HSC Economics

Topic 1 The Global Economy

-Hand out assessment task 1

To warm up

Why did Australia evade the Global

Financial Crisis?

To warm up

Do we live in a borderless society?

Would you want to live in a world
without borders?

To warm up

What is the difference between free

trade and fair trade?

To warm up

What man made barriers slow down trade?

What physical barriers slow down trade?

Physical Barriers

Man made
Barriers

Topic 1: The Global

Economy
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

Topic 1: The big idea

The acceleration of international

integration is key to economic growth

Topic 1: Key Fact

In 1983 global tariffs averaged 26.3%

In 2007 global tariffs averaged 8.8%

The Global Economy

Economics is increasingly interested

in studying the global economy
(rather than individual domestic
economies)
The size of the global economy can
be measured by Gross World Product
Globalisation has lead to increasing
integration of domestic economies

Defining Globalisation

Globalisation involves:
Process of integration between and reduction in

barriers between different domestic economies

Greater influence of global factors in all aspects
of life & economic activity
Complex interactions between different
countries
Greater international flows of goods and
services, finance, labour & information
Global markets responding immediately to
economic news

Features of Globalisation

Remember:
L
I
F
T
T

Remember:
Labour
Investment
Finance
Trade
Technology

Labour

International labour markets allow the international division of

labour. This means certain countries specialise in certain forms
of labour e.g. India IT
Labour markets are less internationalised than other markets
due to migration restrictions
However, the mobility of labour is increasing e.g. Guest worker
schemes in NZ, skills migration at record levels in Australia
This has been promoted by increasing income inequalities and
closer relations between countries e.g. EU
TNCs now compete for talent which is scarce, with this being
one justification of CEO remuneration
E.g. Ronson has relocated the production of cigarette lighters
from Korea to Wales in the UK, leading to 20% wage cost
reduction

Investment

Investment flows between countries

have increased rapidly due to
Short term financial speculation
Longer term flows to buy / establish businesses

as investments
Deregulation of financial markets

These flows of FDI are largely

regionalised and focused on developed
OECD nations, primarily the triad of US,
EU and Japan (and increasingly China)

Finance

There is now a huge global market for capital

Daily transactions of stocks, bonds, currencies and
financial instruments accounts for around US$2 trillion
Private capital flows to developing countries are
around 7 times greater than official (government) flows
Investors transfer funds almost instantly around the
world
Interest rates are being set more and more based on
international factors, with greater convergence
between domestic economies
The scale of financial flows (which are different to real
production flows) has lead to the emergence of the
term casino economy

Technology

Technology has enabled

The range of products & services traded to

expand rapidly
The rapid movement of information and
communication techology e.g. Fibre-optic
networks, satellites, faster and cheaper
computers
Transport: The rapid movement of goods
e.g. Containerisation, cheaper flights, etc.

Trade

Global trade of goods and services has

increased rapidly in recent times
Prices are set internationally
International trade is growing three times as
fast as national economic growth
Trade has been accelerated by the
emergence of TNCs
TNCs purchase factors of production globally
International Trade agreements and
organisations have also facilitated trade

The International Business Cycle

The global economy, like any economy,

is affected by regular and recurring
fluctuations in the levels of economic
activity.
If a countrys economy is experiencing a
boom or recession its domestic demand
for goods and services can be affected.
The combined effects of the level of
economic activity of individual countries
will in turn affect the global economy

The International Business Cycle

Characteristics of the
phases in the business
cycle

An upswing in economic activity, or recovery, is usually

associated with rising levels of GDP, consumption expenditure,
investment expenditure and decreasing levels of
unemployment. This may lead to a boom with high levels of
GDP with businesses operating at close to full capacity,
inflation rising due increasing costs and interest rates at higher
levels.

A recession is a downturn in economic activity and is

associated with falling levels of GDP, consumption and
investment expenditure. Inflation and interest rates are
declining and unemployment is rising. A recession will have a
trough at the lowest point. A trough has GDP, consumption
expenditure and investment expenditures at the lowest levels.
Unemployment is high and inflation is low.

Factors influencing the International

Business Cycle

Investment flows: especially if one nation is experiencing

higher levels of economic growth. An example is the
Chinese economy which is expected to grow at a rate faster
than most developed nations in the next five years
monetary conditions: variations in real interest rates and
exchange rates may cause increased investment flows from
one country at the expense of another.
Market confidence: the Australian economy, like most
world economies, is influenced by the economic conditions
in the United States, Japan and Europe. Strengthening or
weakening consumer confidence in these economies tends
to influence economies in other parts of the world. E.g.
Australias imports influenced by global demand

Interpreting Graphs Skills

What are the main observations

which you could make about a graph?

The International Business Cycle

Where are things at now? How is the

global economy going?

Videos
IMF - Impact of GFC on Trade

Regional Business Cycles

Major regions are: Southeast Asia,

North America and Europe
Regional business cycles can vary
significantly from the international
business cycle
For example, China and Australia
escaped much of the impact of the
GFC

Regional Business Cycles

Regional Business Cycles

Some key terms to learn

ETM
STM
Tariff
Quota
FDI
TNC
Regionalism
Convergence
Comparative Advantage
Globalisation
Harmonisation
GWP
Portfolio investment
Trade blocs
Bilateral agreements
IMF
WTO
World Bank
G7/8
G20
Technology Transfer

To ponder

Is a world which is more integrated

more volatile?