International Economic Integration

- ‘The world is the economy’ – countries are now more connected than ever before. We live in a truly global economy.
- The Global Financial Crisis (GFC) of 2008/09 and the Covid 19 outbreaks of 2020/21 have shown us just how much the whole
world is actually connected. However, the idea of being connected is not a new concept even though the ‘connectedness’ was not
as significant in the past - the Great Depression of the 1930s had a significant impact on employment and economic growth
worldwide.

The Global Economy

- The Global Economy refers to the increased integration (connection) between economies of the world. The world’s economies are
becoming closer and closer. Globalisation impacts on all aspects of life and economic activity.
- Global integration is being driven by transport, cultural exchanges, advances in technology etc. including the way the internet has
globalised the media. News of an economic disaster in one country is almost instantly communicated to the rest of the world.
- Financial traders can move money out of the affected country in no time. They may even stop investing in a neighbouring country
if they feel that the neighbouring country has a similar problem e.g. in Europe during the GFC. This is called contagion or financial
contagion where trouble spreads like a disease.
- International trade is constantly growing and trade in services has increased at a very fast rate, especially in banking, tourism,
education and telecommunications.
- Globalisation also means that many services can now be delivered by somebody in another country e.g. the preparation of
architectural drawings, document design, publishing, customer service roles (call centres), accounting, payroll etc.
- The internet has revolutionised services such as retail, media and entertainment. It has also transformed how we communicate,
search for information and compare prices.

The Global Economy – Part 2

- The most rapid increase has been in global financial transactions such as credit cards. It’s the financial world that connects all
economies.
- Most trade and investment occurs in, and between, developed economies and fast-developing economies such as China and India.
- Global corporations hold most of all the technology and product patents in the world such as intellectual property for designs of
new machines, pharmaceuticals, electronic gadgets, films, TV shows, books, recordings etc.
- Patents are one of the main things the USA sells to the world. Patents of companies such as Apple, Amazon, Facebook, Google and
Microsoft.
- The richest 20% of the world’s population enjoys a share in global income that is far superior than the poorest 20%. The benefits
of increased trade and globalisation aren’t spread evenly between countries.

Wide Reading
- The IMF publishes the World Economic Outlook twice a year. It categorises about
40 countries as advanced economies and the rest as emerging and developing
economies.

GWP
- Gross world product is defined as the sum of all countries GDP over a period of
time such as a year. All GDPs are converted to a $US value for consistency and
then they are added together.

2019 Trial

Answer is C

Explanation
As workers are willing and able to move around the world with less restrictions to seek
appropriate employment, it would be reasonable to assume that there will be an efficient
flow of labour with workers moving to take up employment that rewards them for their
efficiency and skills.
Globalisation
- Globalisation is the creation of a world market in a ‘borderless’ trading world.
- The world is connected through communication, finance, trade, banking, technology, the media, employment, tourism, education,
the English language, environmental management, culture etc. Global businesses are a key link between international economies.
- A recession in one economy can impact on another; if the USA or China is in recession then this will heavily impact on other
economies such as Australia.

Trade in Goods and Services

- Trade in goods and services has increased dramatically in the last few decades.
- Trade agreements between countries and domestic deregulation (the removal of rules and laws) are two factors that have
strongly promoted globalisation and global links.

- The World Trade Organisation, which replaced GATT (General Agreement on Trade and Tariffs) in 1993, works to promote free
trade and a ‘level playing field’ between all member countries.
- Australia has played its part in ‘levelling the playing field’ by reducing barriers such as tariffs (taxes on imports).
- Another way that Australia has promoted free trade is to sign preferential trade agreements/deals:
- bilateral agreements between two countries e.g. Australia and USA; Australia and South Korea, Australia and China (the
most important agreements because they are very specific).
- multilateral agreements across regions such as Asia or the Pacific e.g. APEC.
- Some of the other important trading blocs in the world are the North American Free Trade Agreement (NAFTA) which is now
called USMCA and the European Union (EU).
- In today’s global economy the composition of global trade is continually changing as economies (and people) demand different or
newer goods and services.
- The rise of economies such as China and India has played a significant part in shifting trade patterns. These economies are now
demanding goods and services that they previously didn’t demand.

Financial Flows
- Finance is the most globalised feature of the world economy because everything revolves around money which today can move
instantly between countries (ATMs, credit cards, international banks, money transfers, apps etc).
- It’s the financial world that connects all economies.
- Sydney is often considered the heart of urban Australia with a population of nearly 6 million.
- Sydney is the corporate and financial capital of Australia and is an important financial centre of the Asia-Pacific region.
- It is home to the Reserve Bank of Australia, the Australian Stock Exchange, many Australian and international banks, and major
Australian and multinational corporations.
- It also has a concentration of jobs within the multimedia and communications industries, IT, tourism, hospitality, cultural
industries etc
- Financial deregulation, which began in the 1970s and 1980s, contributed to the globalisation of financial markets. This involved
governments removing certain rules/regulations to encourage globalisation, competition and business.
 - The main benefit of greater financial flows is that it enables counties and companies to obtain the investment finance when they
need it.

Investment and transnational corporations

- International businesses operate in a number of countries in the hope of making a profit. This is called investment.
- The global expansion of manufacturing for instance takes advantage of the low labour costs and the cheaper resources around the
world and, as such, some countries cannot compete and have moved into other areas such as services e.g. Australia
- International businesses are often attracted to a country by various government policies that attempt to encourage foreign direct
investment (FDI) e.g. IKEA, Google, Apple, Amazon, McDonald’s, Toyota, Shell, Emirates, Zara etc. are just a few examples of global
brands.
- All the major brands of the world operate in Australia. Their investment creates local jobs, pays local suppliers and pays local taxes
but some of the profits will ultimately flow back overseas.

Wide Reading
- Ireland, at its peak prior to the GFC in 2008, was able to attract a lot of foreign investment by having a company tax rate of 12.5% -
Australia’s company tax is 30%. It has changed this to 15% since October 2021 in what has been a global shift by governments to
get companies to pay a minimum standard rate of tax across nations of at least 15%. Large multinationals such as Google, Apple,
Microsoft, Facebook, Dell and a range of large pharmaceutical companies located themselves in Ireland to take advantage of that
low tax rate.

2017 HSC

Answer is D

Technology, Transport and Communication

- Consumers are global - they buy over the internet, they travel and they are well informed about prices, trends, quality of goods
etc. Marketing research shows that consumers in the developed world have similar tastes and this has largely allowed
international companies to market products in a similar way around the world.
- Email, videoconferencing, EFTPOS, electronic tracking of stock, iPhones, apps, websites, social media etc. are all part of the
modern business world.
- Technology is a major driver of globalisation and it facilitates better communication and transport bringing businesses together.
- Up until about 1950s, the opportunity to travel remained largely with the wealthier groups in society. It was the period of rapid
economic growth that followed WWII and the introduction of paid holidays that enabled more people to travel.
- New forms of accommodation, the emergence of tour operators, the marketing efforts of tourist organisations, the launch of the
jumbo 747 in 1970 and the growth of businesses that provide tourist services were now driving the growth in tourism.
- Advances in international communications, safer air travel, more comfortable accommodation and more accessible venues have
also driven the globalisation of tourism.
- The global transportation infrastructure is rapidly making the world a seamless, interconnected pathway to all parts of the globe.
- As air travel becomes more affordable and more accessible, there is really no limit on where travellers can go. The range of
destinations for tourists has increased and now encompasses almost all countries in the world.
- Given the contribution that tourism makes toward a country’s economic and social wellbeing, nearly all governments have
established national tourism organisations to promote tourism within their countries e.g. Tourism Australia.

International Division of Labour, Migration

- The global labour market involves:
- the movement of workers to other countries
- the movement of industries to countries where the cost of labour is less.
- The international workforce is integrated. Workers with greater skills are more mobile (geographic mobility) and therefore there
are more ‘globalised’ doctors, engineers, pilots, teachers, marketing executives, architects, banking executives etc.
- Immigration laws around the world generally restrict lower skilled workers from moving to other countries e.g. the ‘Brexit’, the UK
leaving the EU, was partly driven by the fear that foreign workers were taking local jobs.
- Australia’s major intake of migration is in the category of ‘Skilled Migration’.
2019 HSC

Answer is A
Explanation
By elimination of others

The International and Regional Business Cycles

- The international business cycle refers to the business cycle of the world. The regional business cycle generally refers to an area
such as the European Union.
- Regional business cycles can be different to international business cycles, with some regions performing strongly and others not so
strongly e.g. a recession may be happening in the EU but not beyond the EU.
- The Global Financial Crisis had a major impact on most economies and remains a good modern example of financial contagion.
- Rising world oil prices for instance can have a major impact on the international business cycle because it adds to the costs of
production. This occurred twice in the 1970s – 1973 and 1979.

Trade, Financial Flows and Foreign Investment

- Countries trade in goods and services they specialise in e.g. Japan specialised in electronics and car manufacturing and became a
world leader in those fields.
- About 3/4 of Australia’s trade today is with the Asia - Pacific region (source: austrade.gov.au) with smaller proportions going to
the USA (about 9%) and Europe and the UK (about 13%). The Australian economy is much less dependent on both the USA and
Europe than it was in the past, but it does still maintain strong trading links with those traditional partners.
- From about the mid-1990s China became the new market opportunity for the western world. China has grown partly because the
workers earn low wages by comparison to the developed world; however, it is more than just the world’s low-cost producer of
choice. China is transforming itself into an enormous middle class consumer nation, demanding products that we have demanded
for years e.g. cars, iPads, televisions, fridges, washing machines etc.
- China needed lots of iron ore to make steel and this was ‘lucky’ for Australia especially during the Mining Boom years. Today
China represents about 1/3 of Australia’s total trade (source: austrade.gov.au).
- Australia and China are complementary trading partners. Australia has a large natural resource base and specialises in the
production of primary goods for export.
- Australia generally purchases from China manufactured goods. China’s industrial development was built on labour-intensive
production which was then sold to Australia and other countries in the form of manufactured goods.

Wide Reading
Our top 7 Trading partners in 2020:
- China
- USA
- Japan
- Korea
- UK
- Singapore
- India
Our top 5 exports in 2020:
- Iron ore
- Coal
- Natural Gas
- Education
- Gold

Our top 5 imports in 2020:

- Cars (called PMVs – passenger motor vehicles)
- Petrol
- Telecom equipment
- Freight services
- Computers
Source: Department of Foreign Affairs and Trade (DFAT)

The Basis of Free Trade – Its Advantages and Disadvantages

- Free trade occurs when there are limited artificial barriers imposed by the
governments on the flow of goods and services across international borders
such as tariffs, quotas etc.
- The arguments for free trade are based on the concept of comparative
advantage, whereby countries benefit by specialising in producing goods or
services.
- David Ricardo was a famous English economist who made a fortune as a
stockbroker. He wrote his first economics article after reading Adam Smith’s
The Wealth of Nations.
- In his work of 1815 called Essay on the Influence of a Low Price of Corn on the Profits of Stock, Ricardo outlined the economic
concept of the law of diminishing marginal returns.
- Ricardo opposed the protectionist ‘Corn Laws’ of the time which restricted imports of wheat. He argued for free trade and
introduced into economics the concept of comparative advantage.
- Comparative advantage states that the efficiency of a country is measured by opportunity cost i.e. what does a country lose by
trying to produce everything itself?
- The principle of comparative advantage states that if countries specialise and free trade occurs, then the following advantages
should occur:
- more efficient allocation of resources
- increased global output
- higher national income
- better living standards
- international specialisation
- economies of scale in world markets
- competition between local and foreign producers
- promotion of good relations between countries
- obtain a wide variety of goods and services by trading
- encourages innovation

The Basis of Free Trade – Part 2

Absolute advantage
- Absolute Advantage is when a country can:

- produce more of a good with the same resources as another country

OR

- the same quantity of a good with less resources than another country

OR

- the good is produced with lower production costs than other countries.

Absolute and Comparative Advantages Example

- Comparative advantage (developed by David Ricardo) refers to a lower opportunity cost when producing a good. It is based on the
most efficient use of resources.
 - Absolute advantage (developed by Adam Smith) is where a country can produce more output than another country with the same
level of resources.

a) Which country has an absolute advantage in the production of each commodity i.e. which is better at beef and
which is better at wool production?

Australia for beef (100 versus 60)

New Zealand for wool (200 versus 150)

b) For Australia, what is the opportunity cost of producing 1 unit of wool?

2/3 unit of beef (100/150) is given up

c) For New Zealand, what is the opportunity cost of producing 1 unit of wool?

3/10 units of beef (60/200) is given up

d) Which country should specialise in wool? Why?

New Zealand should specialise in wool production because there is a lower opportunity cost i.e. a better comparative
advantage. NZ gave up 3/10 of beef versus 2/3 of beef for Australia.

Completely Free Trade?

- No country follows a policy of completely free trade. The economic theory is NOT about a free-for-all type scenario. Australia and
the USA have a free trade agreement but the economies are vastly different in size. The USA is not going to give Australian
producers free-for-all access to their economy and in return receive free-for-all access to a much smaller economy.
- Free trade refers to the concept of less regulations and lower tariffs than previously. It can be thought of as ‘freer than before’.
- Many justifications are given for protection (from free trade), such as the protection of local jobs, but protection only tends to
save jobs in the short term.
- Infant (new or beginning) industries, less efficient but important industries and industries experiencing hardships, such as farmers
in a drought, may need some degree of protection from the government from time to time.

Short term versus Long Term

- Protecting a select few of a country’s industries against overseas imports can hurt other more efficient industries in the longer
term as resources are diverted to the protected industries i.e. Governments sometimes protect inefficient industries (maybe
through government grants), when that money could have been spent more efficiently elsewhere. Sometimes the rationale for
this protection is not based on sound economics.
- Saving jobs in the protected industry in the short term generally does so at the expense of longer term employment in the rest of
the economy.
- Foreign competitors could certainly put local industries out of business by ‘dumping’ cheap products on the Australian market if
there was absolutely no protection (the free-for-all scenario), so therefore some protection is given to, and is needed for, our local
industries. Quotas on the number of goods that can be imported is a good way to limit dumping.
- In the longer term however protection cannot prevent the economic world from changing. It becomes unsustainable because an
economy needs to adapt to the modern, globalised world.

Wide reading
- Ford Australia was given over $100 million in 2012 to ensure that ford falcons were made in victoria until 2016.
- Once subsidies finished, ford closed both the geelong and broadmeadows plants in october 2016
- There were about 600 jobs lost at the time and the closure ended a 90-year association between ford and the community of
geelong
- Not cars are made in Australia as toyota and holden closed too in 2017

Role of international organisations

- There are some global economic organisations/authorities that promote policies across the world
- They attempt to provide rules for trade and investment, and a forum for the discussion of trade related issues and disputes
- However, they cannot force countries to comply with their regulations because all nations are sovereign states i.e independent
The world trade organisations
- The world trade organisation is the main multilateral trade agreement which provides a forum for countries to promote free trade
and resolve trade disputes.
- Its called an ‘organisation’ but, in many ways, it is really one big trade agreement
- The WTO replaced GATT (general agreement on tariffs and trade) in 1955
- It monitors developments in world trade and review barriers to trade such as tariffs and subsidies
- The WTO’s agreements are negotiated and signed by most nations of the world.
- They are essentially contracts, ‘binding’ governments to keep their trade policies within agreements
- The latest round of WTO trade negotiations is called the Doha round, named after the place where negotiations started i.e Doha,
Qatar
- Rounds (negotiations) can last for many years. This one started in Nov. 2001
- The main aims of the DOha round
- To reduce agricultural subsidies across the globe
- To get advanced economies to grant developing countries more access to their markets
- Negotiations over the years have ebbed and flowed and some issues have been resolved while others are still under negotiation

International monetary fund

- The IMF is responsible for lending funds to countries which experience short-term balance of payment problems, exchange rate
issues or other financial catastrophes
- The IMF was created with money from ‘richer’ countries such as Australia.
- These funds are then made available to countries experiencing short-term, temporary financial problems
- The IMF borrows from its richer member countries and lends to countries in need (but they are charged interest)
- Each country is assigned an amount to lend the IMF based on its size which is part of the conditions of membership
- A country in financial trouble and unable to pay the international bills, poses potential problems for the stability of the
international financial system which the IMF was created to protect
- The stability of global financial markets is at risk because of financial contagion
- The IMF provided temporary assistance to economies such as Greece, Ireland, Cyprus, Portugal, etc. during the years of the GFC

Homework questions
2, 5, 6, 8, 10 Pg 22

Q2
This statement highlights the interconnectedness across the global economy in the 2020s, the impact of the corona virus that originated in
china has now affected the global economy due to its increasing dependence on other countries. Covid temporarily disrupted some cog in
the chains of moving goods and services, people, and to a lesser extent that constitutes globalisation, it has accelerated others.

Q5
Global trade has also grown strongly in recent decades because of new technologies in transport and communications. Technological
developments facilitate the integrate of economies, which has reduced the cost of moving goods between economies and providing
services to customers in distant markets

Q8
They are global companies that have production facilities in at least two countries and reviewed by residents of at least two countries. The
production facilities stimulate global economies and due to their connectedness impact each other’s performance

Wife reading
- oct 2021: Australia has asked the WTO to examine Chinas tariffs in imported wine
- Dec 2020: Australia also asked for WRO action in relation to tariffs on barley
- 2018: Australia banned Chinas Huawei from tendering for the 5G network

The world bank

- The world banks main function is to promote economic development in developing countries through provision of grants, loans,
aid, and technical assistance
- It focuses on long-term development projects, especially in the poorest countries in the world
- The world bank attempts to encourage foreign investment and development on those poorer countries
- The world bank usually require governments in developing countries to implement structural reform in their economies in kre
countries to receive financial assistance