Topic 1 – The global economy Globalisation Globalisation is the process by which the natural and government-created barriers between national economies are broken down. It can also be thought as the geographical dispersion of industrial and services activities and the cross-border networking of companies. Globalisation trends include: 1. The increase in the trends of goods and services between national boundaries – global markets. 2. The increase in movement of capital, labour, and technology between nations – global flows of factors of production and resources.
3. The related increase in interdependency between national economies. 4. The growth of the size of the number of TNC which has business operations in many nations. E. g.
IBM, GMT. 5. The tendency of consumer trends to become worldwide. E.
g. Jeans and Fast food. 6. The need for more inter government consultations and agreements to facilitate the increase in economic contacts and to deal with inevitable increase in disputes.
E. g. WTO. 7. Increase in environmental damage through out the world. Existence of the Global Economy It’s debatable whether the global economy exists yet.
The integration of our economy is far from complete. 1. Labour is anything but mobile in countries. It’s mobile in theory, but not in practice, as seen in the European Union. 2.
... as increased carbon emissions, noise levels have arisen. Domestic labours lose their jobs due to comparative advantage reasons. (economywatch global economy) Global economic trends This economy ... national economies of the world. The emergence of a global economy indicates or presupposes interconnectedness of the different national and regional economies. The formal opening a global economy ...
Total integration is not likely to occur. Since most non-tradables are services, and services account for roughly 80% of GDP in most “high income economies”, it’s likely that other countries’ non-tradables sector is about as big as ours. So the natural barriers between economies remain formidable. The 4 Levels of Globalisation 1 st Level – Trade between Countries The 1 st and most basic level of globalisation is trade between countries. Since the war, trade has grown roughly twice the rate that “Gross World Product” has grown. This implies huge growth in ‘intra-industry trade’ i.
e. trade between same industry, different countries. Growth of trade has been helped since the war because: 1. The 8 rounds of multilateral tariff reductions under the GATT.
2. Technological advance. In recent decades, trade has risen because of this rather than liberalisation. 2 nd Level – Growth in Cross-border Investment The 2 nd level of the globalisation process is the growth in cross-border investment and the consequent transfer of technology. This relates to DFI long term investment in production plants and suchlike and hence, the emergence of multi-national firms.
The policy of import replacement behind high tariff walls adopted by most newly independent developing countries in post war years encouraged the development of the multinational. 3 rd Level – Growth in Short-term Capital Flows The 3 rd level of globalisation process is the growth in short-term capital flows e. g. “Portfolio investment” in bonds and listed shares.
This trend arise from the breakdown of fixed exchange rates in the early 70’s, the move to floating exchange rates and the related abolition of exchange controls, the emergence of offshore capital markets and the deregulation of most high income economies’ financial systems. 4 th Level – Movements of Labour The 4 th level of globalisation is movements of labour. Not much quickening of the pace has taken place in recent times. Countries’ attitudes to migration are influenced far more by political / social considerations than economic ones, thus, hard to see this changing in the future. Most high-income countries have arrangements that facilitate short-term transfers of skilled multinational executives. Some countries may experience ‘brain drains’.
... in the long run, wrecked the country's economy.While there is ample evidence suggesting that World War II increased the opportunities for ... any growth during the war. Yet, the Argentine government succeeded in completing several commercial treaties which increased its trade with ... in the fact that an increase in trade does not necessarily improve a country's economy. In his book The Fitful Republic ...
Land is obviously a totally immobile factor of production. Labour will stay immovable for a while. Global Economy Size and Growth Rate The estimated total output of the world economy in 1999 was valued at $40, 714 billion US. The World economy has been growing, averaging 3.
2% annual percentage growth during the 1990’s. Problems involved in the measurement of the world economy include: 1. Inflation 2. Tax Avoidance 3.
Fluctuations in asset values 4. Lack of Statistical date Problems associated with using the absolute measure: 1. Large number of products that need to be compared. 2. Differences in transport cost between and in countries. 3.
Tax rates. 4. Trade barriers, which prevent this from being an accurate measure of relative prices. The global economy goes through cycles of growth and decline.
These cycles are referred to as the International Business Cycle. Trends in the 1990’s World economic growth was slow at the start of the 90’s, due to low growth in Europe, the US and Japan. It then continued to grow an average of 4% in the mid 90’s but suffered a slowdown due to the Asian Crisis in 1997. World Trade The growth of trade since the war has been greatly facilitated by the 8 rounds of multilateral tariff reductions under the GATT. However, the growth – and hence benefits from it – was biased in favour of trade between ‘high income economies’ because of the decision early on to exclude textiles, clothing and agriculture from negotiations.
Rapid growth in trade in services that has occurred in recent decades is explained more by the technological advances than by liberalisation. 5 Most Important Trading Nations % of World Exports of Goods and Services -1998 1. USA 14. 1% 2. Germany 9. 5% 3.
Japan 6. 9% 4. France 6. 0% 5.
UK 5. 7% 19. Australia 1. 1% Investment Direct Investment involves the purchase of a significant degree of control over foreign assets. Portfolio Investment involves purchasing ownership rights to foreign assets without gaining any significant control over the use of these assets. International financial flows have increased rapidly in the last 25 years as a consequence of the following: 1.
... been seen, American silver made a substantial contribution to the growth in world trade between Europe, Asia, and the Americas. The high value ... -to-weight, along with a worldwide acknowledgment of value. The exchange of silver for commodities in the orient led to a ... the gold produced in the world. A substantial amount of this silver flowed eastward from Europe in exchange for Asian commodities and ...
International trade has expanded at roughly twice the rate of growth in real GDP. 2. International direct investment has grown at roughly 3 times the rate of real GDP. 3. International equity investment has grown at some 10 times the rate of growth of real GDP. Transnational Corporations Transnational corporations establish subsidiaries in other nations in order to establish production facilities ‘offshore’.
E. g. BP, Shell, Daimler, News Corp, NAB, BHP-Billiton. The phenomena of firms seeking growth through foreign subsidiaries is virtually a world wide trend as the development of global markets encourages firms to specialise in certain products in which they have expertise. Global Consumer Culture Consumers in high and middle income nations and even in some low income nations are claimed to be adopting global tastes. This is known as the Global Consumer Culture where foreign tastes and cultures are adopted by other nations.
International Agreements Foreign Exchange Markets Participants in the foreign exchange market are: 1. Normal buyers and sellers who want to exchange some of their own funds. E. g.
exporters, importers, tourists and travellers, firms moving funds for direct and portfolio investment proposes and governments either paying for imports or borrowing and repaying loans. 2. Intermediaries such as financial institutions who are providing services to their customers trading in foreign currency (most banks and merchant banks have licenses permitting them to buy and sell currencies and gain a profit by buying at a lower price than they sell at).
3. Speculators seek to make a profit by anticipating movements in exchange rates. If they feel that the $A is likely to fall against the $US they sell the $A and buy $US.
When the $A falls in value they buy the $A and, if successful, have more $A than they started with. The Exchange Rate The exchange rate is the price of one currency in terms of another. E. g. AUD $1 = US $0. 55 Since December 1983, Australia has used a floating or flexible exchange rate where the value of the Australian Dollar is determined by the forces of demand supply.
... certain good, a country lowers the opportunity cost of that good by forgoing production of other goods. For example: Say country A has an absolute advantage in ... a result of specialization. But exactly how much should both countries trade to gain the highest possible benefits? By trading 1 car ...
Sources of Demand Sources of Supply 1. Demand and Supply residents buying Australian exports. 1. Australians buying imports.
2. All forms of capital inflow. 2. All forms of capital outflow.
3. Incoming foreign tourists. 3. Outgoing tourists from Australia.
4. Speculators. 4. Speculators. The above diagram, the exchange rate is AUD$1 = US$0. 55 – at this price, demand equals the supply of the dollar at quantity One.
At an exchange rate of 70 c, S > D, causing the dollar to depreciate where D = S i. e. 55 c. At an exchange rate of 40 c, D > S, causing the exchange rate to appreciate to 55 c where D = S. The Foreign Exchange market consists of those demanding Australian dollars for various reason and those supplying AUD$ for various reasons. The RBA also intervenes in the foreign exchange market and has done so since 1986 to smooth out fluctuations and test the market – this is called dirtying the float.
Changes to Trade and Financial Flows Exports are an injection while imports are a leakage. A rise in exports, leads to rise in total sales of firms which encourages a rise in output (rise in GDP).
Increased GDP will require more factors of production to be employed in production, and do an increase in income and encourage more consumption spending, more savings and more taxation revenue going to the government sector. Benefits of imports: – Consumers have access to a wider range of goods and services at perhaps different price and quality levels. – puts pressure on local firms to be efficient enough to compete against imports. – Imports sometimes provide access to the best technology.
Sheet 2 – Characteristics of Globalisation Trade International Trade refers to the movement of goods and services and thus financial flows between nations of the world. Free trade is based on the theory of comparative advantage and involves the free or unrestricted movements of goods and services between nations of the world. Protection refers to government assistance to domestic produces to give an artificial advantage over imports. e.
g. tariffs, quotas, subsidies, embargoes, tariffs / quotas , local content rules, technical discrimination and quarantine restrictions. Advantages of Free Trade Potential benefits of free trade are: 1. Increased specialisation can lead to economies of scale in production (more output and lower unit costs) thereby raising technical efficiency.
... in supply and can be easily transferred from production of one good to the production of another. 3. The level of technology is ... full employment, it is only possible to increase the production of one good by sacrificing some of another. That is, at full ... , in a fully employed economy, an increase in the production of capital goods can only take place at the expense of fewer ...
2. Specialisation allows for a greater variety and choice of goods and services available to consumers. 3. Increased competition between firms in the export and import replacement industries can lead to lower prices, employment growth and higher real incomes.
4. Improved incentives to innovate occur through the use of the latest technology to maintain competitiveness. This enhances dynamic efficiency. Disadvantages of Free Trade 1. Newly established firms in infant industries find it difficult to compete against more efficient established firms. This makes it difficult for countries to establish new export or import replacement industries.
2. Under conditions of free trade the most efficient and competitiveness producers will attract resources away from other sectors, causing some regions to lose key industries and experience job losses. Job displacement can lead to structural unemployment and more regional inequality. 3.
Free trade can lead to negative externalities if firms do not pay for spillover effects from their production activities such as pollution and degradation of the environment. 4. Countries pursuing free trade strategies may not be able to diversify their economic base. E. g.
a country specialising in agriculture exports may not have a high level of industrialisation and therefore be dependent on imports of manufactured goods. 5. Free trade may lead to unfair price cutting if countries that are efficient producers of agriculture or manufactured goods sell their exports at below the home price in foreign markets. This is known as dumping which may lead to the export of unemployment. 6.
A country pursuing free trade can often experience an ongoing current account deficit in the balance of payments if it is unable to finance its imports spending with export income. Factor Endowment Factor Endowment refers to the resources that a country may have or lack needed to produce the goods it wants. Countries differ in both the quality and quantity of the resources at their disposal, therefore having different factor endowment. A country’s supply of natural resources (land) is determined by its geography and climate. A country’s supply of other resources (labour, capital and enterprise) is determined more by its history. Here, both quantity and quality matter.
... silver they got from South America and traded it for manufactured goods from well established industrial countries like Great Britain, the Netherlands and ... were the main leaders in the expansion of European trade. Each country was able to establish itself as a power in ... spice trade in addition to other goods like silk and herbal teas which were much desired by many Europeans. Once these countries ...
E. g. well trained labour force, developed capital equipment and accumulation. The effects of differing factor supplies are: – Countries find it impossible or very difficult to produce a product. – Countries with large, relatively unskilled labour supplies tend to have a cost advantage in the production of simple goods requiring many hours. – Countries with relatively large supplies of land tend to be able to produce land intensive goods more cheaply.
E. g. wool. Absolute Advantage A country is said to have an absolute advantage over another country in the production of good X when, using the same quantity of resources as the other country, it can produce more of good X than the other country. E. g.
Australia can produce 100 units of wool while Bangladesh can produce 50 units of wool. Australia has an absolute advantage. According to the Principle of Absolute Advantage, each country will gain from trade by specialising in the good in which it has an absolute advantage and exchanging the surplus for the other country’s good. Pre-Trade Production per Workers Wool Shoes Australia 100 150 Bangladesh 50 200 Total Production 150 350 Pre-Trade Production per Workers Wool Shoes Australia 200 0 Bangladesh 0 200 Total Production 200 400 Table 2 shows that after specialisation more of both goods are produced. Although each country now has nil output of one good, each country can now trade with the other and they share the increased output between them.
Comparative Advantage Even if one country could produce everything more cheaply than another country, both countries would benefit from specialisation and trade. Each country should specialise in the good in which is has the lowest opportunity cost. I. e. where the cost of the alternative foregone is lowest.
In this way, world output could be maximised given the available supply of world resources. Opportunity Cost Ration for Wool/Shoes Australia 200 100 Bangladesh 50 75 Australia has a comparative advantage in wool production as its opportunity cost ratio is lower. Economic Arguments for Protection The Infant Industry Argument States that there may be some industries in which a country could develop a comparative advantage if only they could be sheltered from foreign competition for a little while. With protection, the industry can achieve the economies of large scale production. This means initially increases in prices to consumers, but then prices will fall eventually. This raises a couple of difficulties: 1.
If an industry would develop a comparative advantage over time, why not leave private investors to risk capital. 2. When will the tariff be removed? In Australia, the experience has usually been that the protection becomes permanent; Infant industries never grows up but wallows in inefficiency. Protect Domestic Employment Argument Historically, has been the strongest argument for protection in Australia. The argument is that if protection levels were reduced, unemployment would rise. Also, increases in protection would promote higher employment in Australia.
A few points of qualification are needed. 1. Protection designed to protect employment just transfers the unemployment levels to trading partners. 2. If protection levels were reduced, there would be an increase in unemployment in the short fun from least efficient industries. Most of this is from structural unemployment.
3. In the long run, reductions in protection have the potential to create more jobs. Protection diverts resources into relatively inefficient uses. Misallocation of resources will reduce our rate of economic growth. Thus, protection in the long run will reduce the rate at which jobs can be created. Cheap Foreign Labour Argument It asserts that Australian producers should be sheltered from competitions from countries when products are produced with cheap labour.
This argument ignores the fact that cost of production of goods depends not only on the cost of a resources but also on productivity. High wages mainly reflect the ability of workers to achieve high productivity levels. Therefore firms have to consider: 1. Is productivity maximised. 2. Is the firm trying to compete only on price.
How about quality, design, service? This argument protects the reality of effective or efficient management. Income Redistribution Argument Protection shifts income away from those in our most efficient industries (those which we have comparative advantage) to entrepreneurs and employees in protected industries. Military Self-Sufficiency Argument Argument states that certain industries are considered essential to national defence and that Australia should diversify its production into those areas in case of war. E.
g. shipbuilding, aircraft, communications. On economic grounds, it involves considerable diversion of resources into inefficient industries. Tariffs to Combat ‘Dumping” Argument Dumping refers to selling a product in a foreign market at a price below its cost of production.
Usually a temporary phenomenon to dispose surplus stock. Can cause problems in the importing country. Imposing duties on dumped goods to prevent short term dislocation that would occur in a solution. Summary Although protection can give short term unemployment gains, it is generally accepted by economists that over the long term, it reduces efficiency and slows down employment growth and long-term growth in standards of living. Of the arguments in favour of protection, only 2 are economically valid – genuine infant or sunrise industries and only then in the short term and to protect industries from dumping. These arguments are valid as they don’t contradict comparative advantage.
All the other arguments go against theory of Comparative Advantage and thus encourage inefficient use of resources – they are non-economic arguments. Methods of Protection Embargoes are a total ban imposed by a government usually on the importation of a particular product. Tariffs are taxes placed on goods produced in other nations which are collected by the Customs Department when goods enter the nation. Tariffs act by using the cost of the tax to artificially raise the selling price of imported goods. Tariffs are the most common form of protection used around the world because they not only act as a protective barrier discouraging buyers from purchasing imports in preference to locally produced goods, they also raise revenue for the government. The effects of a tariff are shown below.
In this diagram, OP 1 is the market price if no foreign trade in shoes is permitted. If overseas producers produce the good at price OD, then the demand will beat OM. Local supply will be at OJ, while sales of imported shoes will be JM. With the tariff at AD: Domestic production of shoes rise from OJ to OK and imports reduce from JM to KL, thus local producers gaining a larger market share.
This is the protective effect. The revenue effect is the taxation raised by the government. (Imports (KL) x Tariff (AD) ) The redistribution effect is the transfer consumers to producers. I. e.
local producers gaining more revenue as consumers pay higher prices. The real locative effect – additional local resources have been used by industries to raise output from OJ to OK. Retaliation effect arises when trading partners retaliate by placing a tariff on one of our exports to them, thus causing some local exporters to join consumers as ‘losers in the protection stakes’. Quotas are quantitative restrictions on imports which restrict supply from overseas and force customers to buy locally produced substitutes. Tariffs Quotas are a combination of tariff and quota protection. Subsidies are cash grants paid to a producer by the government to offset high production costs.
Voluntary restraint is where foreign produces agree to voluntarily restrict the quantity of imports to a % of total expected sales in the market. Others include: Import Licensing is a procedure by which the number of importers of a good is limited. Technical Specifications whereby countries insist on certain production specifications on health, safety etc. Quarantine Regulations causes a cost and delay, thus allowing local producers to gain an advantage.
Landing Charges are charges on landing in Australia from planes and boats. Local Content Rules whereby local firms are given access to low or reduced tariffs on imports of raw materials, parts etc. Protection in Australia Australia has always had, at least until 1998, high rates of protection with real or effective rates being much higher than nominal rates. Protection was mainly given for non-economic reasons (defence, self-sufficiency, import replacement) and even where infant or sunrise industries were protected (e. g. car industry) the protection often became long term rather than short term with the infant industry often turning into a sunset industry.
The Australia although gaining some short term benefits from protection incurred many long term costs-high levels of protection made domestic producers ‘inward’ rather than ‘outward’ looking and slowed down the process of structural change and inhibited process of globalisation. Tariff reform began in July 1973 with a 25% across the board reduction in tariffs and sped up in April ’88 (car plan) and May ’88 (general reductions though to the March 91 industry statement through to the year 2000. Specific restructuring plans were implemented by the Australian government for the Australian car, clothing, and footwear industry as these were heavily protected. Trade Trading Blocs and Agreements A trading bloc is a group of nations which agree to trade more freely with each other.
The most extreme trading blocs involve free trade between nations i. e. eliminating all taxes and other barriers on the movement of people and on goods and services between member nations of the trading bloc. Trading Blocs include: CERT A: Closer Economic Relations Trade Agreement is an agreement to reduce trade and other barriers between Australia and New Zealand.
NAFTA: North America Free Trade Agreement is between USA, Canada and Mexico committing them to move to a free trade area between these 3 nations. ASEAN: Association of South East Asian Nations which began as an economic cooperation body and in 1994 expanded an agreed list of products on which tariff barriers between members are to be reduced, and more recently have established a target date of 2003 for free trade in the agreed products. Since 2000, increased consultation and co-operation has been occurring between China, South Korea and Japan and ASEAN with suggestions that ASEAN could expand into an East Asian Free Trade Area. APEC: Asia Pacific Economic Cooperation – a consultative community including Australia, Asean, Japan, China, and the USA which is developing towards a free trade bloc covering Oceania, East Asia and the American nations which border the Pacific Ocean. International Organisations Over time, nations have built up many international organisations as a result of agreements. These international organisations have: 1.
Managers and staff from many nations to administer and carry out the tasks allocated to the organisation by multilateral agreement. 2. The task of providing advice and assistance in their areas of responsibility. 3. A permanent role i. e.
exists for decades. WTO Established in the late 90’s by over 100 nations who were part of the Uruguay Round Agreement on protection reductions. The WTO replaces GATT – General Agreement on Tariffs and Trade. Role of the WTO 1.
Supervising the implementation of the latest agreement on protection reduction. (Uruguay Round) 2. Provide experts to hear and rule on disputes between member nations on the meaning of the agreement. 3. Encourage other nations to join the agreement to develop the extent of free trade in the world. 4.
New initiatives to reduce the barriers to trade in the global economy. The World Bank Formerly called International Bank for Reconstruction and Development (IBRD).
Its original purpose was: 1. To assist countries with repairing the damage from WWII by providing loans to rebuild infrastructure.
2. To provide finance for development projects i. e. projects which will raise potential production and therefore standards of living in less developed countries. This is now the main function of the World Bank. Finance came from member nations as well as loan finance arranged and guaranteed by the I RBD.
The World Bank is a means of increasing the loan funds available to nations which have development projects in mind but trouble in gaining the savings needed. Requests for finance is investigated by W. B. staff who in the event of approval also supervise the use of the funds and control the release of funds as the project proceeds. International Monetary Fund Established at end of WWII to assist participation in the global economy. Its focus was on assisting nations to deal with exchange rate problems which could develop when fixed exchange rates were common.
The key problem was that countries could run out of foreign reserves needed for normal trade to continue. No foreign reserves mean trade would collapse, which leads to unemployment, and producers facing the problem of no raw materials, capital goods, etc. Worksheet 3 – Impact of Globalisation Average Living Standards of Different Nations To measure standards of living we may take either 2 approaches: 1. develop estimates of the average income in each nation (GNP per capita or GDP per capita) and then concert this money income level into one of the main currencies used across the world (usually US$).
Foreign exchange market valuations are not a good measure, PPP is better.
2. Looking at aspects of typical life experience in a nation. This approach is called the measure of the quality of life. E. g. average life span, level of education.
High Income Economies Account for 56. 1% of world production which is the source of the income for 14. 9% of the world’s population. World Production and its Distribution 1999 GNP (PPP) Middle Income Nations (44. 6% of Global Population) 33. 6% High Income Nations (14.
9% of Global Population) 56. 1% World Production US$38, 805 Billion (World Population 5975 million) Low Income Nations 11. 1% (40. 5% of Global Population) Economic Concepts Economic Growth Economic growth is the percentage rate at which the economy’s production is growing.
Economic growth is measured by removing the effect of inflation fro the money value of GDP (or GNP) to get the real value of GDP or a measure of the quantity of production. Real GDP = Money GDP x Base CPI Current CPI Economic Growth = this years Real GDP – Last years Real GDP x 100 Last Years Real GDP Economic growth can also refers to the increase in capacity of an economy to satisfy material wants of its members or sustained increase in the productive capacity of an economy. It is measured by changes in real GDP per annum. Economic Development Economic Development is the average standard of living achieved to date by a nation.
Measuring economic development involves attempting to measure the impact of the performance of the economy on the people of the economy. There are various ways of doing this. Some concentrate on material standards of living, others include or concentrate on non-material aspects of life e. g.
health, education. The traditional way to measure material standards of living is real GDP per capita. Real GDP per Capita = Real GDP Population Economic Development refers to the social and institutional changes that accompany economic growth as increases in literary rates, decreases in poverty, increases in life expectancy etc. Link between Economic Growth and Development Standards of living usually rise when strong economic growth occurs.
Economic growth is usually seen as the 1 st step to Economic Development. Factors Contributing to Economic Growth A country’s economic growth rate basically depends on its resources and technological change. Population Factors The following characteristics of a country’s population would assist Economic Growth: – High proportion of population in workforce i. e.
productive – Well educated population; increases occupational mobility of members (investment in human capital).
Education system provides preparatory production skills and an increase potential for effective entrepreneurial and administrative decision-making. – Healthy Population – A population which wants economic growth (motivated by material incentives) Capital Investment To grow, an economy needs to divert some resources away from current production, to produce capital goods (the produced means of production) which will increase our capacity to produce in the future. The process of adding capital stock to a nation is net investment. The sum of net investment and depreciation is gross investment. Capital widening is where the amount of capital per worker stays constant as population increases.
If the economy produces capital at a faster rate than population growth, it is known as capital deepening. Capital Deepening promotes higher economic growth rates while economic widening is necessary to maintain current real GDP per capita. Improved Efficiency in Resource Use Reductions in the extent to which labour and capital are unemployed will permit an economy to raise its economic growth rate. Making better use of underemployed resources will raise economic growth rate. Technological Progress Technological progress involves the introduction of new and better techniques of production to raise productivity of the economy. Technological progress is usually associated with new capital equipment, hence involves investment (embodied technical progress).
Technological progress can also occur through improvements in education, skills, health and organisation of the labour force (disembodied technical progress).
Costs of technical progress: – Increase risk of structural employment i. e. displaced workers lack skills to fills job vacancies. – Generally increases urbanisation and problems associated with it. The essential point is that for productivity to rise, capital deepening must occur along with technological progress.
Rising productivity in the key to economic growth and development. Institutional Factors Characteristics peculiar to a society may retard the potential for growth. Some of these characteristics are: – Lack of titles to ownership of property (necessary to reduce risks associated with lending).
– No or unreliable bankruptcy laws. – Political control over movements of people or goods. – Public ownership of resources may impact on profit motive.
– The system of public administration. – Diversity of languages spoken may cause inefficiency. Export Industries Export Industries are a source of economic growth in that they can escape restrictions on growth which may come from domestic demand. Trade makes possible larger scale production, the employment of more resources and a greater income and expenditure flow within the economy. Classifying Economies by Level of Development Poor Nations Characteristics of Poor Nations – Dominance of agricultural production – Weakness of public sector – Low levels of human capital – Low technology limiting use of natural resources – Low levels of savings and investment Developing Economies – Have more success in consistently increasing the production levels (e. g.
India 4. 6%) – Economic Growth achievements are usually lifting private consumption per capita levels. – Significant progress made in HDI across virtually all developing nations whereas poorer nation group has considerable variations. – Production pattern moving towards manufacturing and tertiary industries. – Governments have greater control and effectiveness – Growth of urbanisation promotes changes in social classes / customs , assisting economic development. – Savings growth is encouraging higher levels of investment.
– Improving education levels add to use of more advanced technology. Newly Industrialised Countries NIC is a label given to countries which have been experiencing rapid increases in manufacturing production and economic growth. (Regular increase in their production by 6-12% per year).
Features of NIC: – Rapid rise in private consumption per capita. – Sharp improvements in quality of life. – GDP growth rate close to 6% or above in 2 decade period.
– Rapid increase in manufacturing output. – Most cases double digit annual percentage increase in exports. Economies in Transition These economies are formerly socialist economies that are currently in the transition to a more open market economy. High Income Economies High income economies are usually: – industrialised economies in which widespread use of machines produced high output per worker and high levels of income per capita. – Increasingly concentrating on the production of services.
Demand for experiences stronger than goods. – Manufacturing production falling as percentage of GDP. The Impact of Globalisation International Convergence International Convergence can be defined broadly to mean the tendency of economic systems to become more similar in the following ways: – In how they operate – tendency for convergence of economic systems. Formerly centrally planned economic systems have reliance on markets in the 90’s. – Similarity in consumption patterns (global consumer trends) – Similar in their structure of output. Developing nations stress manufacturing production, high income economies establish new production patterns, poor nations hasn’t changed significantly.
– Convergence in economic performance. Depression conditions existed in much of Eastern Europe in 90’s, strong economic performance in anglo-capitalist group of nations, Europe with prolonged growth recession, Asia generally had rapid growth, and poor nations remain poor. – Importance of international trade – trade dependence is on the increase. The Maastricht Treaty The Maastricht Treaty (1992) between EU members triggered a move towards monetary union i. e. to develop and use the same currency, the Euro.
The extent of which the treaty encouraged convergence: – In order to use the same currency, there was a need to develop a Central Bank to administer and supervise common monetary policy across nations. This is a convergence on how they operate. – There had to be a reduction in differences in economic performance so that monetary policy could begin. Exchange rate movements had to be within 2. 25% of an agreed standard and reduction in differences in inflation, interest rates, fiscal deficits and government debt had to be enforced. This is a convergence in economic performance.
Impact on Economic Growth, Development and the Quality of Life The impact of globalisation on economic growth, development and the quality of life is being driven by 2 interrelated forces: (a) Sharp changes in the nature of good and services being traded between nations (increase in trade of high and medium technology manufactures over agriculture).
(b) The impact of technological change (transportation technologies, communication etc. ).
New and Old Economies The new economy is associated with information technology and telecommunications and the old economy is not. Summary of Australia’s performance in the 90’s in Old and New Economies: 1.
Telecommunications increased output enormously 2. Property and Business services includes computer software, network development, consultancies and maintenance as well as accounting and real estate. 3. Old economy industries also did well: Mining, accommodation, cafes and restaurants, wholesale trade, finance and insurance 4. Manufacturing, high and low output in different industries.
(High in recorded media and wood and paper products, low in TCF industries and other manufacturing).
5. Old economy services usually slower growth than typical in past decades. Recent Record of Quality of Life indicators for Australia – Average consumption per capita growth +2% p. a. on average since 1981/82.
– Very low under 5 child mortality rates. 0. 6% in 1998 compared to 1. 3% in 1980. – Long life expectancy, 76 for males and 82 for females. – Percentage of population in urban areas declined between 1980 and 1999, from 86% to 85%.
Indicates extent of access to services. – Percentage of students of secondary age in school risen from 81% to 1980 to 96% in 1997. Impact of Globalisation on Trade, Investment and Transnational Corporations – Australia’s involvement in trade has grown as measured by exports + imports as a percentage of GDP. Australia’s trade dependency has grown from 34% of GDP to 44% of GDP over period 1980-1998. – Australia has attracted considerable inflows of foreign saving, though direct investment is fairly stable.
Portfolio investment and the flow of Australian savings abroad have grown significantly. – Many transnational operations in Australia, many Australian based firms have been transnational. Distribution of Income Measuring the distribution of income involves developing: (a) Statistics on how gross income is shared amongst households ranked into quintiles (20% groups).
(b) Using these statistics to construct a Lorenz curve.
(c) Using these statistics to calculate a Gini index or coefficient. The Lorenz Curve If we convert the quintile income distribution into a cumulative set of statistics we can construct a Lorenz Curve: which gives a visual guide to the distribution of income. The curve is then constructed by plotting the cumulative quintile income shares against the percentage of households and illustrating by shading the distance of the plotted distribution from a line representing equality in the income distribution. The Gini coefficient is a mathematical expression of the degree inequality which can be visualise d from the shaded area of a graph. To calculate the Gini co-efficient we compare the shaded area with the total area of the triangle below the line of perfect equality. G = Area A Area A + B Australia has had increasing distribution inequality: 1981/1982 Gini Co-efficient was 0.
39 1988/1989 Gini Co-efficient was 0. 43 1999/2000 Gini Co-efficient was 0. 45 Globalisation and the Distribution of Income The connection between globalisation and the increasing inequality in income distribution is Globalisation Greater competition in product markets — -> Changes in how wages are determined High Incomes for highly skilled workers and slower wage rises for low productivity, low skill workers. However, changes in the income distribution and Gini coefficient rise before most indicators of globalisation became stronger. Therefore it does not appear to be the only force having a significant influence on the income distribution. Problems associated with assessing the impact of globalisation on income distribution world wide: – Economic development performance of all types of nations has to be evaluated together with their distributions of income and weighted for their share of the world’s population.
– Statistics are slow to be available, far from being up to date and criticised for being misused for propaganda purposes. – Have had events which threaten to make the widely accepted generalisations on economic development obviously inadequate. Conclusions made about the impact of globalisation on income distribution world wide (a) Recent economic development trends in Asia are contributing to a significant reduction in global inequality. (b) The economic development process tends to initially increase the inequality of income distribution. However the high income world indicates that economic and political forces eventually result in more moderate distribution. (c) Australia has had a sharp increase in inequality but this is an anglo-capitalism experience as a result of less government intervention.
Europe has not seen radical change in political ideology or income distribution. (d) The role of globalisation in the income distribution is subject to debate. Some argue, based on the events in anglo-capitalism in NICs, that globalisation increases inequality. However, globalisation in the last quarter of the 20 th century is both very recent and incomplete in its extent. The spread in the benefits of economic development takes decades, and political responses to changes in our society are also slow to accumulate.