations

Weakening
Domestic interest rates
Government fiscal policies
Other domestic policies
Exchange rates
Structural factors
Regional factors

Regional business cycles

o Definition: The fluctuations in the level of
economic activity in a geographical
region of the economy over time
o Regions (e.g. South East Asia, North
America, Europe) have closer internal
economic relations than with the rest of the
world
o Regional trends can vary from global trends
(however can affect global trends)
World GDP growth:

 the basis of free trade its advantages and disadvantages

Reasons for trade liberalisation/ advantages of free trade:
Greater access to a wider range of goods and services
Specialisation and greater efficiency
A more efficient allocation of resources (solution to the
economic problem)
Increased economics of scale lower costs resulting in lower
prices
Competition results in greater international competitiveness
for domestic industries
Increased living standards (increased income and material
consumption)
A country may not have the factor endowments to produce
a particular good that it demands
o E.g. Australia is highly endowed with mineral resources
(land), whereas its trade partner China is endowed with
the labour factor of production
The basis of free trade and protection summary
Advantages of free trade/
Disadvantages of free trade/
disadvantages of protection
reasons for protection
Increased output from
Establishing infant
scarce resources
industries
Increased standard of
Structural unemployment
living
(international division of
labour)
Better resource allocation

Lower prices for

consumers and businesses
Greater GWP

Negative externalities
(pollution levels,
exploitation of labour)
Lack of diversity in the
production base
Unfair price cutting and
dumping
The potential for an
increasing Current Account
Deficit due to an imbalance
on the BOGS

The best outcome is reached without government intervention

o Specialisation in areas of comparative advantage should
increase GWP
o Exports provide income and employment
o Imports provide choice and improve quality of life
Causes of growth in trade flows:
Reduction in man-made
Reduction in natural
barriers
barriers
Reduced government
Transportation cheaper
protection of local industries
shipping and air travel
(e.g. subsidies, tariffs,
quotas). Since the 1970s
there has been a sharp
reduction in tariffs
Emergence of the World Trade Telecommunication:
Organisation (WTO)
Phones, internet
Trade Blocs (e.g. EU and
Reduced time lags and
ASEAN) and regional free
easier coordination
trade agreements
Wider adoption of the
English language
Bilateral free trade
agreements (e.g. AUSFTA)

Adam Smiths theory of absolute advantage identifies the

objective of trade to be for countries to produce that which
they have a comparative advantage and to import goods
which they are not efficient at producing comparably. This
results in a better outcome, as opposed to previous theories of
trade, which sought to minimise imports (M) and maximise
exports (X) which would stimulate the economy according to
the 5-sector circular flow of income model however was a
zero-sum game, resulting in no greater benefit overall.

o Absolute advantage the ability of a party to produce

more of a good or service than another than competitors
using the same amount of resources
o Comparative advantage the ability of a party to
produce a good or service at a lower opportunity cost
than another. This removes the problem of absolute
advantage in if one country has an absolute advantage
in the production of all goods and another in the
production of none. Countries will then only produce
that which has the lower opportunity cost

Countries
Mexico

Trade scenario
Cocoa
Rice
Resources required to produce
1 unit of product
10
20

China

40

Product

Mexico
China
Total
production
Total
production in
economy

10

Comparative
advantage for
cocoa
Comparative
advantage for
rice

Production and consumption

without trade
10
5
2
10
12
15
27

Production with specialisation

Mexico
China
Total
production
Total
production in
economy

Notes

20
0
20

Equivalent in
the world
economy to
GWP
Specialisation
can occur, for
the two
countries are
trading

0
20
20

40

Increase in
40 27 = 13
production with
specialisation
Consumption after Mexico
trades 6 cocoa for 6 rice

Equivalent in
the world
economy to
GWP
A better
outcome
overall

Mexico
China

Mexico
China

14
6
6
14
Increase in consumption as a
result of specialisation and
trade
14 10 = 4
65=1
62=3
14 10 = 4

Both countries
have benefited
from the
exchange

Scenario 2:
Table 1 Absolute Advantage:- production before specialisation

Australia
China
Total output

Wheat (units)

Cloth (units)

30

20

25

35

45

Australia has an absolute advantage in the production of wheat and

China of cloth
Table 2 Production gains after specialisation

Australia
China
Total output

Wheat (units)

Cloth (units)

60(+30)

0 (-20)

0 (-5)

50 (+25)

60 (+25)(net gain)

50 (+5)(net gain)

Total output has increased as a result of global trade

Scenario 3:
Table 3 Comparative advantage: production before specialisation

Australia
China
Total Output

Wheat (units)

Cloth (units)

20

10

25

15

Australia has an absolute advantage in the production of both wheat

and cloth
Table 4 Opportunity costs
Opportunity cost
Country

1 unit of wheat

1 unit of cloth

Australia

0.5 (10/20) units of cloth

2 (20/10) units of wheat

China

1 (5/5) units of cloth

1 (5/5) units of wheat

Australia has a comparative advantage in the production of

wheat since it has to give up only 0.5 units of cloth to produce
an extra unit of wheat, while China must give up 1 unit of
cloth to produce an extra unit of wheat. So it is more practical
for Australia to specialise in the production of wheat
China has a comparative advantage in the production of cloth
since it only has to give up 1 unit of wheat to produce an extra
unit of cloth, while Australia has to give up 2 units of wheat to
produce an extra unit of cloth. Thus it is more practical for
China to specialise in the production of cloth

Table 5 Production levels after specialisation

Australia
China
Total output

Wheat (units)

Cloth (units)

40 (+20)

0 (-10)

0 (-5)

10 (+5)

40 (+15) (net gain)

10 (-5) (net gain)

The total output has increase when countries specialise in the

production of goods and services based on comparative advantage.
Note that the fall in the output of cloth is outweighed by the output
of wheat.
Hence:
AD increases
Economic growth increases
Consumption increases and standards of living rise
Absolute
advantage
Comparative
advantage

The ability of a party to produce more of a good or

service than another using the same amount of
resources
The ability of a party to produce a good or service at a
lower opportunity cost than another

The principle of comparative advantage can be represented using

production possibility frontiers which are diagrammatic
representations of the opportunity costs of producing goods for an
economy

Export goods use factor endowments which are locally

abundant (lower comparative advantage)
o Factor endowments: extent to which a country is
endowed with resources such as land, labour, capital
and enterprise
Endow: To give an income or property to a party
o Corollary: import goods made from locally scarce
factors

Convergence:
The hypothesis that poorer economies per capita incomes will tend
to grow at faster rates than those in richer economies due their
ability to replicate production methods, technologies and institutions
already in use by developed countries on the forefronts of these
things. This results in a convergence of countries in terms of per
capita income
Trade diversion:
An occurrence in international economies in which trade is diverted
from a more efficient exporter towards a less efficient one by the
lowering of trade barriers with the less efficient one.

Economic development of the third world

o A controversial issue
Supporters of globalisation claim that opening up
trade is a way to improve the living standards of
poor countries
Critics believe that it is the rich countries that
benefit, and the wealth gap only widens on a
global scale

Effects of globalisation:
Globalisation has made economies more unequal in their
growth and development patterns, creating a divergence.
Global income inequality, as measured by the Gini Coefficient
has increased rapidly between 1980 and 2002, with the rapid
trend of globalisation due to technological improvements. This
trend seems to have peaked however and begun a reversal,
with rapid economic growth in emerging economies,
particularly the BRIC nations (Brazil, Russia, India, China)

role of international organisations WTO, IMF, World Bank, United

Nations, OECD
World Trade
Organisation
International
Monetary Fund
(IMF)

World Bank

An organisation that intends to supervise and

liberalise international trade
Aims to foster global monetary cooperation, secure
financial stability, facilitate international trade,
promote high employment and sustainable economic
growth and reduce poverty around the world.
Its objectives are to promote international economic
cooperation, international trade, employment and
exchange rate stability
Official goal is the reduction of poverty
Objectives are to promote foreign investment,
international trade and facilitate capital investment

United Nations
(UN)

Provides loans to developing countries. Often they are

soft loans for often they are on charitable terms of
low interest and casual repayment date obligations
Humanitarian and political organisation more than an
economical one. However, these fields are inextricably
linked
Committed to encouraging economic development
and social progress

(OECD)

Established the International Monetary Fund as well as

other intergovernmental economic organisations
An organisation of 34 advanced economic countries
Objectives:
Stimulate economic progress and world trade
Encourage democracy and the free-market
economy
Encourage sustainable development
It is a forum for countries to reach agreements as to
how to achieve these objectives

The World Trade Organisation (WTO)

o Focuses on trade in goods and services
o Roles:
1 Resolve trade disputes
2 Promote reductions in protection
o Has enforcement powers over those who breach their
trade agreements. Dissenting countries may face:
Expulsion from the WTO
High protection barriers on the import of their
goods
o Has found it almost impossible to reduce trade barriers
in agricultural protection especially in developed
countries which see no incentive to, to benefit
developing countries but not themselves
Resulted in the stalling of the DOHA round of
investigations due to the intransigence of
advanced countries
o DOHA Development Round: A trade negotiation
forum of the World Trade Organisation with objectives of
lowering trade barriers around the world to incite an
increase in global trade. These talks have stalled over a
divide on major issues such as agricultural protection
(for which wealthy countries like America still have
formidable trade barriers) and differences between the
developing and developed economies

The International Monetary Fund (IMF)

o Focuses on maintaining international financial
stability, integrating global markets and managing
financial crises
o Attempts to get governments to focus on:
Decreasing the size of their public sectors
(privatisation)
Deregulation

Decreasing budget deficits

Gets its funds through quotas from the 18 member
nations
USA provides 17%
Developing nations provide 60% of total funds
These nations have a greater share of power
Countries in receipt of IMF assistance are generally
required to follow stringent conditions including:
Maintaining a tight fiscal and monetary regime
E.g. high interest rates, budget cuts
Closing insolvent banks and financial institutions
Establishing strict capital adequacy standards
Undertaking structural reforms such as:
Reducing tariffs
Eliminating monopolies
Allowing direct foreign investment in the
non-financial sectors
Changing the value of the borrowing countrys
currency. This usually involves a lowering of the
currencys value
Effects of IMF policies have been mixed
Many South American countries have as a result
had:
Massive inflation
Increased income inequality
Increased poverty
Increased unemployment
Lower standards of living
An example is Argentina:
IMF first became significantly involved in 1991
Followed advice to fix its currency on par with the
US dollar
From 1991 1998
Grew at considerable levels
Inflation declined
However:
o Foreign debt grew
o Current account deficit grew
In 1998 the country went into recession
Partly due to the restrictions placed on it by
the IMF on the current regime
Also became constrained in its ability to use
standard macroeconomic policy tools to
engineer a recovery
Debt burden grew to a point where it
became unstable

IMF provided extensive financial support as

Argentina experienced a complete loss of
market access, capital flight and deposit
runs
In response, Argentinian government
imposed a partial freeze on funds in banks
With Argentina no longer in compliance with
the conditions of the IMF program, the IMF
suspended financial assistance
The country experienced severe political and
social unrest and partially defaulted on its
international debt obligations
After abandoning its peg to the US dollar, a
sharp depreciation of the peso resulted and
a full-blown banking sector crisis
In the trough of 2002, the economy had
contracted 20% in GDP terms since the
onset of recession in 1998
Argentina has made a sharp recovery since
the trough in 2002 and has become
economically independent of the IMF. It has
fully repaid its debt to the IMF

The World Bank

o Focuses on the economic development of Least
Developed Countries (LDCs)
Least developed country (LDC): a country
which, according to the United Nations, exhibits
among the lowest indicators of socioeconomic
development and Human Development Index
Human Development Index (HDI): A
measure of human development, accounting
for life expectancy, education and income.
o Makes soft loans (long repayment times, low interest
rates) to LDCs
The United Nations
o Committed to, among other things encourage economic
development and social progress. Is more so a
humanitarian and political organisation than an
economic one, though these fields are inextricably
connected
o Established the International Monetary Fund as well
as other intergovernmental economic organisations
The OECD
o An organisation of 34 advanced economic countries
o Objectives:
Stimulate economic progress and world trade
Encourage democracy and the free-market
economy

 Encourage sustainable development

o It is a forum for countries to reach agreements as to
how to achieve these objectives

Acronym
stands
for:

World
Trade
Organisati
on

Trade organisations
IMF
World
UN
Bank
Internation
United
al
Nations
Monetary
Fund

Number of
member
nations
General
purpose of
the
organisati
on

157

188

188

193

To
supervise
and
liberalise
internation
al trade

To foster
global
monetary
cooperatio
n, secure
financial
stability,
facilitate
internation
al trade,
promote
high
employme
nt and
sustainabl
e
economic
growth and
reduce
poverty
around the
world

Provides
loans to
developi
ng
countrie
s.

Facilitating
cooperatio
n in
internation
al law,
internation
al security,
economic
developme
nt, social
progress,
human
rights and
the
achieveme
nt of world
peace

WTO

How does
it ensure
complianc
e

A
multilatera
l dispute
resolution
process of
negotiatio
n

Expulsion
from the
IMF for
those who
dont
comply.
This

Goal is
the
reductio
n of
poverty.

By passing
legislation
and
enforcing
this with
peacekeep
ing forces

OECD
Organisation
for
Economic
Cooperation
and
Developmen
t
34
To stimulate
economic
progress
and world
trade.
Provides a
platform to
compare
policy
experiences
seek
answers to
common
problems,
identify
good
practises
and coordinate
domestic
and
international
policies of
its members

WTO

Main

achieveme
nts

Enhanc
ed the
value
and
quantity
of trade.
Eradicat
ed trade
barriers.
Eased
settleme
nt of
disputes
by
enforcing
improve
d rules.
Encoura
ged
sustaina
ble trade
develop
ment

Trade organisations
IMF
World
UN
Bank
involves a
voluntarily
cutting of
provided
any
by
financial
member
assistance.
states

OECD

Major
challenges

Trade organisations
WTO
IMF
World
UN
OECD
Bank
Liberalis Critics
Run by Criticis Exclusive
ing
say that
a small
ed for
ness, for
global
its
numbe
bureau
its
trade in
policies
r of
cratic
members
agricult
make
econo
ineffici
hip is
ure and
economi
mically
ency
limited to
textiles
c crises
powerf
and
a select
worse
ul
waste.
few rich
because
countri
Calls
nations
of the
es
for
severity
which
structu
of the
also
ral
austerit
provid
reform
y
e most
measure
of the
s it
institut
imposes
ions
fundin
g

influence of government economic forums G20, G7/8

Number of
member
nations
Why it was
established

International financial groups

G7
G8
G20
7
8
19 + the EU
The apparent
need to focus
on the global
economy by
observing the
effects of
financial crises
and the
problems of
high-income
economies
such as
stagflation in
the 1970s

A reaction to
the 1973 oil
crisis requiring
better
cooperation
between the
worlds
industrialised
nations to
respond to
crises like this
that affect
them. This was
an inclusion of
Russia to the
G7, despite
that it wasnt a
high-income

Proposed by
Canadian
Prime Minister
Paul Martin as
a forum for
cooperation
and
consultation on
matters
pertaining to
the
international
financial
system after
the GFC

Criteria for
membership

Exclusive to
the leading
high-income,
large
population,
industrialised
nations of the
world (at the
time of
founding
[1982])

nation. This
formed new
political and
economic
relations with
Russia after
the Cold War
Supposedly
the worlds
eight largest
economies,
however does
exclude China
and Brazil

Economically
strong
countries plus
several
countries that
are not
permanent
members are
invited to
participate at
each summit.
This is a
collection of
the 20 highest
producing
nations. This is
because it was
recognised
pre-GFC that
the BRIC
nations
especially were
producing a
large
proportion of
the worlds
product, but
were not highincome nations
or members of
the G8 except
Russia
In 2009 it was
agreed that
the G20 would
replace the G8
as the main
economic
forum for
globalized

economies.
This marks a
greater
acceptance of
the importance
of Asia to the
global
economy

trading blocs, monetary unions and free trade agreements

advantages and disadvantages of multilateral (EU, APEC, NAFTA,
ASEAN) and bilateral agreements
Trading bloc: a group of nations that agree to trade more freely
with each other. They form a free trade agreement (FTA) with
each other in order to do this
Multilateral FTAs:
Trading
Percenta
bloc
ge of
world
exports
2010
Europea 67.3
n Union
%
(EU)

Current
constitue
nts

Advantages

28

European
nations

A monetary
union. They all
use the Euro
currency
o Easier
curren
cy
excha
nge
betwe
en
countr
ies
o Reduc
ed
excha
nge
rate
volatili
ty

Disadvantag
es

Economic
converge
nce
standard
s to
synchroni
se
economie
s before
their
adoption
of a
single
currency
meant
that
some
nations
could not
join
Many
countries
in the EU
now have
large

sovereign
debt
problems
, causing
the
European
Sovereig
n Debt
Crisis
which
threatens
the
stability
of the
entire EU
as
opposed
to just
these
countries
Asia
Pacific
Economi
c
Coopera
tion
(APEC)

47.3%

North
America
n Free
Trade
Agreem
ent
(NAFTA)
Associat
ion of
South
East
Asian
Nations
(ASEAN)

12.9%

6.9%

Bilateral FTAs:

21 AsiaPacific
countries
including
Australia,
China,
Japan,
the
ASEAN
nations
and the
USA
USA,
Canada
and
Mexico

10 Asian
nations

General:
Advantages:
o Increase volumes of trade, maximising the benefits of
globalisation
o Greater political unity and cooperation
Disadvantages:
o Trade diversion: when members of FTAs favour trade
between each other than to other nations
Non-members of the FTAs lose trade opportunities
The allocation of resources is distorted, because
members of the block may be the sources of trade
even if they are less efficient than outside
members. They may be more cost-efficient merely
because they dont have as many barriers to trade
This is why multilateral trade agreements are
favoured over bilateral agreements because they
minimise the numbers of nations excluded
o Bilateral agreements are easier to found, due to the
reduced number of compromises and political
negotiations when just two parties are involved. They
are less effective however

Protection
reasons for protection infant industry argument, domestic
employment, dumping, defence
Reasons for protection / disadvantages of free trade:
Protection: a government action that is taken to give
domestic producers an artificial advantage over foreign
producers. The forming of trade barriers. The practise of this is
called protectionism. It aims to hinder the foreign
competitors of local firms or advantage local exporters to give
domestic firms an advantage on the global market
Infant industry argument:
o That nascent businesses need assistance to aid them in
their establishment to deal with initial costs and
problems for they do not have the economies of scale
that geriatric, established businesses enjoy
Nascent: Just coming into existence and
beginning to display signs of future potential. Not
fully developed yet
Geriatric: Old
o However,
It is hard to know which industries have potential
and thus should be protected

Some industries may instead of maturing, fawn off

the protection. Protection should thus last only a
short time. When the industry is mature,
protection should be withdrawn. When to apply
and withdraw this protection are hard to define
however
o This is generally considered a valid argument for
protection
Protection of domestic employment:
o By protecting Australia from cheap foreign goods,
domestic jobs are saved
o However, protected industries misallocate resources
that are not being used by the more efficient industries
offshore. This does not result in the best outcome
overall (the greatest GWP)
o This creates political problems, for it exports
unemployment to trading partners. This encourages
them to also impose trade barriers (this is the effect of
most forms of protection) and hence it decreases trade.
This is the retaliation effect. This may increase
unemployment in the long-run due to the lower
economic growth as a result of lower trade
o In the short-term, structural unemployment may
increase as a result of trade and the process of
specialisation, but theoretically the theory of
comparative advantage states that there should be less
unemployment overall if free trade is allowed
o This argument may have a xenophobic basis, for fear of
influxes of migrant workers
Prevention of dumping:
o Dumping occurs when foreign businesses flood another
market with their products at below cost price in order
to:
Dispose of a surplus
Establish market control
o Due to the practise of dumping, local businesses often
fail and unemployment results
o Once the local competition is eliminated, the foreign
producer raises prices again
o Dumping is a short-term phenomenon, so duties on
dumped goods can be imposed selectively in the shortterm and then removed
o The identification of what constitutes dumping is the
only problem with this policy, for it could be otherwise
be used as an excuse to implement government
protection
o This is generally considered a valid argument for
protection

Defence:
o Some nations argue that it is necessary to protect
industries which are related to the defence of the
country
o Despite that it would result in the most efficient
allocation of global resources, countries do not want to
rely on other countries for their defence equipment for
political reasons. This is an example of a political
expediency and it is an example of where political
considerations trump economic principles

Also:
Ethical reasons:
o To prevent the purchase of goods produced that exploit:
The environment
Labour
Though there is a strong argument that
cheap labour is one of the main factors that
develops nations into industrialised
economies, for developing countries have a
comparative advantage in labour, over
advanced economies for their labour is
cheaper.
o Embargoes can prevent the import of items which are
deemed unethical
One of the main political reasons for protection is nationalism which
can cause xenophobia and tribalism in which other nations are
secluded.
methods of protection and the effects of protectionist policies on
the domestic and global economy tariffs, subsidies, quotas, local
content rules, export incentives

Free trade: when a government does not attempt to

influence what its citizens can buy and sell to other countries
though intervention.
Types of protection (usually as protection of domestic
industries)
o Duty a tax on items purchased abroad
o Local content rules
o A requirement imposed that certain products
contain a minimum percentage of domestically
produced components
o Australia has used local content rules in the motor
vehicle industry. This means that to qualify for
protection for making cars in Australia, Australian
car manufacturers must include a certain

percentage of car components made in Australia

(85%).
o Export incentives The government provides
assistance to domestic businesses in developing their
export markets
o Tariff a tax on imports or exports (usually imports) to
or from a country. Used to give imports a disadvantage
compared to local products
o Types:
Specific tariff or import duty
Imposes a fixed monetary (dollar) tax
per unit of the good imported
E.g. $10 per shirt
Ad valorem tariff
A constant percentage of the
monetary value of 1 unit of the good
imported is taxed
E.g. A 20% tax/ tariff on imported cars

E Instead of societal loss should be welfare loss or

deadweight loss
Imports and the effects of tariffs

Domestic economy. No trade

Economy opened to global trade. Is exposed to imports at lower costs

than domestically produced goods, however domestic supply shrinks
from:

0Qe to 0Q1
For at the world price for the product, that is how much domestic
industries are willing to supply (that is where the domestic supply curve
intersects the price), however at this price the demand is at Q2, and thus
Q1Q2 is filled in with imports, which are happy to provide at this price.

*Sworld is horizontal as it is so vast as to be practically unlimited, and

negligibly affected by demand from this economic situation. It is perfectly
elastic and thus the burden of the tariff (tax) is passed onto the
consumers

Before imports
Definitions:
Consumer surplus:
The monetary gain obtained by consumers
because they are able to purchase a product for a
price that is less than the highest price that they
would be willing to pay

Producer surplus:
The monetary gain of a producer obtains by selling
a product at a market price that is higher than the
least they would be willing to sell it for

Decrease in producer surplus after imports

Increase in consumer surplus after imports

Imposition of tariff. Rise in import price

Results in rise in Producer surplus

Results in a reduction in consumer surplus (greatly outweighing the rise in

producer surplus due to deadweight loss and government revenue) The
government often uses this revenue on public goods to partly reimburse
consumers (the public)

Results in an increase in domestic supply and decrease in imports

Loss in consumer surplus is divided between producers, the government

(which collects the tariff revenue), and deadweight loss.
Also notice the reduction in domestic consumption as a result of the tariff
due to higher prices

Summary:
Without imports
(Autarky [selfsufficiency]):

With imports:

With tariffs:

o Subsidy financial aid paid to firms to allow them to

reduce their costs of production
o On the graph: The price moves down (as the firms
can sell their product at a lower price due to the
lowered production costs) to create a new supply
curve of S1

In this economy:
Autarky:
o Equilibrium would occur at price Pe and Quantity Qe for
barley
o Domestic producers make 0Q2
With uninhibited global free trade:
o Barley is imported at a lower cost than what is produced
domestically. Thus domestic production falls from 0Qe to
OQ1 and foreign production now occupies the supply of
Q1Q2. Both accept a price of Pworld and by multiplying

price x quanitity, we see domestic producers earn box

a and foreign producers boxes b, c and d.
With a government subsidy to domestic producers of barley:
o The supply curve shifts to the right (outwards) to the
new supply curve of Sdomestic + subsidy. This is how
much domestic firms will supply at the current price +
the governments subsidy. Domestic firms receive
Pworld + subsidy for their production
o Domestic producers supply 0Q3 at Pw+S, while foreign
producers supply only Q3Q2 and earn c and d. Since
domestic firms are less efficient than the foreign
producers, since they require a higher price to produce
Q1Q3 (the artificially augmented section of their
production), box g is a deadweight loss in welfare.
Domestic producers earn a, b, e and f.

o Quota a maximum quantity placed on imported goods

In this economy:
Autarky:
o Equilibrium is at Pe and Qe for sorghum
o Domestic producers make 0Q2
With uninhibited global free trade:
o Price of Sorghum is Pworld due to lower world price
(comparative advantage of other economies at
producing it)
o Domestic producers make 0Q1 and foreign producers
make Q1Q2
o Domestic producers earn box a
o Foreign producers earn boxes b, c and d
With a government quota on imports of foreign sorghum:
o The Sdomestic supply curve shifts right to Sdomestic +
quota
o Domestic producers produce 0Q1 and Q3Q4 and foreign
producers produce Q1Q3 (the limit of the quota)
o Box j is a deadweight loss due to the domestic
producers being less efficient than the foreign producers
o Domestic producers earn a, f, c, I and j and foreign
producers earn b, g, h

Globalisation and economic development

differences between economic growth and economic development
Economic growth
Economic growth: the
percentage change in real
GDP over time

Economic development
Economic development:
a broad measure of a
nations welfare and living

standards
Achieved by increased
aggregate demand and
supply in the economy
A lack of government
Excessive government
intervention may promote high
intervention may promote
economic growth at the expense economic development at the
of economic development
expense of economic growth
The two concepts are related however in that economic growth
facilitates economic development, and also vice versa due to the
increased demands (AD) of economic development

Economic growth:
Real GDP=nominal GDP

Economic growth=

Base CPI
Current CPI

This yea r ' s real GDPlast yea r ' s real GDP

100
Last yea r ' s real GDP

Growth rate mainly depends on factor endowments and

technological change
Population factors:
o Unemployment rate (the utilisation of the labour factor
of production)
o Education (investment in human capital). This
constitutes a skilled workforce
o An incentivised workforce
Capital accumulation: investment:
o Capital: the produced means of production
o Net investment: investment towards the adding of
capital to the production process
o Gross investment: net investment accounting for
depreciation
o Capital widening: increases in capital to keep up with
the growing workforce
Maintains real GDP per capita (the level of
economic growth and development)
o Capital deepening: increasing capital per worker
Promotes higher economic growth rates
Improved efficiency of resource use:
o Utilising unemployed resources maximises economic
activity. It represents an expansion towards the
production possibilities frontier
Technological progress:
o The introduction of new technology can raise
productivity

o Usually involves the introduction of new capital:

embodied technical progress
o However, can be introduced in other ways e.g.
education. This is disembodied technical progress
Institutional factors:
o Factors that are specific to a particular economy
Export industries:
o Can provide an outlet for production when there is less
than adequate domestic demand

For productivity to rise, capital deepening and technological process

must occur
Rising productivity causes economic growth and economic
development
Economic growth precedes economic development so:
Developing countries may grow at slow rates e.g. Jamaica
which had growth rates of just 1.2% yearly averaged from
2000-2010
Emerging economies have begun their period of growth and
so experience high growth rates e.g. China which has
sustained levels of economic growth of around 10% for the
last three decades and is only now starting to slow as it
progresses into an advanced economy. Such a transition
occurred in Japan in the 1950s to 1980s
Advanced economies with growth rates that have stabilised,
but high economic development e.g. Australia which
consistently has had growth rates around 3% for the last
century
Definitions:
Efficiency: the degree to which the factors of production are
used to their greatest extent
Productivity: a measure of efficiency by finding the ratio of
outputs to inputs of production
Economic development:

The impact of the performance of the economy on the

population
A traditional measure is real GDP per capita:

Real GDP per capita=

real GDP
Population count

o This is nominal GDP adjusted for inflation and population

changes

Real GDP=nominal GDP

Base CPI
Current CPI

Therefore:
Base CPI
Current CPI
Population count

nominal GDP
Real GDP per capita=

o Limitations:
Only measures the approximate material standard
of living
Does not account for inequality, which may cause
an unequal distribution of this real GDP to be
concentrated in the hands of the few. This will not
benefit the majority of the populations standards
of living
Standard of living: a holistic term encompassing the general
quality of life of a person or population

distribution of income and wealth

Measuring income inequality: the Lorenz curve

Ginicoefficient=

A
A+ B

Need to know this formula for HSC, not how to calculate it

Global trade is increasingly being dominated by TNCs which

direct financial flows towards developed nations
Globalisation causes a race to the bottom where countries
compete to reduce regulatory standards to attract
transnational corporations. Creating pressure to:
o Keep wage levels low
o Restrict union membership
o Deregulate. This can reduce the working conditions of
workers however
Generally inequality in wealth is greater than that of income in
a nation
o The purchase of wealth requires an income high enough
that a portion of it can be saved. High-income earners
save more because they have the means. They have a
higher marginal propensity to save (MPS). This wealth
often then generates further income and the cycle
continues
o Despite a shortage of records on wealth ownership,
generally:

At the end of the 20th century, most highly wealthy

individuals were European, American and
Japanese citizens
The number of wealthy mainland Asians has
grown to levels similar to those of Europeans

Global inequality:
As of 2010:
o Advanced economies constitute just 16.3% of the global
population, yet earn just 55.1% of GNI (PPP)
o Developing economies constitute 11.5% of the
population, yet earn just 1.3% of GNI (PPP)

income and quality of life indicators

Real GDP per capita: measures the average income for an
individual in the economy
o Limitations:
Doesnt account for inequality in the distribution
of income
Measures income but doesnt account for the
actual quality of life of the people in the country
Human Development Index (HDI): a holistic measure of
human development, accounting for life expectancy,
education and income (but this is just one factor)
o Limitations: doesnt account for any environmental
factors of the economy. Essentially, it measures the
present but not the future

developing economies, emerging economies, advanced

economies
Levels of economic development
GNI per
Economic
Structure of
capita cutoffs growth
the economy
(UN, 2010)
Advanced
$12,196 or
Slower in
Service
E.g. Australia,
more
recent decades industries and
USA, Germany,
advanced
Singapore,
manufacturing.
Korea, UK,
PostCanada, Euroindustrialised
zone
Emerging
$996 to
Strong growth
Industrialising
e.g. BRICs
$12,195
(5-10%)
(usually strong
Type of
economy

(Brazil, Russia,
India, China),
Mexico, Middle
East oil
exporters
Developing
E.g.
Bangladesh,
Sub Saharah
Africa, Chad,
Niger, Ethiopia,
Zimbabwe

manufacturing)

$995 or less

Moderate
growth (and
high population
growth)

Agriculture and
foreign aid

BRIC: An acronymic collective term for the emerging economies of

Brazil, Russia, India and China which are estimated to overtake the
G7 economies in terms of economic prosperity by 2027
G7: An international finance group with containing members from
the nations of France, USA, UK, Germany, Italy, Canada and Japan
Generalised features of economies of these types:
Developing (though this is a broad and pollyannaish term
encompassing countries that have low-incomes but are both
developing and those that arent developing e.g. Pakistan is
showing definite development whereas Zimbabwe is not, but
they are both classed as developing economies)
o Low level of income
o Weak human resources sector
o Low labour productivity
o Limited industrial advancement
o High levels of absolute poverty
o Vast inequalities between people
o Dependence on agriculture
o Reliance on aid
o Unstable political environment
o Weak public sector and limited utilities and public goods
and services
o Low levels of saving and investment (low MPS)
o Labour-intensive production processes
o Lack of overhead capital needed to produce ETMs. Usually
produce STMs
o Predominantly agrarian industries
o If developing:
Industrialisation
Improving education levels
Emerging
o Experiencing rapid changes
o Often in transition from socialism to capitalism
o Actively seeking to be part of globalisation
o Encouraging large amounts of FDI

High economic growth as resources are utilised

Industrialisation. Increased production of ETMs
Increasing wages
Improving qualities life (HDI indicators)
Advanced
o High economic development
o High GDP
o High spending on services as opposed to goods. This
represents a satiated society in terms of goods wants
o Democratic Governments
o Advanced / liberal economies
o Stable financial systems
o Large services sector. Post-industrialisation
o Some previously socialist economies which have now
completely transitioned to capitalism are listed as advanced
economies. An example is Russia.
o
o
o
o

The main economic problem faced by emerging nations is

overcoming the middle-income trap in which rising wages
make them less competitive in the global trade of the labourintensive products that they had relied upon to elevate
themselves to such a level. Their comparative advantage in
making these products begins to diminish. Simultaneously, at
this stage they may struggle to be competitive in those
capital-intensive manufactures. Japan had to overcome this in
the 1950s to 1980s
China and India have recently transitioned from being
developing to emerging nations and China is now in the
process of becoming an emerging nation
The Asian Tiger economies overcame the middle-income
trap by following an export-oriented growth strategy that was
pioneered by Japan

reasons for differences between nations

Causes of inequality in the global economy:
Global factors:
o Global trade system:
Wealthy countries protect their domestic
agriculture sector because it is not competitive
with agricultural producers in developing nations
Resulted in the stalling of the WTO DOHA
round
Regional trade blocs exclude poorer nations

Poorer nations do not have the funds to implement

international agreements and lodge appeals
against other countries protectionist measures
o Global financial architecture:
FDI flows heavily favour the emerging economies
(especially BRICs) which have prolific growth rates
and thus high returns on investment
Many developing countries have large foreign debt
burdens.
The IMF and World Bank provide debt relief
to Heavily Indebted Poor Counties
(HIPCs)
o Debt relief: the partial or total
forgiveness of debt or the slowing or
stopping of debt growth
o Heavily Indebted Poor Countries
(HIPCs): Countries with high levels of
poverty and debt elected by the IMF
and World Bank for aid and debt relief
o Global aid and assistance:
Much aid is spent by receiving countries on
servicing their debt
Much aid by developed nations is tied aid, which
is spent on overpriced or unnecessary goods and
services which are produced by the donor country
Aid often reflects the considerations of the donor
countries rather than the receiving country.
Usually military or economic considerations
o Global technology flows:
The difference in access to new technologies is
called the digital divide
Intellectual property rights restrict the benefits of
technological transfer to poorer countries because
they cannot pay developed country prices for
those technologies
Domestic factors:
o Economic resources the acquirement of sufficient
resources for the production process:
Natural resources (land):
Countries gifted with abundant natural
resources have better opportunities for
economic development
Labour supply and quality
High income countries tend to have highly
educated and skilled labour resources
Low income nations are characterised by
high population growth, poor education

levels and low health standards, which

reduced the quality of the labour supply
Access to capital and technology
Difficulty in gaining access to capital for
development for poor countries
Low income levels provide little opportunity
for savings that can be used for investment
Institutional factors
o Political and economic institutions:
Political instability, corruption and a lack of law
enforcement by government agencies undermine
the confidence of investors
o Economic policies:
How governments balance the rolls of market
forces and government intervention in the
economy
A heavier slant towards management by market
forces may result in a high level of economic
growth, but not improve education, health care
and quality of life
Excessive government control over economic
decision making can constrain the
entrepreneurship and innovation, reducing
economic growth but possibly increasing economic
development
The historical ineffectiveness of socialism as an
economic system. This suffers from a lack of
incentive, corruption in the economic planning
authorities and also the protectionist measures
involve dont allow the country to benefit from
global trade.
o Government responses to globalisation:
Policies relating to trade, financial and investment
flows, transnational corporations and the countrys
participation in regional and global economic
organisations will influence an economies ability
to take advantage of the benefits of integration
such as economic restructuring, greater efficiency,
access to foreign capital and technology and
access to overseas goods markets

effects of globalisation
trade, investment and transnational corporations
environmental sustainability
the international business cycle.

Case study
Undertake a case study of the influence of globalisation on an
economy other than Australia, including an evaluation of the
strategies used to promote economic growth and development in
this economy

China
(Strategies used to promote economic growth and development)
China is an emerging economy due to its rapid economic
growth rates and increases in economic development

Planned/
socialist
economy

Market/
capitalist
economy

Market liberalisation/ deregulation/ de-centralisation

Abandonment of commune system (de-collectivisation)
o Households can now make their own production
decisions and sell surplus output in free markets once
the state quota was met

The dual track system

o Dramatic increases in food production (reducing

poverty)
o Surplus income invested in privately run town and
village enterprises (TVEs)
o Saying among Chinese farmers: Mao Zedong gave us
liberation, Deng Xiaoping gave us food
o By the 1990s, central planning was obsolete in
agriculture. Market forces determine the distribution and
allocation of resources

The private economy

o Prior to reform all enterprise was government-owned
o 1980s relaxation of restriction on private enterprise
to supplement SOEs
o State-owned sector accounts for approximately 40% of
GDP

Many industries (banking, mining, power, steel

making) still SOE monopolies

o Tariff reform reduced cost of imports and increased

competition and efficiency

Dengs famous maxim: It doesnt matter if a cat is black or

white as long as it catches mice

State owned Enterprises

o 1980s-90s privatisation many small SOEs are sold to
the private sector
o Many large SOEs remain

E.g. banking, mining, power, steel making,

shipping

Some compete with international competition

(hence contradicting Chinas strategy of
globalisation and attracting foreign companies)

Others are monopolies (Thus not allowing any

foreign companies to enter the market at all or
domestic companies)

o SOEs are managed like private companies

(corporatisation)

Domestic
focus/
isolationist

Tradeorientated
focus/
globalised

Globalisation/ trade liberalisation

1980: Open door policy towards foreign trade and
investment
o Previously, China pursued an objective of achieving
autarky. In 1974, trade in goods and services was just
6% of GDP
o Special Economic Zones (SEZs) established to attract
foreign investment and MNCs through incentives such

as lower tax rates, exemption from import duties, cheap

labour and power and less stringent government
regulations
o Increased inflows of foreign capital, transfers of Western
technology and management skills

Foreign Direct Investment and Special Economic Zones

o 1980: Open door policy
o Coastal development strategy to take advantage of

Port infrastructure and trade routes

Labour supply

Access to technology

o SEZs facilitate trade and attract foreign investment

Are used (unofficially) as a model for the Asian

Tiger economies

o More adaptive and flexible government policies

Tax incentives for investment

Less restrictions on foreign investment

Rural-urban migration (movement permits)

Movement is still very much restricted

though and the Household Responsibility
Scheme remains

China was transitioning to a system of market socialism

Profiteering activity within an economy that is still dominated

by the public sector

Reduction of trade barriers (trade liberalisation)

o 1990s cuts to tariffs and other forms of protection

o WTO member as of 2001

o Encourages greater efficiency due to direct competition
o Attracts foreign investment

Opens domestic market to foreign competition

o SOEs still hamper foreign prospects of development in

China

Consequentially:

Agricultu
ral
economy

Industrial
economy
Industrialisation

Urbanbased
society

Agrarian
society
Urbanisation
Other policies:
GDP

o During the trough of the GFC in 2008-09, the

governments top priority was to maintain its growth
target rate of 8%

In 2008 it approved a US$586b stimulus package

2009-10 to counter the economic slowdown, boost
domestic demand and prevent a rise in poverty

China has employed a strategy of pump

priming (stimulating) the economy to
maintain high levels of GDP growth

Instituted an easing of monetary policy (an

expansionary monetary stance) in response to the
economic slowdown by cutting interest rates and

the reserve requirements on Chinese commercial

banks

Therefore:
o Lower interest rates make borrowing
more attractive and encourage
investment and consumption (C > S)
o Due to the reduction in the reserve
requirements for banks: Banks have
the ability to lend more money (as
they are not obliged to hold as much),
this increases lending

Unemployment
o Has been pump priming economy for the last decade
to keep GDP growth at around 8%

This level is needed to keep unemployment from

rising too fast

The labour market

o The Household Responsibility System restricts the
freedom of the movement of people around China
o Particularly affects rural peasants wanting to migrate to
urban areas in search of employment, higher incomes
and better living standards
o Inefficient use of labour resources as its allocation is not
responsive to the forces of demand and supply in the
labour market
o Problems:

Lack of well-defined occupational health and

safety regulations exposes workers to health risks

Exploitation of workers by employers through

underpayment or non-payment of wages

Taxation reforms

Also many cases of child labour

o 1994: Tax collection responsibility shifted from provincial

governments to the central government in Beijing

More efficient collection

Reduced tax evasion (a major problem)

Raising finance for central government

infrastructure spending and the reallocation of
resources to reduce income inequality. Rising
income inequality is a major problem for emerging
economies due to the effect of economic growth in
distributing income growth in an uneven fashion.
Chinas ageing population will also be a growing
drain on welfare payments in the future due to the
increase in aged care and medical payments

Financial system reforms

o Banks previously run by government departments
o Banking laws introduced in 1995 to develop network
banking
o More efficient flow of funds from savers to borrowers
o SOE banks still dominate (98% of banks)
o Stock exchanges established

Effectiveness of government strategies and future policy challenges:

Government policy implications
o Key successes

Trade and investment reforms resulted in dramatic

increase in economic growth

Economic development and reduction of absolute

poverty

Labour productivity growth 8.8%pa (2008-2010)

and the general utilisation of Chinas factors of
production (labour being a major one due to China
having the worlds largest population, exceeding 1
billion)

o Future challenges

Rebalancing the economy towards domestic

consumption

Creating a more equitable distribution of income

Income inequality may become a problem if

it rises due to the prolific growth rates

Becoming more environmentally sustainable

Due to the rising middle-class of the

developing China, the domestic market will
increasingly be a source of demand, and
hence economic growth (aggregate
demand)

Environmental sustainability is another

economic issue that is diametrically opposed
to growth. Industrialisation generally has
very negative effects on the environment,
however as China progresses to a developed
economy, the emergence of the services
sector and other high-tech clean industries
may decrease the environmental impact

Further reducing the size of the public sector, for

this has the effect of crowding out the private
sector from its expansion into these areas. Public
banks for example still dominate 98% of this
sector. The reduction in this dominance will allow
public banks to inhabit this market

Recently:

The one child policy has restricted the growth in the labour
force
o Wage rates are rising as the demand for labour grows
(an average of 20% per annum)

Rapid growth in the inequality of income

o 0.47 in 2012

Excessive spending on investment residential properties which

could eventually result in busting of this housing bubble

Expansionary macroeconomic policy to reduce and largely

avoid the economic slowdown in the GFC
o China is being affected by the slowing of the growth in
its export markets. These are the high-income countries
that were more highly impacted and are still recovering
from the GFC e.g. the US and Europe

Timeline:
Agricultural reforms (1978-1994)
o Abandonment of the commune system of agriculture (decollectivisation)
o Replaced with the Household Responsibility System
Households can make their own production decisions
and sell surplus output in free markets once the state
quota is met. This is a policy of incentivisation
o Resulted in:
Dramatic increases In food production
Surplus income was invested in privately run Town and
Village Enterprises (TVEs). This further raised output
Open-door policy (1980)
o Towards foreign trade and investment
o Special Economic Zones (SEZs) established
Attracted foreign investment and TNCs through marketliberalist policies such as:
Lower tax rates
Exemption from import duties
Less stringent government regulations
o Inflows of foreign capital increased Chinas access to export
markets, transfers of Western technology and management
skills, creating substantial employment in Chinas
manufacturing sector
Cuts to tariffs and other forms of protection (1992)
o Encourage greater domestic efficiency through import
competition, exposing domestic businesses to the global
market
o Chinas average tariff rate was cut from 32% to 19% in 1996
and reduced to 15% in 2000. This represents a decrease in
protectionism and a flouting of Chinas Maoist policy of
economic isolationism
Taxation reforms (1994)

o Shifted the power to collect taxes away from provincial

governments to the central government in Beijing in order to
improve the efficiency of tax collection and finance
infrastructure spending
o Also targeted tax evasion which was a major problem
encountered in raising significant government revenue
Banking laws (1995)
o Develop a system of network banking
o Establish stock exchanges. This represents a liberalisation of
the financial market
o Promote a more efficient capital market to facilitate saving
and investment in China