Topic 1 - THE GLOBAL ECONOMY

Question 1

Define the global economy

Answer 1

The economy which is based on all the world’s countries

Question 2

What is GWP

Answer 2

sum of total outputs of goods and services of all economies OVER A PERIOD OF TIME!!!!!! GWP is adjusted for purchasing power parity (takes into account exchange rates and price variations)

Question 3

Define globalisation

Answer 3

Process of increased economic integration between different countries

Question 4

What are the indications of increased economic integration

Answer 4

1. International trade flows
2. Financial flows
3. International investment (long-term)
4. Technology, transport and communication
5. International division of labour and migration

Question 5

What is the international business cycle

Answer 5

Fluctuation in world economic growth due to changes in aggregate demand and supply (upswing, boom, downswing, trough)

Question 6

Outline factors that strengthen the international business cycle

Answer 6

• Trade flows
• Investment flows
• TNC’s
• Financial flows
• Technology
• Global interest rates
• International organisations

Question 7

Outline factors the weaken the international business cycle

Answer 7

• Domestic interest rates
• Government fiscal policy
• Domestic economic policy (restrictions)
• Exchange rates
• Structural factors
• Regional factors

Question 8

What is an opportunity cost

Answer 8

cost of satisfying one want over an alternative want

Question 9

Outline the basis of free trade

Answer 9

Most fundamental assumptions of economists is that free trade is good and will achieve fastest rates of economic growth to an economy. There has been progression towards free trade shown in Australia’s progressive protectionism reforms throughout different governments since the 1980’s as well as recently Australia’s participation in AUSFTA, NAFTA, AANFTA and finishing up free trade agreements with China in 2014.

Question 10

Advantages of free trade

Answer 10

• Allows specialisation which drives efficiency and more efficient allocation of resources in an economy
• Leads to economies of scale
• Encourages international competiveness
• Higher living standards as prices are lower and greater option in the economy

Question 11

Disadvantages of free trade

Answer 11

• Increased in short-term structural unemployment as businesses may find it hard to compete internationally
• New industries may find it hard to establish themselves
• Dumping

Question 12

Outline the role of the 5 different International organisations

Answer 12

1. WTO: Promote free trade, Negotiate any trade disputes
2. IMF: Maintain international financial stability
3. World bank: Assistance to developing countries to further economic development through low/no interest loans
4. UN: Provides economic development assistance
5. OECD: Provide economic advice and actively provide economic help to membering countries

Question 13

Explain the role of the g8

Answer 13

Largest industrialised nations, operated as the economic council of the world’s wealthiest nations. Agenda often includes general political issues and current priorities such as CLIMATE CHANGE, GLOBAL POVERTY and SECURITY BETWEEN NATIONS

Question 14

What is a trading bloc

Answer 14

Occurs when a number of countries join together in a formal preferential trading agreement to the exclusion of other countries

Question 15

Name Australia’s multilateral trade agreement

Answer 15

-World trade organisation (WTO)

Question 16

Name current regional trade agreements

Answer 16

• EU (European Union)
• NAFTA (North American Free trade agreement)
• ASEAN (Association of South East Asian Nations)
  - AFTA (ASEAN Free trade area)
• APEC (Asia-pacific economic cooperation)
• GAFTA (Greater Arab Free Trade Area) 1957

Question 17

Name current bilateral trade agreements

Answer 17

• AUSFTA (Australia United States free trade agreement)
• ANZCERTA (Australian New Zealand closer economics relations agreement)
• SAFTA (Singapore Australia free trade agreement)

Question 18

What is protection

Answer 18

Any policy which gives domestic producers advantage over foreign producers. Despite economic arguments for free trade, governments have historically protected countries from international competition.

Question 19

Reasons for protection:

Answer 19

1. Infant industries argument: short-term to allow industries to reach economies of scale before competing in international markets
2. Prevention of dumping: creates temporary harm to domestic industries when international businesses dump excess stock to dispose of surplus or establish market foothold, shown currently with Saudi Arabia dumping of oil prices to reduce market share of competitors such as Russia, and the US (who have recently found new oil depositaries)
3. Protection of domestic employment: Allows minimal demand for foreign goods so demand for domestic goods are higher allowing more domestic consumption and higher demand for domestic employment. Positive in short-term but negative in long-term

Question 20

Outline different protection policies:

Answer 20

-Tarrifs, Subsidies, Quotas

Question 21

Explain Local content rules

Answer 21

Stipulates that products must contain a certain percentage of locally produced/assembled parts

Question 22

Explain export incentives

Answer 22

Gives domestic producers in form of grants, loans or technical advice to help business’ expand into global markets

Question 23

Define economic growth

Answer 23

Increase in a countries productive capacity over a period time. Usually measured in percentage change in GDP

Question 24

Define economic development

Answer 24

A broad measure of welfare in a nation that includes indications of health, education, and environmental quality as well as material standards of living

Question 25

What is GNI

Answer 25

GNI is sum of value added by all RESIDENT producers in an economy plus receipts of primary income from foreign sources

Question 26

What does HDI measure

Answer 26

HDI measures 3 aspects of ED of: - life expectancy at birth - levels of educational attainment - GDP per capita

Question 27

What do differences in HDI and GDP show

Answer 27

If two countries have same HDI, the country with lower GDP has a better distribution of income than the country with higher GDP. This is shown in Cuba and Myanmar both having HDI 30 places above their GDP (good distribution of income) compared to South Africa which has a HDI level of 70 places below GDP rank (bad distribution of income)

Question 28

Explain differences in distribution of income and wealth in different countries

Answer 28

``` Despite benefits of globalisation, rewards may not be shared between advanced, emerging and developing countries. High-income countries and newly industrialized countries (China) have generally benefited from globalization. Transition economies (planned to market economies) fared worse experiencing a drop in their growth rates ```

Question 29

What are some income and quality of life indicators?

Answer 29

- Inflation - Domestic savings and MPS - Life expectancy - HDI - GINI Index and Lorenz curve - Physicians per 100,000 people

Question 30

What are causes of inequality between nations

Answer 30

Global factors: - Global trade systems - Global Financial architecture - Global aid and assistance - Global technology flows Domestic factors: - Economic resources - Institutional factors

Question 31

What are the effects of globalisation?

Answer 31

1) Increased economic growth: Advanced/emerging economies experience rapid growth due to increase in trade and investment. Some economies may be pushed down 2) Trade, Investment and TNC's: Substantial increase in trade flows, FDI and TNC's gaining a much more influential role in the economy 3) Environmental sustainability: Negative effect of environment as production increases rapidly 4) International business cycle: Closer economic integration makes countries more exposed to downturns in the international business cycle show in the global effects of the GFC in 2008