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Chapter 1:
Introduction to the Global
Economy
1.1 The Global Economy
Economics was in the past focused on how
domestic economies operate.
How they operate?
Economic policies? p
Trading, etc.
Economics is now focused on the global
economy.
How they interact?
How they form a global system?
Understanding the associated risks of a global
economy.
1.1 The Global Economy
The aggregate of all goods and services is
known as Gross World Product (GWP).
In the industrialised world the value of what
countries buy and sell is >than 50%of the countries buy and sell is >than 50% of the
countries economic output.
Therefore, globalisation is the process of
increased integration between different
counties and economies and the impact
of international influences on all aspects
of life and economic activity.
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1.1 The Global Economy
Process of globalisation examples!
Dimensions of globalisation.
Social cultural TV shows, fashion, , ,
telecommunication, etc. examples!
Economic 4 major indicators:
1. International trade flows.
2. International financial flows.
3. International investment flows/tech transfer.
4. The movement of workers among countries.
1.2 Globalisation
Trade in Goods & Services.
Trade in G & S grown rapidly:
$US 8.5 Tr. 1990 (40% of global output)
$US 39.5 Tr. 2008 (65% of global output)
GWP 10 ti l l f 1950 GWP 10 times level of 1950
Volume of world trade 40 times level of 1950
However, greater volatility of trade compared
with GWP.
Growth of global trade expanded and contracted faster
than economic output
Risk a number of Global Financial Crisis (GFCs).
Detail 2008 example
1.2 Globalisation
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1.2 Globalisation
Global Trade encouraged by agreements.
GATT 1993
WTO organisation to enforce agreements
NAFTA US/Canada/Mexico free market
APEC Asia Pacific forum
EU European Union
Impact of these agreements discuss!
The Composition of Trade dominated by
manufactures, then fuels & minerals. Services
are growing fast!
1.2 Globalisation
Direction of trade flows
Between 1995 & 2008 high income economies
saw their share of global trade fall from 82% to
69%. East Asia experience the moist rapid rise in 69%. East Asia experience the moist rapid rise in
trade surging from 7% to 13%.
Trends in the direction of trade for Australia:
China now the No 1 trade partner & this helped
insulate us from the GFC.
Current/future trade opportunities for Australia?
Examples?
1.2 Globalisation
Financial Flows
Crucial for the working of any economy.
1970s & 80s trend for financial deregulation.
Issues? Issues?
Communication networks linked financial
markets.
Impact on markets
The share market
The derivatives market
The Forex market (speculation issue)
Other markets?
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1.2 Globalisation
Investment & Transnational Corporations
Growth in the movement of capital
Short term speculation
Increase in longer term investment (FDI Foreign c ease o ge e es e ( o eg
Direct Investment, skewed to developed countries)
Increases in Mergers & Acquisitions & TNCs
Global M & A opportunities (2007 $1.6 Trillion)
Concentration of power & influence in the West
Since 1990 TNCs grown from 37,000 to 82,000
1.2 Globalisation
Tech, Transport & Communication
Main driver of globalisation (freight,
communications, financial technology
l ) examples).
Other examples:
Broadband & mobile phones.
Email, social networking, etc.
Electronic banking.
1.2 Globalisation
International Labour Markets.
Far less globalised.
Capital moves freely, population more difficult
World Bank estimate.
3% of world pop. (migrating for work =200 Mil.)
Movement of labour.
Top end (expats) & bottom end (sweatshops)
Restrictions.
Language, cultural factors & education
Shifts of business between countries.
Corp. shift production in search of cost effective labour
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1.2 Globalisation
1.2 Globalisation
1.3 Global/Regional Cycles
The level of economic activity never constant.
The ups & downs of the business cycle caused
by changes in AD & AS.
There is a strongrelationshipbetween the There is a strong relationship between the
economic growth performances of the worlds
major economies. Examples?
RBA states that 63% of changes in output
levels in Australia can be explained by the
changes in IR, growth & inflation rates in the 7
largest economies.
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1.3 Global/Regional Cycles
Strengthen IBC Weaken IBC
Trade Flows Domestic interest rates
Investment flows & investor
sentiment
Government fiscal policy
sentiment
Transnational corporations Other domestic policies
Financial flows Exchange rates
Technology Structural factors
Global interest rates Regional factors
International organisations
1.3 Global/Regional Cycles
Regional Business cycles are fluctuations in
the level of economic activity in a specific
geographical region.
USA &the rest of the Americas examples USA & the rest of the Americas examples.
One Euro country on another examples.
One Asian country on another examples.
Ultimately, it is the business cycles of
different regions that interact in complex
ways to drive the level of economic activity
around the world.
End of Chapter Activity
1. Organise your notes.
2. Use Chapter Summary as a
checklist to confirm your y
understanding of the issues and
concepts.
3. Complete (at least) some of the
questions in the Chapter Review.
4. Complete the Self Test on this topic.