International Economic Integration

The Global Economy

The Global Economy refers to the integration of all the worlds economies being linked together to
form a single economic entity, it is characterised by the increase of, trades, investments, labour and
ideas and technology between individual economies.

The Global Economy consists of primary, secondary and tertiary economies

1. Primary - Developing economy:

 A notion with low level of material well-being

 Opposite of an advanced economy

2. Secondary - Emerging/Transitional economy:

 An economy is changing from a centrally planned economy to a free market

 Undergo economic liberalization, where market forces set prices rather than a central
planning organisation and trade barriers are removed

 Privatization of government-owned enterprises and resources

 Creation of financial sector to facilitate macroeconomic stabilization and the movement of

private capital

 The transition process is usually characterized by the changing and creating of institutions,
particularly private enterprises; changes in the role of the state, thereby, the creation of
fundamentally different governmental institutions and the promotion of private-owned
enterprises, markets and independent financial institutions. In essence, transition involves
the functional restructuring of state institutions from being a provider of growth to an
enabler, with the private sector its engine.

3. Tertiary -Advanced economy:

- countries that have a high level of development according to

o income per capita/GDP per capita

o industrialization

o life expectancy and education

o national income

o HDI (Human Development Index)

Newly industrialized country:

- countries whose economies have not yet reached first world status but in a macroeconomic sense
have outpaced their developing counterparts

- nations undergoing rapid economic growth (usually export-oriented)

- Incipient or ongoing industrialization is an important indicator

- social upheaval can occur as primarily rural, or agricultural, populations migrate to the cities, where
the growth of manufacturing concerns and factories can draw many thousands of labourers

- features include:

o Increased social freedoms and civil rights.

o A switch from agricultural to industrial economies, especially in the manufacturing sector.

o An increasingly open-market economy, allowing free trade with other nations in the world.

o Large national corporations operating in several continents.

o Strong capital investment from foreign countries.

o Lowered poverty rates.

Gross World Product

Gross World Product (GWP) is the monetary value of all goods and services that have been
produced by individual countries collected together over a period of time, usually a year.

 Usually GWP is determined by the GDP (Gross Domestic Product) of all individual economies
combined over a period of time, usually a year.

Monetary usually relates to money or currency.

Globalisation

Globalisation is the process of breaking down man-made and natural barriers resulting in increased
integration between the economies of the world to the movement of trade, finance, labour,
investment, technology and ideas.

 Barriers to finance have been dismantled globally due reasons such as advancements in
technology. (Most of the worlds finance is digital)

 The current focus is on reducing barriers to the trade of goods and services.

 Labour markets are difficult to breakdown, though the European Union (EU) has reduced
such barriers internally.

 Shortage of skilled labour are also decreasing the barriers to labour worldwide.

 The more economies trade, the more reliant and dependent they are on other economies.
The main indicators of globalisation are -

 Trade flows

 Financial flows

 Investment flows

 Flow of technology and ideas

 Labour flows

Measuring or indicators of globalisation

 Social

 Cultural

 Economic ties between countries

Economists usually focus on how many goods are being traded, and how much money is moving
around the world. Trade flows is one of the best indicators of global integration.

Trade in Goods and Services

Trade refers to the exchange of goods and services across national boundaries

Increase in trade has caused national economies to be more interdependent on other economies to
trade with them for goods and services (imports), and also depend on the money they earn when
other countries buy their products (exports). Due to this, if an economy experiences a
upswing/downswing in growth, it will often take other economies with them, e.g. GFC (Global
Financial Crisis).

Statistics of Trade in goods and services

 Trade in goods and services has grown rapidly in recent years increasing from $US 8.7 trillion
(38% of global output) in 1990 to $US 31.2 trillion (63% of global output) in 2007

 GWP has increased 9 times since 1950s

 Volume of world trade has grown 33 times since 1950s

 Global trade is now equal to 2/3 of global output

Changes in the International Trade Flow

Global trade flows have changed significantly over the globalisation era. They have increased in size
and proportion of global economic activity.

Both the Composition and Direction of trade flows has changed in recent years.

Composition of global trade consists largely of capital inputs and raw materials
  This mix has changed from goods such as Tea and Spice to raw materials and capital inputs
to production

 The most significant feature of the composition of trade is the overwhelming importance of
manufactured goods and merchandise goods (73% of total trade composition in 2006)

 The increased need for freight services to transport goods, falling transport costs have
meant that traditional transport and travel services have declined in relative importance

Direction of trade flows see different economic regions as being important.

 Direction has also changed during the globalisation era because of the changing importance
of different economic regions

 High income economies saw their overall share of global trade fall from 82% in 1990 to 71%
in 2007

 The fastest growing economies of the East Asian and Pacific region experienced the most
rapid increase in trade from 7% in 1990 to 71% in 2007

Impacts of global trade flows

The change of trade flows have significant impacts on individual economies.

 Shifts in the demand for certain g/s of an economy will lead to that economy shifting
resources to the high demand industries.

 Similarly, a fall in a the demand for certain g/s of an economy can cause the downsizing or
closure of those businesses

 Imports also put pressure on local firms to be efficient enough to compete against imports

 Imports allow consumers to have a wider range of goods and services at different price and
quality level

Financial Flows

Financial Flows are the movement of funds across national boarders for both currency exchange
and investment.

 Barriers to finance have been dismantled globally

 Finance is the most globalised aspect of the global economy as money can flow around the
world fast and more easily due to the removal of barriers.

 Most of the worlds finance is digital

 Australia deregulated financial sector in 1983

 Financial flows is evident through increased financial transaction i.e. being able to invest in
foreign stock markets and currency volatility
  Domestic governments have allowed individuals, firms + financial markets to lend, borrow
and speculate on money and financial products such as currency swaps, derivatives and
other forms of financial hedging.

Foreign Direct Investment (FDI) are at least 10% of shares (or voting power) of an organisation or
company.

 This usually involves companies either acquiring other firms or merging with them.

 FDI flows have been boosted by the rapid increase in the number and importance of TNCs

 FDI flows favoured the advanced industrialized nations of the Organisation for Economic
Cooperation and Development (OECD)

 FDI flows to developed countries reached $US 265 billion in 2010

Portfolio Investment - refers to any investment worth less than 10% of shares in a company.

 It also refers to the purchase of bonds or other foreign securities, as well as cross-boarder
loans

Transnational Corporations (TNC) are companies that manufacture and operate in 2 or more
countries.

 TNC's are global companies that dominate global product and factor markets

 The development of TNCs has both increased trade flows and influenced world trade

 TNCs account to about 10% of GWP

 TNCs make countries more dependent on each other. By distributing goods and managing
production around the world they increase trade flows and related activities, and fuel
investment and financial transactions globally

 A major criticism of TNCs is that they do not operate under one government body and so can
move production facilities to countries with weak government regulations

A significant cause of the growth of international investment is the increased level of international
mergers and acquisitions.

Mergers - The legal union of two or more corporations into single entity, typically assets and
liabilities being assumed by the buying party

Acquisition - is the purchase of one business or company by another company or other business
entity

Foreign Exchange Markets (FOREX) are a major feature of the global economy. They are networks of
buyers and sellers exchanging one currency for another where the value of a currency is expressed
in terms of another currency.
The main participants of the FOREX Markets include exporters & importers, speculators, Investors
and government.

Exporters & Importers - Exporters want to be paid in their own currency and thus importers need to
be able to convert their currency into the foreign currency to make the payment.

Speculators - make short term currency trades, and represent the majority of FOREX transactions.

Investors - are those who are purchasing assets such as property or shares within a country, they
must exchange their currency for the local currency before making this purchase.

Government - The power of governments to influence the exchange rates has been reduced due to
private sector participants. In recent years, governments have not played a major role in global
exchange markets.

One country that has used fixed exchange rates arguably successfully is china. Up until July 2005, the
Chinese government pegged the Yuan to low USD, making exports comparatively cheap. This policy
was designed deliberately to stimulate export growth and was part of China's 5 year plan. Since the
exchange rate has been allowed to float, it has appreciated against USD. - USABLE FOR CASE STUDY

Role of Financial Markets on Globalisation

The International and Regional Business Cycle

The International Business Cycle (IBC) refers to the changes in the level of economic activity in the
global economy over time.

It follows the world economy (the sum of individual economies) also follows a business cycle
pattern.

Trade, Financial Flows and Foreign Investment

Free Trade Advantages and Disadvantages

 Free Trade is the economic situation where countries are able to trade between each other
without any government imposed artificial barriers such as tariffs and quotas with the aim
of protecting domestic producers from foreign producers.
  The argument for free trade is based on the concept of comparative advantage where
economies should specialise in the production of goods and services where they are most
efficient, rather than producing everything required.

Advantages of Free Trade

 Trade allows economies to obtain goods and services that they cannot produce themselves,
or in sufficient quantities to satisfy domestic demand (Generally due to lack of domestic
resources)

 Allows countries to specialise in producing goods and services that they produce most
efficiently (comparative advantage) which lead to better and more efficient resource
allocation and increased production within countries

 This tendency for specialisation leads to economies of scale which lowers production costs
and increases productivity and efficiency

 Leads to innovation of new technologies and production processes

 Increased competitiveness as domestic producers face stiff competition from foreign

producers

 Higher living standards as a result of cost of goods and services as nations are producing
goods and services which they are best suited

Disadvantages of Free Trade

 Short term unemployment may arise as some domestic businesses cannot compete with
imports. However in the long term this will correct itself as the domestic economy redirects
resources to where it has a comparative advantage

 Countries may 'dump' surplus goods on other nations at unrealistically low prices which may
hurt domestic producers

 Makes nations reliant on the economies of other nations which gives governments less
control of their economies. E.g. if Australia is reliant of trade with China and the Chinese
economy dives, so will Australia economy

 If Australia adopts free trade but other nations don’t, then Australia is disadvantaged as it is
not competing on a level playing field

Comparative Advantage

Refers to the ability of a party (an individual, a firm or a country) to produce a particular good or
service at a lower opportunity cost than another party.

Absolute Advantage

Refers to the ability of a country to produce more of a certain good or service than another using
the same amount of resources.
Factor endowment is commonly understood as the amount and combination of land, labour, capital
and entrepreneurship that a economy possesses and can exploit for manufacturing.

Trade Agreements

As the level of trade has grown in the global economy, countries have formed trade agreements and
alliances with other nations to maximize the benefits which trade provides.

The two main types of trade agreements are:

1. Bilateral Agreements which are trade agreements between 2 countries and are also regional
agreements (close geographical proximity). E.g. of a bilateral agreement is:

 CERTA (Closer Economic Relations Trade Agreement) an agreement to reduce trade

restriction and other barriers between Australia and New Zealand

2. Multilateral Agreements which are trade agreements between more than 2 countries. Such
agreements are officially sanctioned by the WTO. E.g. of a multilateral agreement is:

 ASEAN (Associations of the South East Asian Nations)

Free Trade Agreements is an agreement where economies agree to withdraw most or all major
barriers to each other's exports. Additionally they agree to offer preferential treatment towards
each other's exports. They are often bilateral, or regional.

Trade Blocs occur when a number of economies join together in a formal preferential agreement
with each other excluding other economies.

Trade diversion occurs when non-members of the bloc lose export opportunities to less efficient
nations that are members of the bloc. This tends to happen when the bloc maintains high
protection against non-members.

Regionalisation describes the trend of closer economic links of countries located in close
geographical proximity to one another.

The major institutions of the global economy include IMF, the WTO and the World Bank.

WTO (World Trade Organisation) is one of the most powerful economic institution in the world. Its
role is to implement and advance global trade agreement's and settle trade disputes between
nations.

 Since its establishment, the WTO has been affective at ensuring countries abide by the
global trade rules

 GATT (General Agreements on tariffs and trade) was a global agreement on the promotion
of multicultural trade agreements.

 GATT was considered weak as it was up to the signatory nations to enforce them
  Additional, the agreement by 1993 had become obsolete and dated and it was replaced by
the WTO

 The WTO was established in the Uruguay round and was the first to cover the trade of
finance and intellectual property (the property of your mind or proprietary knowledge)

 Additionally, the agreement involved the reduction of agriculture protection which was a
historic step in global trade

 However, due to technicalities, this aspect of the agreement has largely failed to materialise

 The most important function of the WTO is it's dispute resolution process

 If a country has a complaint about another in terms of trade, they will lodge a complaint
with the WTO. The WTO will then hear the complaint and render a decision on the issue
which is binding

 If nations don’t abide by the WTO's decision, the WTO may impose sanctions on the
offending nation

 When dealing with smaller nations, the WTO is effective at dispute resolution whilst it tends
to be ineffective when dealing with larger nations (USA, EU)

 This is because large nations delay implementing WTO directives or continually lodge
appeal's

 The WTO is growing with 153 member nations in 2009 with 30 more countries applying for
membership

Doha Round is a round of trade talks held in 2001 which proposed landmark free trade goals on
agriculture, manufactured goods and services

 The WTO estimated that the Doha Round would increase trade b $520 billion and lift 140
million people out of poverty

 It was called the 'development round' because was intended to focus on delivering benefits
to developing nations, something which previous talks greatly failed to achieve

 Despite its promise, the talks have largely failed due to a breakdown in the negotiations
between nations

 However, according to the WTO before the breakdown, several key agreements were made
including, the complete abolition of agricultural subsidies and the removal of trade barriers
imposed on the 50 poorest countries , giving them greater access to larger markets

 Persistent disagreements on agricultural protection and pharmaceutical production

restrictions ere the greatest contributors to the breakdown of talks
The International Monetary Fund (IMF) consists of 186 nations and is one of the most important
institutions in the global economy. Its role is to maintain international financial stability, particularly
in relation to FOREX markets.

 In situations where a financial crisis occurs in an economy, region or even across the world.
The IMF plays a critical role in minimising the crisis

 The IMF usually devises 'rescue packages' for individual economies, whilst using stimulus in a
global or regional situation

 In the 2008-09 GFC, they injected $250 billion into the global economy, along with
suspending the loan's of the third world countries in an attempt to reduce the effects of the
crisis

 The IMF supports the free trade of goods and services and financial product. The IMF often
requires that its members have economic policies that open their markets to foreign trade
before they receive financial assistance. Such policies are referred to as "Structural
adjustment policies"

 The IMF was criticised during the Asian financial crisis (AFC) of the late 90s for suggesting the
use of contradictory policy which further inflamed the issue

 However, in the 2008-09 GFC thy encouraged inflationary policy which proved to slow the
decline of the global economy

The World Bank is a financial institution that provides financial assistance to developing countries
for capital programs. The World Bank has a stated goal of reducing poverty and helping developing
countries adjust to globalization

 The World Bank is funded primarily by member nations and from its own global financial
market borrowings

 In its millennium goals, the WB (World Bank) set out to half the amount of people living on
1 USD a day to half the 1990 levels by 2015.

 It also hopes to improve HDI and standards of living in 3rd world nations by 2015

 In reaction to the GFC, the WB increased tripled its lending to lower the impact of the
recession on third world nations

 One of the most important roles of the WB is its support of the heavily indebted poor
countries initiative which aims to reduce debt by two-thirds in 46 of the world's poorest
countries with debts considered unsustainable

 However due to a rise in FDI over the past few years the WB role as a lender has largely
diminished

The World Bank has a number of organizations which provide assistance to lower income countries
including:
 o The International Development Association, which provides soft loans (little or no interest)
to 3rd world counties

o The International Finance Corporation, whose role is to attract private sector inflows into
The World Bank's projects

o The Multilateral Insurance Guarantee Agency, which provides risk insurance to private
investors

Other Organisations

G8 - is the group of eight is an international organisation composed of the eight budgets

industrialised nations in the world aimed at discussing and acting on global economic and political
issues.

 The G8 includes Germany, Canada, Italy, France, UK, US, Japan and Russia

 Most economically developed economies

 Is worth 63% of net world wealth

 Due to the power of its member nations, the G8 can act as an unofficial forum at
coordinating global macro- economic policy

 A recent security issue with Russia was to settle disputes with Russia and Ukraine

G20 - is the group of twenty

 Emerged as a key forum in management of the global economy

 Includes 19 of the world's largest economies and the European Union

 In 2009, the G20 agreed that no plan to address the deepening global recession

 Recent summit held in Brisbane in which a pledge was made called "Brisbane Action Pack"

 It aimed to lift growth by 2.1% by 2018, generate jobs and add $2 trillion in global economy

 G2 is now more important than the G8

 This is because members of the G8 are no longer representative of the most important
forces in the global economy

Government Economic Forums - organisation that exist as forums (venues) where representatives
(i.e. governments)

Aims:

1. Discuss/coordinate economic policies

2. Cooperate to overcome shared problems

UN (United Nations) - is the organisation that overseas several agencies that have a central focus on
assisting developing countries.

Protection

Protection refers to government policies that give domestic producers an artificial advantage over
foreign competitors such as tariffs on imported goods.

o Protection is implemented in general terms to ensure growth of domestic producers and to

prevent them from going out of business due to foreign competitive advantages.

Reasons for protection

Infant Industries (new industries) - New industries often face higher costs as they operate on a
smaller scale and thus may find it difficult to compete with established firms in the international
market place. It is argued that governments should protect these infant industries until the can
compete with foreign producers. However, this method of protection should only be temporary
otherwise industries will become overly reliant and inefficient with no incentives to innovate.

Prevention of dumping - Dumping is the practise of exporting goods to an economy at unrealistically

low prices (well below countries market price) to dispose of large production surpluses or to
establish a market position.

 This harms domestic producers who are forced to run out of business thus reducing a
country's productive capacity and increasing unemployment which would have otherwise
not occurred.

 The only gain from dumping is short term low prices for consumers which will eventually rise
when surplus is expended or domestic competition is eliminated

 Dumping is disapproved of but not legally prohibited by the WTO. However it does have
policies regarding how countries are allowed to respond to dumping

Protection of domestic employment - Protects local jobs as firms protected from cheaper foreign
producers will lead to an increase in the demand for domestic goods which causes demand for
domestic jobs (employment)

Defence and self-sufficiency - Some countries have non-economic reasons for wanting to retain
certain industries.

 E.g. USA does not buy defence (e.g. military equipment) goods from overseas as they do not
want to rely on other nations for their defence

Types of Protection

Tariffs - A tariff is an additional tax placed on imports for the purpose of protecting domestic
industries.

 Tariffs are passed onto the consumer

  As such the price of imports increases leading to an expansion in supply and a contraction in
demand

 The price increase leads to an expansion in the demand for domestic products as tariffs
don’t apply to domestic products

 Since consumers are paying more for less and as such redistributes income from the
consumer to domestic producers

 Raises government income

 Can lead to a retaliatory effect as nations place tariffs on goods from countries that have
imposed tariffs on their goods

Quota - A quota is a government imposed limit on the amount of a good or service that may be
imported

 Has similar effect to tariff only government receives no profits.

Tariff Quota- is the use of both tariffs and quotas on goods and services. If a good is imported
beyond the quota the firm will pay a larger tariff.

Subsidy - Subsidies are cash payments from the government to businesses to encourage production
of goods and services and influence the allocation of resources in an economy.

 Subsidies are often granted to help domestic businesses to compete with imported goods
and services.

GO TO CLASS NOTES FOR GRAPHS!!!

Other Forms of Protection

Voluntary Export Restrains (VER's) - are agreements between governments and foreign businesses
to limit the amount they import into that country. They are similar to quotas, with the only
difference being VER's are voluntary.

Local Content Rules - This requires that certain goods contain some level of locally made
components. E.g. Foreign car companies must use 30% of Australian made goods in their products.
In return for this guarantee, the import may not be subjected to tariffs.

Export Incentives - These provide domestic producers assistance in the form of loans, grants or
technical advice in order to reduce firm's marginal costs and promote expansion in the domestic or
international markets.

Some Effects of protection

 The WTO estimates that protection policies cost the global economy between US$180 - 520
billion in exports a year

 Protection reduces living standards and global economic growth by shielding inefficient
industries, losing a potential of US$ 300 - 700 billion a year in GWP
Case Study - China

 China's liberalization began in the 1970's

 China's economy has boomed since 1978 as result of sweeping economic reform

 China has is the fastest-growing major economy for the past 30 years with an average annul
GDP growth rate above 10%

 China's economy of GDP US$128 billion in 1980 grew to a GDP of US$8.23 trillion in
December 2012, surpassing Japan's $5.96 trillion and placing it in 2nd place behind the US
which is on US$15.68

China can be seen as a 3 engine economy driven by:

 Exports

 Investment

 Domestic Consumption

Major Reforms in China:

Open Door Policy

 Aim is to encourage foreign investment and foreign trade

 Also aims to set up SEZ (Special Economic Zones)

 This leads to quicker economies of scale (externally) and is more efficient

As TNCs make up most of FDI, TNCs need to be attracted in order to obtain investments which will
then lead to economic growth

Methods used to attract foreign trade and investment:

 Low tax rates

 Less negotiations - (this is a disadvantage)

 Cheap resources

Household Responsibility System (HRS) - This Aims to sell extra or surplus output in the market for
profit

Governments increased prices of rural products (made it attractive to produce more)

The benefits of this was:

 Innovation which leads to efficiency

 Allocative efficiency - more incentives to use resources more efficiently

  Increased economic growth

 Increased production

 Increased income which results in an increase in economic development

 Increased income is used to start TVE (Township Village Enterprise) - this is a market-
oriented public enterprises under the purview of local governments based in townships and
villages

Banking Reform

Taxation Reform

By what amount does revenue of foreign producers decrease as a result of the tariff? - QUESTION IN
TEST!!