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Increasing

 Economic  Integration  
 
The  Global  Economy  
Today  we  live  in  a  global  economy  –  where  the  economies  of  individual  countries  are  linked  to  each  
other  and  changes  in  a  single  economy  can  have  ripple  effects  on  others.  In  the  past  two  decades,  the  
term  globalisation  has  become  a  dominant  economic,  political  and  social  theme.  
Globalisation  refers  to  the  integration  between  different  countries  and  economies  and  the  
increased  impact  of  international  influences  on  all  aspects  of  life  and  economic  activity.  

The  major  indicators  of  integration  between  economies  include:  


 
 
 
Trade  in  Goods  
and  Services    
 
 
 
 
International  
Division  of    
Financial  Flows  
Labour  and    
Migration  
 
Globalisation    
 
 
 
 
 
Technology,  
Investment  and  
 
Transport  and  
Communication  
TNC's    
 
 
 
Gross  World  Product  
GWP  refers  to  the  sum  of  total  output  of  goods  and  services  by  all  economies  in  the  world  over  a  
period  of  time.  
 
Trade  in  Goods  and  Services  
Q International  trade  in  goods  and  services  is  a  measure  of  how  goods  and  services  produced  in  
an  economy  are  consumed  in  other  economies  around  the  world.  
Q Trades  in  goods  and  services  have  grown  rapidly  in  recent  decades.  
Q The  size  of  the  GWP  is  now  over  ten  times  its  level  in  1950.  
Q The  volume  of  world  trade  has  grown  to  almost  50  times  its  1950  level.  
Q However,  the  global  downturn  beginning  in  2001  brought  the  growth  of  global  trade  to  a  near  
standstill,  and  it  has  been  slow  to  recover  since.  
Q There  is  a  greater  volatility  of  trade  compared  with  GWP.  
Q Global  trade  has  increased  due  to  new  technology  in  transport  and  communications    
Q Also,  governments  have  encouraged  trade  by  removing  barriers  and  joining  trade  agreements.  
Q Composition  of  Trade:  the  mix  of  what  goods  and  services  are  traded  
Q Manufacturers  dominate  global  trade.  
Q Direction  of  trade  flows:  there  has  been  a  change  in  the  importance  of  different  economic  
regions  
Sahil  Bhandula  2014  Economics  HBHS  
10%  
7%  
Food  and  Agriculture  
2%  
Fuels  and  Minerals  
Other  goods  
19%  
62%   Commercial  Services  
Manufacturers  

1995  Composition  of  Global  Trade  


6%  
8%  
Food  and  Agriculture  
Fuels  and  Minerals  
9%  
Other  goods  
58%   19%   Commercial  Services  
Manufacturers  

2011  Composition  of  Global  Trade  


 
Financial  Flows  
Q International  financial  flows  have  expanded  substantially  following  financial  deregulation  
around  the  world.  
Q Controls  on  foreign  currency  markets,  flows  of  foreign  capital,  banking  interest  rates  and  
overseas  investments  in  share  markets  were  lifted.  
Q There  has  been  a  growth  in  exchange-­‐traded  derivatives  –  major  instrument  in  global  financial  
markets.  
Q An  important  feature  of  international  finance  is  foreign  exchange  markets  (FOREX  markets).  
Q Foreign  exchange  markets  have  experienced  extraordinary  growth  in  recent  years.  
Q The  value  of  a  currency  is  expressed  in  terms  of  another  currency  and  is  known  as  the  
exchange  rate  between  two  currencies.    
Q The  main  drivers  of  global  financial  flows  are  speculators.  
Q Speculators  shift  billions  of  dollars  in  and  out  of  financial  markets  worldwide  to  undertake  
short-­‐term  investments  in  financial  assets.  
Q The  main  benefit  of  greater  global  financial  flows  is  that  it  enables  countries  to  obtain  funds  
that  are  used  to  finance  their  domestic  investment.  
Q Negative  impacts  of  changes  in  global  financial  flows  include:  speculative  behaviour  can  create  
significant  volatility  in  foreign  exchange  markets  and  domestic  financial  markets.  
Q Once  an  upward  or  downward  trend  in  asset  prices  is  established,  it  tends  to  continue.  
Q The  International  Monetary  Fund  (IMF)  is  responsible  for  the  overall  stability  of  the  global  
financial  system.  

Speculators  are  investors  who  buy  or  sell  financial  assets  with  the  aim  of  making  profits  from  
short-­‐  term  price  movements.  They  are  often  critics  for  creating  excessive  volatility  in  financial  
markets.  
 
FOREX  Markets  are  networks  of  buyers  and  sellers  exchanging  one  currency  for  another  in  order  
to  facilitate  flows  of  finance  between  countries.  
 
 
Sahil  Bhandula  2014  Economics  HBHS  
Investment  and  Transnational  Corporations  
Q One  measure  of  the  globalisation  of  investment  is  the  expansion  of  foreign  direct  investment  
(FDI).  
Q There  has  been  a  dramatic  increase  in  FDI  flows  over  the  past  three  decades  –  FDI  flows  are  
strongly  influenced  by  the  level  of  economic  activity.  
Q FDI  is  directed  towards  nations  with  greater  industrial  capacity  and  larger  consumer  markets.  
Q Since  2010,  developing  economies  received  more  FDI  flows  than  developed  economies  
Q Developing  economies  such  as  China,  Brazil,  India  and  Mexico  continue  to  be  the  dominant  
source  of  FDI  funds  –  largest  recipients  of  investment.    
Q Transnational  Corporations  (TNCs)  play  a  vital  role  in  global  investment  flows  –  they  bring  
foreign  investment,  new  technologies,  skills  and  knowledge.  
Q A  significant  cause  of  the  growth  of  international  investment  is  the  increased  level  of  
international  mergers  and  takeovers.  
Q However,  majority  of  investment  still  comes  from  domestic  sources  –  FDI’s  account  for  less  
than  20%  of  total  investment,  while  80%  of  investment  comes  from  within  national  economies.  
 

Foreign  Direct  Investment  (FDI)  refers  to  the  movement  of  funds  between  economies  for  the  
purpose  of  establishing  a  new  company  or  buying  a  substantial  proportion  of  shares  in  an  existing  
company    (10  per  cent  or  more).  FDI  is  generally  considered  to  be  long-­‐term  investment  and  the  
investor  normally  intends  to  play  a  role  in  the  management  of  the  business.  

 
Transnational  Corporations  are  global  companies  that  dominate  global  product  and  factor  
markets.  TNCs  have  production  facilities  in  at  least  two  countries  and  are  owned  by  residents  of  at  
least  two  countries.  
 
 
Technology,  Transport  and  Communication  
Technological  developments  facilitate  the  integration  of  economies:  
Q Developments  in  freight  technology  
Q International  communications  through  high-­‐speed  broadband  
Q Facilitating  finances  around  the  world  through  computers  
Q Mobile  telecommunications  and  the  internet  help  TNC’s  
Q Advances  in  transportation  (e.g.  railway  and  aircrafts)  
 
International  Division  of  Labour  and  Migration  
Q More  people  than  ever  before  are  moving  to  different  countries  to  take  advantage  of  the  better  
work  opportunities  that  other  countries  offer.  
Q Highly  skilled  workers  are  attracted  towards  the  richest  economies  such  as  the  United  States  
and  the  largest  European  economies.  
Q Low  skilled  labour  is  also  in  demand  in  advanced  economies  to  do  certain  types  of  jobs.  
Q These  trends  in  migration  reflect  an  international  division  of  labour,  in  part  because  of  the  
migration  of  workers  to  countries  where  jobs  are  plentiful  or  better  paid,  and  also  because  of  
the  shift  of  business  between  economies,  in  search  of  the  most  efficient  and  cost-­‐effective  
labour.  

International  division  of  labour  is  how  the  tasks  in  the  production  process  are  allocated  to  
different  people  in  different  countries  around  the  world.  

 
 

Sahil  Bhandula  2014  Economics  HBHS  


The  International  and  Regional  Business  Cycles  
Q The  business  cycle  refers  to  fluctuations  in  the  level  of  economic  growth  due  to  either  
domestic  or  international  factors.  
Q Just  as  individual  economies  experience  stronger  and  weaker  periods  of  economic  growth,  so  
too  does  the  global  economy  -­‐  the  ebb  and  flow  of  world  economic  growth  is  known  as  the  
international  business  cycle.  

International  business  cycle  refers  to  fluctuations  in  the  level  of  economic  activity  in  the  global  
economy  over  time.  

Factors  that  strengthen  the  international  business   Factors  that  weaken  the  international  business  
cycle   cycle  
Trade  flows   Interest  rates  
Investment  flows   Government  fiscal  policies  
Transnational  corporations   Exchange  rates  
Financial  flows   Structural  factors  
Financial  market  and  confidence   Regional  factors  
Global  interest  rate  levels    
Commodity  prices    
International  organisations    
 
Regional  Business  Cycles  

Regional  business  cycles  are  the  fluctuations  in  the  level  of  economic  activity  in  a  geographical  
region  of  the  global  economy  over  time.  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sahil  Bhandula  2014  Economics  HBHS  
Trade,  Financial  Flows  and  Foreign  Investment  
 
Free  Trade  

Free  trade  can  be  defined  as  a  situation  where  governments  impose  no  artificial  barriers  to  trade  
that  restrict  the  free  exchange  of  goods  and  services  between  countries  with  the  aim  of  shielding  
domestic  producers  from  foreign  competitors.  Free  trade  is  based  on  the  economic  concept  of  
comparative  advantage.  
   
     
     
  Comparative  advantage  is  the    
  economic  principle  that  nations  should   Opportunity  cost  represents  the  
  specialise  in  the  areas  of  production  in   alternative  use  of  resources.  Often  
  which  they  have  the  lowest  opportunity   referred  to  as  the  ‘real’  cost,  it  
  cost  and  trade  with  other  nations,  so  as   represents  the  cost  of  satisfying  one  
  to  maximise  both  nations’  standards  of   want  over  an  alternative  want.  
  living.  
   
 
Advantages  of  Free  Trade   Disadvantages  of  Free  Trade  
Trade  allows  countries  to  obtain  goods  and   An  increase  in  short  term  unemployment  may  
services  that  they  cannot  produce  themselves,  or   occur  as  some  domestic  businesses  may  find  it  
in  sufficient  quantities  to  satisfy  domestic   hard  to  compete  with  imports  
demand    

Free  trade  allows  countries  to  specialise  in  the   It  may  be  more  difficult  to  establish  new  
production  of  the  goods  and  services  in  which   businesses  and  new  industries  if  they  are  not  
they  are  most  efficient   protected  from  large  foreign  competitors  

Free  trade  encourages  the  efficient  allocation  of   Production  surpluses  from  some  countries  may  
resources   be  ‘dumped’  on  the  domestic  market  
A  greater  tendency  for  specialisation  leads  to   Free  trade  may  encourage  environmentally  
economies  of  scale,  which  will  lower  average   irresponsible  production  methods  because  
costs  of  production  and  increase  efficiency  and   producers  in  some  nations  may  produce  goods  at  
productivity  even  further   a  lower  cost  
International  competitiveness  will  improve  as    
domestic  businesses  face  greater  competitive  
pressures  from  foreign  producers,  and  
governments  will  encourage  domestic  industrial  
efficiency  
Free  trade  encourages  innovation  and  the  spread    
of  new  technology  and  production  processes  
throughout  the  world  
Free  trade  leads  to  higher  living  standards  as  a    
result  of  lower  prices,  increased  production  of  
goods  and  services  and  increased  consumer  
choice  
 
 
Sahil  Bhandula  2014  Economics  HBHS  
 
Where  an  economy  can  produce  everything  at  a  lower  cost,  compared  to  another  country  it  enjoys  an  
absolute  advantage.  Trade  works,  however,  where  countries  can  sell  to  each  other  the  things  that  they  
make  the  cheapest  e.g.  Australia  sells  minerals,  China  sells  clothing.  
 
Where  countries  are  producing  similar  products,  however,  and  no  clear  advantage  is  evident,  
comparative  advantage  (least  opportunity  cost)  may  be  the  decider  over  which  trade  should  occur.  
 
Assuming  that  both  countries  can  produce  these  quantities  with  the  same  resource  pool  they  may  
specialise  in  those  products  that  deliver  greatest  comparative  efficiency  gained  via  economies  of  scale.  
 

Production  Possibility  Curve   Clothing  (tonnes)   Cars  

Australia   30   10  

Japan   20   30  
 
   In  this  example  given:  
• With  all  of  their  resources  Australia  can  produce  either  30  tonnes  of  clothing  or  10  cars.    
• On  the  other  hand,  Japan  can  produce  20  tonnes  of  clothing  or  30  cars.    
!
• For  Australia  the  opportunity  cost  of  one  tonne  of  clothing  is  !  of  a  car  
!
• For  Japan  the  opportunity  cost  of  one  tonne  of  clothing  is  1  !  cars  

• For  Australia  the  opportunity  cost  of  one  car  is  3  tonnes  of  clothing  

Opportunity  Cost   Clothing  (1  tonne)   1  Car  


!
Australia   !
 of  a  car   3  tonnes  of  clothing  
! !
Japan   1  !  cars   !
 tonnes  of  clothing  
!
• For  Japan  the  opportunity  cost  of  one  car  is    !  tonnes  of  clothing  

 
!
On  comparative  advantage  terms  it  is  cheaper  for  Australia  (!  of  a  car)  to  produce  clothes  than  Japan  
!
(1  !  cars)  so  Australia  should  specialise  in  clothing.  Similarly  Japan  should  specialise  in  cars,  because  it  
!
enjoys  a  lower  opportunity  cost  (!  tonnes  of  clothing  compared  to  3  tonnes  of  clothing)  and  has  a  
comparative  advantage.  
 
 
 
 
 
 
 
 
Sahil  Bhandula  2014  Economics  HBHS  
Role  of  International  Organisations  
World  Trade  Organisation  (WTO)  
World  Trade  
Q The  role  of  the  WTO  is  to  implement  and  
Organisation   advance  global  trade  agreements  and  to  
resolve  dispute  between  economies.  
 
Q The  WTO’s  membership  has  over  150  
International  
OECD   Monetary   countries  
Fund    
Q The  WTO’s  major  focus  in  recent  years  has  
been  the  Doha  Round  which  wishes  to  
address:  
 
1) Reducing  agriculture  protection  
United   2) Lowering  tariffs  on  manufactured  goods  
Nations   World  Bank  
3) Reducing  restrictions  on  trade  in  services  

International  Monetary  Fund  


Q The  IMF’s  role  is  to  maintain  international  financial  stability,  particularly  in  relation  to  
foreign  exchange  markets.  
 
Responsibilities  include:  
Surveillance:  is  the  monitoring  of  the  economic  and  financial  policies  of  the  187  member  countries.  
The  IMF  aims  to  highlight  possible  risks  to  domestic  and  external  stability  and  advises  on  needed  
policy  adjustments.  It  provides  regular  assessment  of  global  economic  performance  and  of  financial  
markets.  
   
Financial  assistance:  The  IMF  was  established  with  a  pool  of  central  bank  reserves  and  national  
currencies  that  could  be  made  available  to  member  countries  experiencing  short-­‐term  balance  of  
payments  problems.  
 
 
 The  
  World  Bank  
  Q The  World  Bank’s  role  in  the  global  economy  is  primarily  concerned  with  helping  poor  
countries  with  their  economic  development.  
 
Q The  World  Bank  is  funded  by  contributions  from  member  countries  and  from  its  own  
borrowings  in  global  financial  markets.  
 
Q It  makes  loans  to  developing  nations,  at  rates  that  are  below  standard  commercial  rates,  to  
fund  infrastructure  projects  such  as  power  plants,  roads  and  dams.  

United  Nations  
Q The  United  Nations  has  an  agenda  that  is  broader  than  any  other  organisation,  covering  the  
global  economy,  international  security,  the  environment,  poverty  and  development,  
international  law  and  global  health  issues.  

Organisation  for  Economic  Co-­‐operation  and  Development  (OECD)  


Q The  primary  goal  of  the  OECD  is  to  conduct  and  publish  research  on  a  wide  range  of  economic  
policy  issues,  and  to  coordinate  economic  cooperation  among  member  nations.  

 
Sahil  Bhandula  2014  Economics  HBHS  
Influence  of  Government  Economic  Forums  
The  aim  of  economic  government  forums  is  to  enable  heads  of  state,  along  with  their  treasurers  and  
central  bank  governors  to  discuss  global  economic  issues,  with  particular  attention  to  economic  
stability  and  growth.  
 
  Group  of  Eight  Nations  (G8)    Group    of  Twenty  Nations  (G20)  
  Q US,  UK,  France,  Germany,  Canada,   Q Leading  forum  for  coordinating  the  
  Japan,  Italy  and  Russia   global  response  to  avert  a  
    depression.  
  Q Effectively  operated  as  the  economic    
  council  of  the  world’s  wealthiest   Q The  G20  agreed  to  coordinate  fiscal  
  nations,  meeting  annually  to  discuss   stimulus  around  the  world,  as  well  as  
  conditions  in  the  global  economy.   improving  supervision  of  the  global  
    financial  system  and  international  
  Q Its  agenda  has  often  included  general   financial  institutions.  
  political  issues  and  current  priorities    
  such  as  climate  change,  global    
  poverty  and  security.  
 
 
Trading  Blocs,  Monetary  Unions  and  Free  Trade  Agreements  
Q Countries  have  formed  agreements  and  trading  alliances  to  ensure  that  they  are  in  the  best  
position  to  gain  from  growing  trade  opportunities  and  also  to  avoid  being  excluded  from  
emerging  trading  blocs.  
Q Trade  agreements  can  be  multilateral,  bilateral,  or  global.  

Trade  bloc  occurs  when  a  number  of  countries  join  together  in  a  formal  preferential  trading  
agreement  to  the  exclusion  of  other  countries.  
 
Q Free  trade  agreements  (or  preferential  trade  agreements)  are  formal  agreements  between  
countries  designed  to  break  down  barriers  to  trade  between  those  nations.  
 

Trade  Agreements  

Multilateral  or   Bilateral  Agreements  


Global  Agreement  
Regional  Agreements   CERTA,  SAFTA,  TAFTA,  
World  Trade  
EU,  NAFTA,  APEC,   AUSFTA,  CHAFTA,  
Organisation  
AFTA,  AANZFTA   MAFTA  

Sahil  Bhandula  2014  Economics  HBHS  


MULTILATERAL  AGREEMENTS  
Multilateral  trade  agreements  are  agreements  between  many  nations.  
 
Advantages  
Q Particularly  effective  as  they  can  cover  many  nations  in  the  one  agreement  and  create  a  more  level  
playing  field  between  many  nations.  
Q Multilateral  agreements  that  focus  on  a  particular  geographic  area  can  also  promote  regionalism  
more  than  global  free  trade.  
 
Disadvantages  
Q Their  effectiveness  is  limited  as  by  the  very  nature  of  needing  many  to  agree  to  the  one  
understanding.  
Q Multilateral  agreements  can  be  complicated  to  negotiate.  
 
Examples  
European  Union:    
Q Formed  to  allow  free  trade  between  members  in  Europe  (27  nations).  
Q EU  imposes  external  tariffs  on  goods  being  imported  from  outside  the  union.  
 
Asia  Pacific  Economic  Cooperation  Forum  (APEC):  
Q 21  Pacific  Rim  nations  that  seek  to  promote  free  trade  and  economic  cooperation.  
Q It’s  not  a  free  trade  agreement  but  a  forum  –  has  had  more  political  success  than  economical.  
 
North  Atlantic  Free  Trade  Agreement  (NAFTA):  
Q Trilateral  trade  bloc  in  North  America  between  US,  Canada  and  Mexico.  
Q Important  as  it  is  a  trade  agreement  between  developed  and  developing  nation.  
 
Association  of  South  East  Asian  Nations  (ASEAN):  
Q Thailand,  Malaysia,  Singapore,  Indonesia,  etc.  
Q Australia  and  New  Zealand  have  a  FTA  with  ASEAN  

BILATERAL  AGREEMENTS  
Bilateral  agreements  are  between  two  nations.  
 
Advantages  
Q Usually  easier  to  negotiate  than  multilateral  agreements  
Q Reductions  in  trade  barriers  =  extent  of  market  access  for  exporters  and  potential  growth  in  trade  
and  investment  flows  
Q Common  agreements  on  conduct  of  international  trade  
Q Strengthen  economic  relationships  
 
Disadvantages  
Q Their  ability  to  reduce  trade  barriers  is  not  as  broad  
Q Too  much  competition  
 
Examples  
Australia  has  bilateral  agreements  with:  
Q NZ  
Q Singapore  
Q Thailand  
Q United  States  
Q Chile  

  Sahil  Bhandula  2014  Economics  HBHS  


Protection  
Protection  can  be  defined  as  any  type  of  government  action  that  has  the  effect  of  giving  domestic  
producers  an  artificial  advantage  over  foreign  competitors.  

 
Reasons  for  Protection  

Infant   Prevention  of   Domestic  


Industry   Dumping   Employment   Defence   Others  

 
Infant  Industry  Argument:  
Q New  industries/businesses  find  establishment  difficult  with  increased  initial  costs  and  
problems  
Q The  protection  argument  is  that  these  businesses  need  extra  assistance  to  aid  them  in  their  
establishment  
Q They  need  to  be  shielded  from  competitors  in  the  short  run  to  enable  them  to  build  capacity,  
establish  markets  and  achieve  economies  of  scale  so  that  they  can  compete  in  the  global  
economy  
Q Protection  should  last  for  a  short  time  to  act  as  an  incentive  to  promote  efficiency  and  organise  
cost  structures  
 
Prevention  of  Dumping:  
Q Dumping  occurs  when  foreign  businesses  sell  their  goods  in  another  market  at  below  cost  
price  in  order  to:  
a) Dispose  of  a  surplus  
b) Establish  market  control  
Q Due  to  the  practice  of  dumping,  local  businesses  often  fail  and  unemployment  results  
Q The  only  gain  from  dumping  is  that  it  results  in  lower  prices  for  consumers  in  the  short  term  –  
however  once  the  local  competition  is  eliminated  the  foreign  producer  raises  prices  again  
 
Protection  of  Domestic  Employment:  
Q By  protecting  Australia  from  cheap  foreign  goods  –  the  demand  for  local  goods  will  be  greater  
and  this  will  create  more  domestic  employment.  
Q This  argument  not  supported  because  protection  will  tend  to  distort  the  allocation  of  resources  
in  an  economy  away  from  areas  of  more  efficient  production  towards  areas  of  less  efficient  
production.  This  will  lead  to  higher  levels  of  unemployment  and  lower  growth  rates.  
 
Defence:  
Q Some  nations  argue  that  they  need  to  protect  industries  which  are  related  to  the  defence  of  the  
country  
Q A  nation  would  not  wish  to  become  reliant  on  other  nations  for  providing  its  defence  
equipment  
Q Yet,  this  argument  misses  the  main  problem  of  inefficient  allocation  of  global  resources  
 
Other  Arguments  for  Protection  
Q Cheap  foreign  labour:  it  is  important  to  protect  the  nation  against  goods  which  are  produced  
by  cheap  foreign  labour  
Q Protection  can  exist  against  nations  which  exploit  the  environment  
 
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Methods  of  Protection  
 
 
  Tariffs  
 
 
 
  Export  
Incentives   Quotas  
 
  Methods  
 
 
 
  Local  
  Content   Subsidies  
  Rules  
 
Tariffs:  
Q Tariffs  are  taxes  on  imports  
Q Tariffs  raise  the  price  of  the  import  and  make  it  more  expensive  and  therefore  less  attractive  
than  the  domestically  produced  good  
 
PWORLD  =  World  Price  à  QS1  =  Quantity  Supplied  (Domestically),  QC1  =  Quantity  Demanded,  
 
PTARIFF  =  World  Price  with  Tariff  à  QS2  =  Quantity  Supplied  (Domestically),  QC2  =  Quantity  Demanded  
 
At  PTARIFF  the  gap  between  the  quantity  supplied  and  the  quantity  demanded,  which  is  filled  by  
imports,  has  been  decreased.  
 
      Economic  Effects  of  a  Tariff  
  Q Domestic  producers  supply  a  greater  
  quantity  of  the  good,  therefore  
  stimulates  domestic  production  and  
  employment  
   
  Q More  domestic  resources  are  attracted  
  to  the  protected  industry  =  
  reallocation  of  resources  towards  less  
  efficient  producers  
   
  Q Consumers  pay  a  higher  price  and  
  receive  fewer  goods  
   
  Q The  tariff  raises  revenue  for  the  
  government  
   
  Q In  response  to  tariffs  on  imports,  other  
  countries  may  impose  tariffs  on  the  
  goods  that  are  exported  to  them  i.e.  
 
retaliation  effect.  
 
 
Sahil  Bhandula  2014  Economics  HBHS  
 
   
Quotas  
Q An  import  quanta  restricts  the  amount  of  a  good  which  can  be  imported  into  a  nation  
Q Quotas  guarantee  domestic  producers  a  share  of  the  market  
 
-­‐ The  curve  SS  and  DD  represent  domestic  
supply  and  demand  
 
-­‐ 0P  is  the  price  at  which  the  imported  
goods  would  sell  if  there  was  no  quota  
imposed.  At  this  price  consumers  
demand  0Q1,  domestic  producers  supply  
0Q,  and  the  quantity  imported  would  be  
QQ1  
 
-­‐ If  the  government  imposed  a  quota  
restricting  imports  to  Q2Q3,  this  would  
have  the  effect  of  raising  the  price  of  
imported  goods  to  0P1.  This  price  would  
allow  domestic  supply  to  expand  to  0Q2  
 
 
Economic  Effects  of  a  Quota  
Q Domestic  producers  supply  a  greater  quality  of  the  good,  therefore  the  tariff  stimulates  
domestic  production  and  employment  in  the  protected  industry.  
 
Q More  resources  in  that  economy  are  attracted  to  the  protected  industry  =  reallocation  of  
resources  from  other  sectors  of  the  economy.  
 
Q Consumers  pay  a  higher  price  and  receive  fewer  goods.  
 
Q Unlike  tariffs,  quotas  do  not  directly  generate  revenue  for  the  government.  
 
Q As  with  tariffs,  the  imposition  of  a  quota  on  imports  can  invite  retaliation  from  the  country  
whose  exports  may  be  reduced  because  of  the  quota.  

 
Subsidies  
Q Subsidies  involve  government  assistance  to  
domestic  producers  to:  
a) Decrease  costs  and  prices  
b) Increase  output  of  goods  
 
Subsidies  are  cash  payments  from  the  government  to  
businesses  to  encourage  production  of  a  good  or  service  
and  influence  the  allocation  of  resources  in  an  economy.    
Subsidies  involve  financial  assistance  to  domestic  
producers,  which  enables  them  to  reduce  their  selling  
price  and  compete  more  easily  with  imported  goods.    
 

Sahil  Bhandula  2014  Economics  HBHS  


-­‐This  is  shown  by  the  rightward  shift  of  the  domestic  industry’s  supply  curve,  which  results  in  a  lower  
market  price.  Quantity  produced  increases  from  Q  to  Q1.  
 
 
 
Economic  Effects  of  a  Subsidy  
Q Domestic  producers  supply  a  greater  quantity  of  the  good,  therefore  tariff  stimulates  
domestic  production  and  employment  
 
Q More  resources  in  that  economy  are  attracted  to  the  protected  industry,  leading  to  
reallocation  of  resources  from  other  sectors  of  the  economy.  
 
Q Consumers  pay  a  lower  price  and  receive  more  goods  
 
Q Subsidies  impose  direct  costs  on  government  budgets  because  they  involve  payments  
from  the  government  to  the  producers  of  goods  and  services.  
 
Q While  economists  are  opposed  to  protectionist  policies,  they  often  prefer  a  subsidy  to  a  
tariff  because  subsidies  tend  to  be  abolished  more  quickly  –  since  they  impose  costs  on  
the  budget,  rather  than  generating  revenue  

Local  Content  Rules  


Q Local  content  rules  state  that  goods  must  contain  a  specific  percentage  of  locally  produced  
components.  
Q Such  a  guarantee  allows  the  imported  components  to  be  untaxed.  
 
Export  Incentives  
Q Export  incentive  programs  give  domestic  producers  assistance  such  as  grants,  loans  or  
technical  advice,  and  encourage  businesses  to  penetrate  global  markets  or  expand  their  market  
share.  

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Globalisation  and  Economic  Development  
 
Differences  Between  Economic  Growth  and  Economic  Development  

Economic  growth  refers  to  a  sustained  increase  in  a  country’s  productive  capacity  over  time.  This  
is  measured  by  (real)  GDP  growth.  However,  it  is  important  to  look  further  than  measures  of  
income  and  economic  growth  when  assessing  living  standards.    
 
Economic  development  is  a  broader  concept  than  economic  growth  that  attempts  to  measure  
improvements  in  well-­‐being  or  welfare  and  other  quality-­‐of-­‐life  indicators  like  health  standards  
and  education  levels  which  are  not  given  a  financial  value.  
 
 
The  most  popular  method  for  comparing  living  standards  between  different  economies  is  income  
(Gross  National  Income)  because  it  measures  the  ability  of  a  nation’s  citizens  to  satisfy  their  material  
wants.  
 
GNI  is  the  sum  of  value  added  by  all  resident  producers  in  an  economy  plus  receipts  of  primary  
income  from  foreign  sources.  However,  the  exchange  rate  is  a  limitation  to  comparing  GNI’s  as  a  
whole,  and  therefore  economists  usually  make  an  adjustment  using  what  is  known  as  purchasing  
power  parity  (PPP)  before  comparing  GNI  levels  between  countries.  
 
Purchasing  Power  Parity  (PPP)  is  a  theory  that  states  that  exchange  rates  should  adjust  to  
equalise  the  price  of  identical  goods  and  services  in  different  economies  throughout  the  world.  

 
Human  Development  Index  
 
The  main  alternative  measure  to  GNI  is  the  Human  Development  Index  (HDI),  devised  by  the  United  
Nations  Development  Program  (UNDP)  to  measure  economic  development.  It  takes  into  account:  
 
• Life  expectancy  at  birth.  This  is  indicative  of  the  health  and  nutrition  standards  in  a  country.  
High  levels  of  longevity  are  critical  for  the  country's  economic  and  social  well-­‐being.  
• Levels  of  educational  attainment.  Education  is  important  for  the  development  of  the  skills  of  
the  workforce  and  the  future  development  potential  of  an  economy.  The  HDI  measures  adult  
literacy  and  the  ratio  of  people  in,  or  having  completed,  primary,  secondary  and  tertiary  
education.  
• GNI  per  capita,  which  measures  the  sum  of  gross  value  added  by  all  resident  producers  in  the  
economy,  on  a  purchasing  power  parity  basis.  This  is  used  as  a  measure  of  a  decent  standard  of  
living  and  is  an  essential  determinant  of  the  access  that  people  have  to  goods  and  services.  

The  HDI  is  a  score  between  0  for  nations  with  no  human  development  and  1  for  maximum  human  
development.  The  2007/08  Human  Development  Report  gave  Iceland  the  highest  HDI  at  0.968  and  
Sierra  Leone  the  lowest  at  0.336.  Australia  ranks  third  after  Iceland  and  Norway,  with  an  HDI  of  0.962.  
 
 
 
 
 
 
Sahil  Bhandula  2014  Economics  HBHS  
 
Developing  Economies,  Emerging  Economies  and  Advanced  Economies  
 
Countries  are  generally  categorised  into  groups  because,  although  all  countries  face  unique  
circumstances  at  any  point  in  time,  they  tend  to  confront  similar  issues  according  to  their  stage  of  
economic  development.  The  main  categories  that  economists  use  are:  
 
• Developing  Economies:  Developing  economies  experience  low  living  standards,  low  education  
levels  and  generally  have  agriculture  based  economies  with  poor  infrastructure  and  economic  
and  political  institutions.  
 
• Emerging  Economies:  Emerging  economies  are  in  the  process  of  industrialisation  and  
experiencing  sustained  high  levels  of  economic  growth.  
 
• Advanced  Economies:  Advanced  economies  refer  to  high  income,  industrialised  or  developed  
economies.  The  group  includes  34  economies  across  North  America,  Europe  and  the  Asia-­‐
Pacific.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reasons  for  Differences  Between  Nations/Causes  of  Inequality  in  Global  Economy  
 
Global  Factors   Domestic  Factors  
• Global  trade  system   Economic  Resources  
• Global  financial  architecture   • Natural  resources  
• Global  aid  and  assistance   • Labour  supply  and  quality  
• Global  technology  flows   • Access  to  capital  and  indebtedness  
• Entrepreneurial  culture  
 
Institutional  Factors  
• Political  and  economic  institutions  
• Economic  policies  
• Government  responses  to  globalisation  

Sahil  Bhandula  2014  Economics  HBHS  


 
 
GLOBAL  FACTORS  
 
Many  features  of  the  global  economy  and  the  process  of  globalisation  contribute  to  the  inequalities  
between  countries.  Although  globalisation  also  creates  opportunities  for  economic  growth  and  
development,  many  aspects  of  the  global  economy  appear  to  be  entrenching,  rather  than  alleviating  
global  inequalities.  
 
Global  trade  system  
Several  features  of  the  global  trade  system  work  to  reinforce  rather  than  reduce  global  inequalities:  
• Wealthy  countries  protect  their  domestic  agricultural  sector  because  it  is  not  competitive  with  
agricultural  producers  in  many  developing  nations.  Developing  countries  that  export  
commodities  are  severely  affected  by  continued  high  levels  of  global  protectionism  in  the  
agricultural  sector.    
• Expanding  regional  trading  blocs  like  the  European  Union  and  North  American  Free  Trade  
Agreement  exclude  poorer  nations  from  gaining  access  to  lucrative  global  consumer  markets.  
Exclusion  from  trade  opportunities  has  an  enormous  impact  on  poor  countries  
• Although  the  World  Trade  Organization's  Doha  Round  of  trade  negotiations  had  been  
promoted  as  the  'development  round'  because  of  its  focus  on  trade  reforms  to  benefit  poorer  
nations,  it  has  struggled  to  achieve  any  outcomes.  High-­‐income  nations  have  resisted  making  
concessions  on  the  issues  that  would  provide  the  greatest  benefit  to  developing  countries  -­‐  
reduced  agricultural  protection  and  less  restrictive  intellectual  property  laws.    
• The  benefits  of  free  trade  agreements  are  often  not  accessible  to  developing  nations  because  of  
the  substantial  cost  in  implementing  international  agreements  and  lodging  appeals  against  
other  countries'  protectionist  measures.    

Global  financial  architecture  


Although  deregulated  global  financial  markets  and  the  global  financial  system  are  intended  to  create  
development  opportunities  by  enabling  the  free  flow  of  funds  around  the  world,  the  global  financial  
system  can  also  entrench  global  inequalities:  
• Long  term  international  flows  of  investment  heavily  favour  developed  countries.  High  income  
economies  received  around  two-­‐thirds  of  total  FDI  inflows  in  2006.  
• Short  term  financial  inflows  also  heavily  favour  the  more  prosperous  'emerging  markets'  of  the  
developing  world,  which  offer  better  financial  returns  for  currency  and  stock  market  
speculators.  However,  these  regions  have  also  experienced  the  greatest  economic  volatility  in  
the  past  decade.  
• As  a  result  of  greater  access  to  global  financial  markets,  many  developing  countries  have  
massive  foreign  debt  burdens.  In  2005,  the  governments  of  developing  countries  owed  $US637  
billion.  Interest  repayments  on  these  past  loans  reduce  the  income  available  for  governments  
to  promote  growth  and  development  through  spending  on  education,  healthcare  and  
infrastructure.    

Global  aid  and  assistance  


The  limited  efforts  made  by  developed  countries  to  address  the  problem  of  global  inequalities  also  
contribute  to  the  entrenched  problem  of  differences  in  living  standards:  
• The  total  level  of  annual  development  aid  provided  by  rich  nations  is  relatively  small  -­‐  
$US104.4  billion,  or  0.2  per  cent  of  gross  world  product.  This  is  well  below  the  level  to  which  
high-­‐income  countries  have  been  committed  for  over  three  decades  (0.7  per  cent  of  their  GDP)  
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• Critics  of  the  aid  policies  of  developed  countries  argue  that  a  significant  proportion  of  official  
development  assistance  is  'phantom  aid'  -­‐  i.e.  aid  funds  that  do  not  improve  the  lives  of  the  
poor.  According  to  the  World  Bank,  only  38  per  cent  of  bilateral  foreign  aid  is  used  for  
development  projects  (such  as  finance  or  resources  for  capital  projects)  or  humanitarian  
assistance  (such  as  emergency  distress  relief).  
• The  distribution  of  aid  by  high-­‐income  countries  often  reflects  strategic  and  military  
considerations  rather  than  the  needs  of  the  world's  poorest  countries  e.g.  USA  and  Iraq  
• While  multilateral  development  aid  (distributed  by  the  World  Bank,  IMF  and  United  Nations)  is  
better  targeted  at  the  world's  poorest  countries,  it  is  less  than  one-­‐third  of  the  value  of  total  
development  assistance  from  the  Development  Assistance  Committee  members.  

Global  technology  flows  


Although  technology  has  the  capacity  to  contribute  to  closing  the  gaps  in  living  standards,  it  is  largely  
geared  to  the  needs  of  high-­‐income  countries  and  not  to  the  needs  of  developing  nations.  High-­‐income  
economies  choose  the  priority  areas  of  scientific  research  and  technological  development.  Much  of  
this  technology  is      of  little  benefit  to  poorer  nations  that  have  abundant  labour  supplies,  limited  
capital  resources  and  a  young  population  whose  main  health  risks  are  common  infectious  diseases.    
Developing  nations  also  find  it  difficult  to  gain  access  to  new  technologies.  Intellectual  property  rights  
restrict  the  benefits  of  technological  transfer  to  poorer  countries  because  they  cannot  pay  developed  
country  prices  for  those  technologies.    
 
 
DOMESTIC  FACTORS  
 
Economic  resources  
The  simplest  explanations  for  contrasts  in  levels  of  development  focus  on  the  difficulties  most  
economies  face  in  acquiring  and  maintaining  sufficient  resources  for  the  production  -­‐  namely,  natural  
resources,  labour,  capital  and  entrepreneurship.  
Economies  that  have  similar  features  can  experience  contrasting  levels  of  development  if  one  country  
has  greater  access  to  a  particular  input  to  the  production  process  than  other  countries.  
• Natural  resources:  While  natural  resources  may  in  themselves  be  low  value  added  goods,  they  
are  important  inputs  for  the  production  of  higher  value-­‐added  manufactured  goods  and  
services.  Economies  that  have  an  abundant  and  reliable  supply  of  cheap  natural  resources  
clearly  have  better  opportunities  for  economic  development  than  those  that  do  not.  But  natural  
resources  can  also  hamper  a  country's  economic  development  if  they  lead  to  the  economy  
developing  a  narrow  export  base  and  becoming  over-­‐reliant  on  a  small  number  of  industries  to  
drive  economic  growth.  
• Labour  supply  and  quality:  In  a  sophisticated  global  economy,  labour  is  becoming  the  most  
important  input  to  the  production  process  for  many  sectors  of  the  economy  and  is  thus  an  
important  factor  influencing  development  levels.  Whereas  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  reduce  the  quality  
of  the  labour  supply  
• Access  to  capital  and  indebtedness:  Difficulty  in  gaining  access  to  capital  for  investment  and  
development  is  another  major  structural  weakness  of  developing  nations  that  contributes  to  
their  lower  living  standards.    
• Enterprises  in  countries  with  high  levels  of  foreign  debt  will  often  find  it  more  difficult  to  
obtain  access  to  funds.    

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• Entrepreneurial  culture:  While  it  is  difficult  to  quantify  differences  in  culture  between  
economies  and  how  this  can  impact  upon  economic  performance,  evidence  suggests  that  a  
country's  history  and  social  institutions  can  impact  on  its  economic  success.    

 
Institutional  factors  
Institutional  factors  -­‐  ranging  from  political  stability,  legal  structures,  central  bank  independence,  
extent  of  corruption,  strength  of  social  institutions  and  the  government's  domestic  and  external  
economic  policies  -­‐  can  affect  the  ability  of  a  nation  to  achieve  economic  development.  
• Political  and  economic  institutions:  Institutional  factors  in  individual  countries  can  have  a  
dramatic  influence  on  the  economic  environment  for  businesses,  investors  and  consumers,  and  
thus  have  implications  for  a  nation's  level  of  economic  development.    
• Political  instability,  corruption  and  a  lack  of  law  enforcement  by  government  agencies  tend  to  
undermine  the  confidence  of  investors,  who  will  be  reluctant  to  take  risks  if  their  business  
interests  are  threatened  by  an  inadequate  structure  for  resolving  legal  disputes,  corruption  or  
other  institutional  problems.  Developed  economies  have,  in  general,  lower  levels  of  corruption  
than  developing  and  transitional  economies.  
• Government  responses  to  globalisation:  Government  responses  to  globalisation  can  have  a  
substantial  influence  on  a  nation's  ability  to  achieve  economic  development.  Policies  relating  to  
trade,  financial  flows,  investment  flows,  transnational  corporations  and  the  country's  
participation  in  regional  and  global  economic  organisations  will  influence  an  economy's  ability  
to  take  advantage  of  the  benefits  of  integration,  such  as  economic  restructuring,  efficiency,  
access  to  foreign  capital  and  technology  and  access  to  overseas  goods  markets.  

 
 
 
 
 
 
 
 
 
 

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