Yr 12 Topic 1, Ch 1, Internal economic integration
international business cycle definition
refers to fluctuations in the level of economic activity in the global economy over time
Definition of 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
Define foreign direct investment
refers to the movement of funds between economies for the purpose of establishing a new company or buying 10% of more shares in an existing company.
Definition of gross world product
refers to the sum of the total output of goods and services by all economies in the world over a period of time.
define portfolio investment
short-term movement of funds between economies for loans or purchases of small share holdings (less than 10% of the total value of the company)
Definition of financial flows
the movement of money that occurs between two or more countries
Definition of migration
the movement of people between countries on a permanent or long-term basis usually for 12 months or longer
Definition of 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
Business cycle definition
- refers to fluctuations in the level of economic growth due to either domestic or international factors
Benefits of greater financial flows
.enable countries to obtain funds that are used to finance their domestic investment. This is especially true for investors in countries with low national savings who cannot obtain necessary finance. Therefore, global financial flows may enable a country to achieve higher levels of investment and economic growth
4 Costs of globalisation
1. Industries which are uncompetitive in the global market may contrast or cease production 2. Widening income inequality between advanced and developing countries 3. Acceleration in the rate of environmental degradation 4. Exploitation of labour and environmental standards
Factors that weaken IBC: Domestic interest rates and exchange rates
1. Interest rates have significant impact on the level of economic activity and interest rates differ between countries. 2. Exchange rates differ between countries an impact on the level of trade competitiveness and confidence within economies. In turn these factors will influence the level of economic growth
3 reasons for increase in global trade
1. New technology in transport and communications which has reduced transport costs in distant markets 2. Economies imports goods and services that they need or do not produce efficiently and in order to specialise in an area of comparative advantage 3. governments encouraging trade by removing barriers and joining international and regional trade groups e.g. WTO, EU, ASEAN and trade agreements e.g. ChAFTA
3 Benefits of globalisation
1. Specialisation according to comparative advantage leading to efficient allocation of world's resources in production 2.Economies of scale leading to lower prices and increased quantity and quality of goods 3. Strong growth in world output, trade and investment which has helped to increase incomes, employment and living standards in countries
3 Examples of international division of labour
1. The establishment of manufacturing plants either subsidiaries or joint venture by MNCs in China and ASEAN economies to utilise abundant supply of cheap local unskilled labour. 2. Migration of unskilled labour from emerging and developing countries to work in primary, manufacturing and service industries in advanced and emerging Asian economies 3. International market for specialist labour skills has emerged leading people to work in foreign countries to earn higher incomes
3 benefits of foreign direct investment on Australia
1. allows a country to fund required infrastructure when domestic savings are insufficient. 2. FDI projects can also create highly-paid domestic employment opportunities which contribute to domestic wealth and improve domestic living standards. 3. If the FDI is in infrastructure projects, such as roads or mines, then it can help an economy become more internationally competitive by improving domestic aggregate supply
3 costs of foreign direct investment on Australia
2. Some costs of FDI may arise from the fact that domestic assets are now controlled by foreign residents, potentially including foreign governments. 3. This can lead to political problems if the foreign investors have different views on issues such as environmental management. 2. Moreover, any income earned from the asset in future flows to a foreign investor which has negative implications for the balance of payments.
Factors that weaken IBC: government policies and example
2. The government's economic policy decisions can influence the economic growth rate for example the UK's decisions in 2016 to leave the EU reduced the rate of economic growth as investor confidence in Britain's economy fell
Advantages and disadvantages of foreign investment for emerging economies
Advantage: Increases productive capacity in the economy through establishment of new industries or firms, Creates more employment opportunities for the labour force, May introduce new technology, May bring into the country new management style and entrepeneurial skills. Disadvantages: Foreign ownership and control of key resources or industries, Exploitation of environmental standards or labour standards, Profits are repatriated back to shareholders or parent company, May use capital intensive methods of production and thus not create many employment opportunities.
How does changes in the level of economic growth of on economy impact upon economic growth in other economies (GFC)
Although the levels of economic growth each year often differ greatly between countries, for most countries economic growth is stronger when the rest of the world is growly strongly and weaker when other countries are experiencing a downturn - The extent of synchronisation is highlighted in global downturns such as the GFC and COVID-19
Trend in trade flows-composition (and covid)
Global trade is dominated by manufactured goods such as vehicles, clothing and electronic goods making up 53% in 2018. Trade in services such as finance and communication are the fastest growing category of trade and make up two thirds of global output. COVID-19 pandemic resulted in change in composition of world trade in the short term, with services such as tourism and international services dropping significantly due to travel restrictions
How has Australia contributed to the process of globalisation
Australia has contributed to this process by following a free trade agenda with other countries including unilaterally reducing its own import tariffs as well as establishing free trade agreements with countries such as China and the US. This has resulted in increased bilateral trade flows between Australia and its trading partners. Australia has also contributed to increased financial flows around the world by deregulating financial markets and permitting foreign banks to operate in the domestic market. Furthermore is has encouraged TNCS to use Australia as a gateway to doing business in Asia, promoting foreign investment.
role of TNC's in promoting globalisation
Because TNC's establish or expand production facilities in a country they bring foreign investment, new technologies, skills and knowledge as well as capital and job opportunities. They contribute to globalisation as the supply chain is spread out in multiple countries where TNCs can take advantage of low cost input costs due to specialisation of individual countries and increase their global reach
Factors that strengthen IBC: Financial market and confidence, Global interest rate levels
Consumer confidence and the animal spirits of investors are constantly influenced by conditions in other countries. Monetary policy conditions in individual economies are strongly influenced by interest rate changes in other countries
The international division of labour in the shift of businesses between economies
Corporations shift production between economies in search of the most efficient and cost-effective labour. In a globalised business environment, many producers operate a global supply chain, with production facilities in several countries. The process called offshoring allows companies to shift production between countries to reduce costs. This results in the development of export-oriented economies that can compete on the basis of their abundance of low-wage labour. Recent years has seen services functions such as IT support, data management and accounting move to more competitive locations to reduce costs. A recent study found that global supply chains have gone furthest in electric and machinery manufacturing sector
Factors that strengthen IBC:Global prices and international forums
Global prices of key commodities such as energy, minerals and agricultural products play an important role influencing inflation, investment, employment, growth and other features of the international business cycle. International forums such as G20 and the G7 can play an important role in influencing global economic activity
Factors that strengthen IBC: trade and investment flows
If there is a boom or recession in one country it will affect its demand for goods and services from other nations. Economic conditions in one country will affect whether businesses in that country will invest in new operations in other countries affecting their economic growth
impacts of globalisation on the international division of labour
Improved transport and communication technology and the expansion of TNCS has led to an increased number of people moving from their country of birth to foreign locations in order to supply their labour and take advantage of better work opportunities. However there are still barriers to working in other countries such as Immigration restrictions, Language, Cultural factors, Incompatible education and Professional qualifications. Globalisation has also meant many producers operate a global supply chain, with production facilities in several countries and increased use of offshoring. As globalisation has meant specialisation terms of comparative advantage labour is divided accordingly e.g. Developing economies which have a large population of workers with only basic labour skills and education levels they specialise in labour-intensive manufacturing while Advanced economies have generally shifted away from labour-intensive manufacturing focusing on specialised service aspects of the economy that use more high skilled workers who are in greater supply in advanced economies.
trends in the level and direction of investment in the global economy in recent years and possible consequences
In 2018 developed countries faced the largets decline in investment with countries such as the US having an 18% decrease due to trump's tax reform and preceding high earnings of MNES. This may impact their level of economic growth. Developing countries have sustained their increase in the share of global FDI in particular Asia and Africa. This would mean higher levels of innovation and economic growth for these countries. In 2010 however there was a slower increase in FDI inflows to developing countries, falling from 11% in 2010 to 8% in 2019, due to a decline in returns on FDI relative to returns on investment in developed countries.- The COVID-19 pandemic caused another sharp downturn in FDI flows, flows of just $1 trillion in 2020, half their level in 2015 FDI flows have traditionally favoured developed
Why is the world economy experiencing international covergence
International convergence means that economies are becoming more similar in their economic systems, adopting market capitalism. This is a result of the globalization process such as the internationalisation of labour forces, the dominance of TNCs on the production process, the spread of telecommunication and the internet and the growth of international trade and investment. Barriers between nations have been eroded through the liberalisation of trade and deregulation of financial markets.
Account for trends in international financial flows during the globalisation era
International financial flows expanded substantially following financial deregulation around the world (1970s-1980s) which lifted controls on foreign currency markets, flows of foreign capital, banking interest rates and overseas investment in share markets. New technologies and global communication networks linked financial markets throughout the world and allowed evens in major international markets e.g New York, Tokyo London to produce immediate results. All measures of international financial flows have shown a dramatic increase in the globalisation era e.g. exchange-traded derivatives reached almost $US95 trillion in 2019. Foreign exchange markets have experienced extraordinary growth with average daily turnover reaching almost US$5.8 trillion by 2019. The main drivers of global financial flows are speculators and currency traders who shift billions of dollars in and out of financial markets worldwide to undertake short-term investments in financial assets
Explain a significant cause of the growth in international investment
Increased levels of mergers and takeovers. - During recent decades there has been a spate of mergers between some of the world's largest corporations most recently between food chains e.g. burger king and tim hortons, media companies Walt disney and 21st century Fox and mining companies Glencore and Xstrata ect. These have seen the formation of companies worth hundreds of billions of dollars and reduced the number of truly global companies in different product markets. International mergers and acquisitions move in line with changes in global economic conditions- investment falls when economic growth is lower
Indicator of globalisation: Trade
International trade in goods and services is an important indicator of globalisation as it is a measure of how goods and services produced in an economy are consumed in other economies around the world. GWP is now 50 times its nominal level since 1960. This has been due to new technology in transport and communications which has reduced transport costs in distant markets, Economies importing goods and services that they need or do not produce efficiently and in order to specialise in an area of comparative advantage. This has also been due to governments encouraging trade by removing barriers and joining international and regional trade groups e.g. WTO, EU, ASEAN.The pattern and direction of world trade has changed to reflect the increased importance of advanced technology and services and the growth of the Asia Pacific region
Role of foreign exchange markets in international financial flows
Most countries determine the value of their currency through the interaction of supply and demand in foreign exchange markets
one cost and benefit of globalisation
One benefit of globalisation is that countries, firms and industries are able to specialise according to their comparative advantage leading to efficient allocation of world's resources in production. This then leads to Economies of scale leading to lower prices and increased quantity and quality of goods. One cost of globalisation is the acceleration in the rate of environmental degradation through a loss of biodiversity, increased pollution, rising greenhouse gas emissions, extreme weather events and the rate of climate change because of global warming. This can occur because multinational corporations exploit environmental standards.
domestic vs international investment statistic
Overall most investment in economies around the world still come from domestic sources. FDI typically accounts for less than 20$ of the total investment meaning that over (80%) still comes from within national economies
The internet and globalisation
Provides a communication backbone that links businesses, individuals and nations in the global economy. This not only allows greater communication within and between firms but also reduces business costs that have been a barrier to integration between economies. Estimated that the global marketplace for information and communication technology is worth almost US$5 trillion. Surge in internet usage to 4 billion users highlights the rapid spread of technology across countries in recent years and the increasingly interconnected nature of the global economy
Factors that weaken IBC: regional factors and example
Regional factors between economies differ some economies are closely integrated with their neighbours and are therefore very influenced by the economic performances of their major trading partners. For example, geopolitical instability in countries like Egypt, Turkey, and Yemen has held back economic growth in other Middle Eastern economies throughout the 2010s.
Negative Economic Impacts of greater financial flows
Speculative behaviour = significant volatility in foreign exchange markets and domestic financial markets (herd mentality). This can be blamed for large currency falls and financial crises
Factors that weaken IBC: Structural factors
Structural factors differ between economies. For example, countries have different levels of resilience in their financial system; different levels of innovation and takeup of new technologies; different attitudes towards consumption and savings; different population growth rates and age distribution; different methods of regulating labour markets, educating and training employees and regulating businesses
Five factors of globalisation
TITIF, Trade, Investment, Technology, International division of labour, Financial flows
Factors that strengthen IBC: Transnational corporations and Financial flows
TNCs are in an increasingly important means by which global upturns and downturns are spread throughout the global economy. Countries with strong financial integration will experience an increase in financial flows between themselves especially in response to common external shocks
Role of technology, transport and communication in facilitating globalization
Technology plays a central role in driving globalization and some examples of how it has facilitated the integration of global economies include: - Developments in freight technology facilitate greater trade in goods - Cheaper and more reliable international communication through high-speed broadband allows for the provision of commercial services globally - In finance and investment the powerful computer and communication networks allow money to move around the world - Smart phones, electronic funds transfer and mobile internet access opening up the global market place - Advances in transportation such as aircraft and high-speed rail allowing greater labour mobility between economies and increased accessibility to tourism and travel for consumers - Being a driver of growth in trade and investment
Trend in trade flows-directions
The direction of trade flows has changed in recent decades, reflecting the changing importance of different economic regions. Between 1995-2017 high-income economies' (concentrated in North America and Western Europe) overall share of global trade fell from 82% to 69%. During this period the fast-growing economies of East Asia and the Pacific region experienced rapid increase in trade with percentage of exports growing by 9% between 1995 and 2019. Reflects the increasing importance of advanced technology and services and the growth of the Asia Pacific region.
international division of labour and comparative advantage
The international division of labour reflects the economic concept of "comparative advantage". Developing economies have a large population of workers with only basic labour skills and education levels, giving them a comparative advantage in labour-intensive manufacturing. Advanced economies have generally shifted away from labour-intensive manufacturing focusing on specialised service aspects of the economy that use more high skilled workers who are in greater supply in advanced economies
Define Global economic integration
The liberalisation of trade through removal of artificial barriers to trade
examine the role of speculators and currency traders in global finance
The main drivers of global financial flows are speculators and currency traders who shift billions of dollars in and out of financial markets worldwide to undertake short-term investments in financial assets. Based on data from the Bank of International Settlements survey only a small share of foreign exchange transactions is for 'real' economic purposes such as trade and investment. The vast majority is for speculative purposes to derive short-term profits from currency and asset price movements or technical purposes.
Why is the world experiencing international convergence
This is a result of the globalisation process, such as the international division of labour, the dominance of TNCS on the production process, the spread of telecommunication and the internet and the growth of international trade and investment. Barriers between nations have been eroded through the liberalisation of trade, the deregulation of financial markets and political and legal changes such as the Washington consensus
Definition of International division of labour
how the tasks in the production process are allocated to different people in different countries around the world
Factors that strengthen the international business cycle
Trade flows, investment flows, Transnational corporation, financial flows, financial market and confidence, Global interest rate levels, Commodity prices, International organisations e.g. G20 and G7
Factors that weaken the international business cycle
domestic interest rates, Government fiscal policy, Exchange rates, Structural factors, Regional factors
define transnational corporations
global companies that dominate global product and factor markets and have production facilities in at least two countries and are owned by residents of at least two countries.
