International economic integration
merchandise trade
(actual physical products)
More trade stats
- Developed economies account for the greatest proportion of world trade, however this percentage has been decreasing (68 per cent of exports in 1995 to 56 precent of 2014) - Developing economies have seen an increase in their share of world trade over the last 15 years ( from 30% of global exports in 2000 to 43% in 2015 - The emergence of BRICs has seen a significant increase in trade flows between these nations and the rest of the world
What are the drivers of globalization?
- Improvements in transport → in regards to shipping, have facilitated the increase in global trade - Improvements in telecommunication and technology - Liberalisation of Trade
Factors which allow TNCS to develop
- Removal of restrictions on foreign ownership - Development of global capital markets → led to substantial growth in TNCs
How can globalisation be seen?
- The level if trade - The level of global financial flows - The level of investment between nations - The growth in technology, transport and communication - The movement of people
Volatility of portfolio investment
- VOLATILITY!!! • Portfolio investment has increased exponentially over the last 2 decades • Total value of share trading per year is approx. $114 trillion
Value and volume of trade summary
- long term there has been a strong increase in the value and volume of world trade over the last 40 years → Facilitated by increasing liberalisation of global trade through the dismantling of trade barriers, as well as significant improvements in telecommunication, technology and transport - this has led to world trade growth compromising almost 60% of global GDP, up from 39% in 1985. → World trade has grown consistently faster than global GDP - However, sluggish world trade growth post the GFC has economists concerned that relatively low growth (compared to global GDP growth might be partly explained by the slower pace of multilateral trade liberalisation and convergence economics theory - 2017 did see a rebound in trade growth owing to a global economic upswing, however the WTO forecasts slower than expected growth in trade volumes throughout the remainder of 2018
Summary of Composition of world trade
-There has been a growing trend towards trade in " parts of products" This is in line with the growth in TNCS as they look to produce at the most efficient cost -countries who trade mostly in agricultural products can be left behind. Agriculture is most heavily protected export (EU in particular) which makes it difficult for developing countries whose dominant export is agriculture to compete More value-add comes from increased levels of production and profits flow back to TNCS home country
Direction of trade
-majority of trade is by advanced economies the top 39 advanced nations of the world dominate trade, accounting for 63.3% of exports in goods and services the other 152 emerging and developing economies account for 36.7% of exports in goods and services The euro area accounts for the greatest level of exports - 26.3% But china is the biggest individual exporter at 10.7% of global exports
Examples of financial flows
1. Foreign Exchange 2. Portfolio Investment 3. Foreign Direct Investment
Two choices
1. Migration → people can move to jobs 2. International division of labour → jobs can move people
How many TNCS are there?
320,000 compared to 37,000 in 1990
World trade as a percentage of global GDP, has grown by approximately
50% in the last twenty years from 39% of GDP in 1995 to 60% in 2015
Financial Flows
: money flows around the world for both currency exchange and investment
how is the size of an economy measured?
Gross World product -This is the total of the production of goods and services by all economies in the world given period. In other words, add up the GDP of all economies
Brics account for
In 2015,Brics countries accounted for 23.1% of the world GDP. Since 2001, the BRICS have more than doubled their share of world exports. IN that year, the group represented 8% of the world total exports, in 2015, they accounted for 19% of that total
Comparative advantage
In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade.
summary
Increasing global economic integration ha led to increasing level of synchronisation between the world economies. This means that they tend to move in the same direction in regards to their growth Given Australia is a relatively small open economy (trading a lot), it can be heavily impacted by economic growth overseas - particularly in China, Japan and the USA AS the above graphs show,
Role of social media
Social media • Rise of social media - change the way organisations do business • →2015 report declared that Facebook that added $227 billion and 4.5 million jobs to the global economy in 2014 • "Facebook enables significant global economic activity by helping unlock new opportunities through connecting people and business, lowering barriers to marketing and stimulating innovation.
The key players of trade
USA, BRICS, CHINA, The european union, developed countries, developing countries and newly industrialised countries( NICS) those countries between developed and developing countries
Key trade indicators
Volume of trade - how much is being traded Value of trade : What is the value of what is being produced Composition- mix of goods and services which nations trade with each other ( What is being traded) Direction of trade- WHO Is trading and which direction is it following
Which direction are people going?
Which direction are people going? • Proportion of people in developing countries migrate to other developing countries (51.5%) > developed countries • Movement in upper and lower ends of skills spectrum • Higher skilled workers → move to advanced economies → seek higher wages and challenge • Lower skilled labour → lowly paid work → may not be attractive to domestic labour force
Commodities
a raw material(eg copper) or agricultural product (eg coffee)
portfolio investment
any investment in a company that is worth less than 10% of that company. • This is buying shares in a company on the stock exchange • Investor seeks to gain money not control Total value of global share trading in 2017 was $US 77 trillion • Global stocks value → grown from $US 11 trillion in 1992 to $US 70 trillion in 2015
Simply transformed manufactures (STMS)
basic metals and chemicals that can be used in the production of other goods ( eg steel products, leather, cotton)
Examples of mechanises and services
commodity - iron ore simply transformed manufacture - steel Elaborately transformed manufacture - Car
There has been an increase in developing economies share of world trade in the last 20 years much of this growth has been between
developing economies
Elaborately transformed manufactures (ETMS)
finished products, machinery, motor vehicles, clothing, footwear
What are TNCS
global economies that manage production and/or provide services in at least 2 countries
international division of labour
how the tasks in the production process are allocated to different countries around the world
convergence economics
hypothesis that poorer economies' per capita incomes will tend to grow at faster rates than richer economies. As a result, all economies should eventually converge in terms of per capita income.
There has been an overall decline
in value of trade in the past 3 years
International trade
is the the movement of goods and services between nations
There are two broader types of trade
merchandise trade services trade
Foreign Direct Investment
movement of funds between economies for the purposes of establishing a new company or buying a substantial proportion of shares (more than 10%) in an existing company
services trade
non tangible goods such as transport, tourism, education and computer services
Services
non tangible services. This can include transport, tourism, education and computer services
Foreign Exchange Market
the buying and selling of currencies AKA: - Forex market - FX market - Currency market
Global business cycle
the changes in the level of economic activity in the global economy over time --> demonstrates growing intergration
long term, there has been a strong increase in value and volume of trade over the last 40 years what has this been facilitated by?
the increased liberalisation of global trade through dismantling of trade barriers, as well as significant improvements in telecommunications, technology and transport
What is globalisation?
the increasing economic and financial integration of economies around the world It can be seen through the following concepts
However there has been sluggish growth post GFC has economists concerned that relatively low rates of growth are the norm (WTO)These relatively low rates of trade growth (compared to Global GDP growth) can be partly explained by
the slower pace of multilateral trade liberalisation and convergence economics theory
Some stats about trade
the top 39 advanced nations of the world dominate dominate trade,accounting for 63.3% of exports in goods and service the 152 other emerging and developing economies account for 36.7% of exports in goods and services The euro area accounts for the greatest level of exports 26.3% But china is the biggest individual exporter at the 10.7% of global exports
Roles TNCS play in global economy
• Account for estimated 80% of global trade • Contributing to the increasingly synchronised business cycle • Promotes efficiency and growth of world economy
GENERAL ELECTRIC (GE)
• American conglomerate • Holds more assets abroad than any other non-financial firm in the world - over $500 billion worth • Foreign assets make up over 70% of its total • More than half of GE's 300,000 workforce based outside America • Headquarters in USA → operates in 170 countries
technology and telecommunication
• Cheaper and more reliable international communications through high-speed broadband allows for the provision of commercial services to customers around the world • Technology plays a key role in allowing financial flows around the world in a fraction of a second, facilitating the growth of the forex market and portfolio investment • Smartphones and mobile access has fundamentally changed the structure of many industries from retail and transport sectors to education and leisure
Impact of International division of labour
• Corporations shift various aspects of their business between countries → search for most efficient and cost-effective labour - Due to liberalisation of trade, decreasing costs and improvements in transport and communication technology • 'Global Industrial Shift' → production processes are relocated from developed countries to developing countries in Asia and Latin America • economies are more interconnected -->blamed for loss of manufacturing jobs in developed nations --> car industry in aus -comparative advantage plays a major role
Positive impacts of TNCS
• Creation of jobs • Investment in infrastructure • A better developed economic base for developing countries • Brings latest technology and new knowledge to host country
factors that weaken the international business cycle
• Domestic interest rate • Government fiscal policies • Other domestic economic policies • Exchange rates • Regional factors
Trends in financial flows
• Dramatic increase in global financial flows with the liberalisation (removal of government restrictions), and relaxing of rules on capital flows • Advanced countries deregulated their markets in 1970s - Australia deregulated in the 1980s • Global financial flows increased at a much faster rate than trade flows over the last 30 years • Technological improvements → also increased financial transactions
What do we need to know about forex flows?
• Exchange rates determined in this market • Daily turnover in FX market approx. $5.3 trillion → approx. 95% of these transactions are speculative • Global foreign exchange turnover has grown by approx. 800% since 1989 • Foreign exchange flows easily the area of greatest economic integration in the global economy • Level of forex transactions increased exponentially since deregulation of financial markets + floating of exchange rates • All results in tremendous volatility in global economy
What is the global economy?
• Exists when national economies become more closely linked with each other. • It includes the globalisation of production, finance, communications and the labour force • Changes in the economy of one nation can significantly affect another nation.
Negative impacts of TNCS
• Exploitation of workers in developing countries • Exploitation of natural resources in developing countries • Can result in significant environment damage (BHP ain Brazil and PNG) • Ability to shift profits to lower taxing countries (Apple in Ireland)
Impact of improvement in transport
• Improvements in all forms of transport but particularly shipping have had a significant impact on the growth of global trade
Takeaway points for the drivers of globalisation
• Improvements in technology, transport and telecommunications have facilitated the growth in global trade, financial flows and investment • Improvements in container shipping and greater port efficiency has allowed for a greater volume of merchandise trade • Technological improvements, particularly with the Internet (with global access around 46%) have had a substantial impact on the way businesses operate and the growth in financial flows, allowing instantaneous movement of funds • Improvements in telecommunications have also improved businesses access to global markets, including areas such as call centres. This has led to the creation of millions of jobs in emerging economies such as the Philippines and India
Call centres
• Improvements in telecommunications have led to the creation of millions of jobs in emerging nations in call centres • One of the biggest call centre business is a French company called Teleperformance. They employ190,000 people working in 65 countries communicating in 75 languages • Ironically, improvements in technology will also lead to a decline in these jobs in the future as robots replace humans
Migration stats and remittance
• International migrants worldwide grew rapidly over last 15 years → 244 million in 2015, up from 173 million in 2000 (UN report) • In 2017 → US $466 billion in remittances - Funds often used to improve livelihoods of families and communities → investments in education, health, sanitation, housing and infrastructure →fill critical labour shortages, create jobs as entrepreneurs an contribute in terms of taxes and social security
barriers to migration
• Labour markets less internationalised than markers for goods, services, finance and investment • Social barriers • Barriers to free movement of people
IMPACT OF TNCS
• Led to establishment of strategic global production networks • More influential in the global economy than before • Increasingly dominating business activity around the world
FDI trends
• Recently, world investment flows have been really low • The share of FDI outflows from developed economies has been on a downward trend • FDIs increased significantly since the 1980s → govt. started allowing greater foreign investment • Total value of FDI in 2017 was $1.43 trillion → decline of 23% on previous year • Share of FDI in developing countries has been increasing
What has allowed for the increase in forex flows?
• Technology → trade currencies electronically • Flexible exchange rate systems → currency value determined by market forces (rather than government intervention) Dramatic increase in currency speculation → investors aim to make money from currency fluctuations/volatility
transport trends
• The standardisation of shipping containers (containerisation) after WWII revolutionised shipping →more efficient • More efficient port operations→ enhanced movement of goods • Air cargo has become a lot cheaper • Container carrying capacity has increased approx 1200% since 1968
factors that strength the international business cycle
• Trade flows • Investment flows • Transnational corporations • Financial flows • Technology • Commodity prices • International organisation
Value and volume of trade
→ Higher commodity prices has increased world merchandise exports from US$17.73 trillion in 2017 up from 16.0 trillion in 2016 partly due to higher commodity prices → World commercial services exports grew by 8 in 2017 reaching US $5.28 trillion. Growth in services was roughly in line with growth in exports of manufactured goods → Export volume increased prior GFC but has remained steady post GFC → Global trade remains below its precious peak but trade in services is growing → World trade as a percentage of global GDP, has grown by approx. 50% in the last 20 years from 39% of GDP in 1995 to 60% in 2015 (WTO) → The last three years has seen a decline in the value of world trade. This is off the back of declines in world commodity prices → 1.5 ratio of growth in world merchandise trade volume to world GDP growth at market exchange rates in 2017 → 2017 merchandise trade grew by 4.7% in volume terms, its strongest growth in 6 years
Regional Business Cycle
→Refers to economic activity in a particular region The size of this impact is dependent upon the level of economic integration and countries in their regions
Australia is more synchronised with East Asia than the US
⇒ Our regional business cycle is more attuned to East Asia's than US due to our trade with East Asia ( as seen by our continued growth during the GFC and resultant global recession) ⇒ most regions are dominated by the largest and most globalised economies, however specific events in smaller economies can impact others in regions (eg sovereign debt in Greece) ⇒ The region business cycle can vary substantially from the international business cycle, but essentially, these business cycles exist owing to increase integration and globalisation
Volatility of FDI
➢ Significant flow of funds for speculative purposes → increased level of volatility in global financial markets ➢ Speculative activity blamed for numerous large currency falls + financial crises - Fall in the Euro 2013/15