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TOPIC 1 - THE GLOBAL ECONOMY

Global economy: the sum of the interactions between economies of individual countries that
are now becoming increasingly linked into one economic unit
Gross World Product (GWP): the sum of total output of goods and services by all economies in
the world over a period of time
Globalisation: the integration of difference countries and economies and the increased impact
of international influences on all aspects of life and economic activity
o Trade in goods and services:
Measure of how goods and services produced in an economy are consumed in
other economies around the world
Size of GWP is now 10 times its level in 1950; but the volume of world trade has
grown to over 40 times its 1950 level
During economic downturns, the growth of global trade has contracted faster than
world economic output highlighting of the greater volatility of trade compared
to GWP

Technological developments in transport and communications, reduces the cost of
moving goods between economies and provides services to customers in distant
markets strong growth in global trade
Governments encourage trade by removing barriers and joining international and
regional trade groups (e.g. WTO, EU, ASEAN)
Composition of trade: the mix of what goods and services are traded
Dominated by manufactures, such as vehicles, clothing and electronic goods,
and recently fuels and minerals such as oil, gas and coal
Direction of trade flows has changed in recent decades from advanced economies
to advancing economies
Between 1995 and 2009, the share of global trade of advanced economies
(in North America and Western Europe) fell from 82% to 70%; over the same
period, advancing economies of East Asia and the Pacific region (China,
Indonesia, Vietnam) increased their share of global trade from 7% to 14%
Leads to countries forming closer trade ties to countries that're rapidly
developing (e.g. China)
o Financial flows:
Globalisation of finance has had a major impact in terms of linking economies
around the world
Finance is the most globalised features of the world economy, as money moves
between economies faster than goods, services or people

Financial deregulation of the 1970s and 1980s substantial expansion of
international financial flows
Technological developments linking of major financial markets allowing for
immediate results

FOREX (foreign exchange) markets: networks of buyers or sellers, who exchange
one currency for another, in order to facilitate flows of finance between countries
effects the determining of one's currency
Experienced extraordinary growth turning over $4 trillion daily in 2010

Main drivers of global financial flows are speculators (investors who buy or sell
financial assets with the aim of making short term profits)
Creates greater volatility in foreign exchange markets and domestic financial
markets

Benefit of global financial flows: enables countries to obtain funds that are used to
fund domestic investment higher levels of investment, which leads to greater
economic growth
o Investment and transnational corporations (TNCs):
Global finance: short term; speculative shifts of money
Global investment: long term; flows of money to buy or establish businesses

Foreign direction investment (FDI): the movement of funds between economies
for the purpose of establishing a new company or buying a substantial portion of
shares in an existing company
FDI flows are strongly influenced by the level of economic activity

TNCs bring foreign investment, new technologies, skills and knowledge to a
country
o Technology, transport and communication
Technology facilitates the integration of economies
Development of freight technologies more efficient logistics system
more trade
Cheaper and more reliable communication provision of services to
international customers
Technology allows money to around the world in a fraction of a second
Allows TNCs to function (i.e. because of the Internet, mobile and
international communications)
Advancements in transportation greater labour mobility increased
accessibility to tourism and travel
Technology represents a major trade opportunity
Trade operates as a means of spreading new technologies
Leading developers of technologies often move directly into overseas
markets to sell their products and services direct to local buyers often
invest substantially in education and training increased FDI
The Internet reduces business costs that have been a barrier to integration in the
past
o International division of labour and migration:
Labour markets are far less internationalised people cannot/dont move jobs as
freely as goods or money
International division of labour: how the tasks in the production process are
allocated to different people in different countries people move where their
skills are needed
Corporations shift production between economies in search of the most
efficient and cost efficient labour
Global supply chain: production facilities in several countries shifts
production between countries, reducing costs

International business cycle: fluctuations in the level of economic activity in the global
economy over time
In Australia, domestic factors have less influence than international factors on economic
growth
o Trade flows: if there is a boom/recession in one country, this will affect its demand for
goods and services from other nations
o Investment flows: stronger economic conditions in one country will make it more likely
that businesses in that country will invest in new operations in other nations
o TNCs: spread global upturns and downturns throughout the global economy
o Financial flows: short term financial flows have a substantial influence upon the
international business cycle 70% of financial market volatility in advance countries is
passed onto emerging economies in a few days
o Financial market and confidence: consumer confidence is influenced by conditions in
other countries strong correlation in the movements of share prices in different stock
exchanges
o Global interest rates: monetary policy conditions in individual economies are influence
by interest rate changes in other countries
o International organisations: international forums influence global economic activity

Regional business cycle: the fluctuations in the level of economic activity in a geographical
region of the global economy over time

Free trade: a situation where governments impose no artificial barriers to trade that restrict
the free exchange of goods and services between countries with the aim of shielding domestic
producers from foreign competition
Advantages of Free Trade:
o Allows countries to obtain goods and services they cannot produce themselves, or
cannot produce in sufficient quantities to satisfy domestic demand (due to lack of
adequate resources)
o Increased production within individual economies, due to economies specialising in
production
o More efficient allocation of resources (comparative advantage: the economic principle
that nations should specialise in the areas of production in which they have the lowest
opportunity cost and trade with other nations to maximise both nations' standards of
living)
o Specialisation leads to economies of scale (savings in cost resulting from a firm
expanding its scale of operations) lower average costs of production, increased
efficiency and productivity
o Increased international competitiveness
o Encourages innovation and the spread of new technologies
o Leads to higher living standards due to lower prices, increased production of goods and
services, increased consumer choice
Disadvantages of Free Trade = Reasons for Protection:
o Protection: government policies which give domestic producers an artificial advantage
over foreign competitors

o Protection of infant industries:
New industries usually have costs that're relatively high than those of the more
established firms in the competing
Argued that infant industries need protection in the short term to assist them in
expanding their scale and reduce their costs of production, so that they can
compete with foreign competitors
Historically, industries that have received assistance continue to rely upon this
assistance economists generally do not accept this argument in favour of
protection
o Prevention of dumping:
Dumping: when foreign firms attempt to sell their goods in another country's
market at prices lower than that of those charged in the home country (lower
prices usually last for only a short period of time), to establish a market position or
to dispose of production surpluses
The temporary low prices of the foreign firm may force local firms out of business,
causing a loss in a country's productive capacity higher unemployment
Is the only widely accepted reason for protection by economists
o Protection of domestic employment:
If local producers are protected from cheaper foreign imports, the demand for local
goods will increase, and consequently the demand for labour will increase
Little support amongst economists for this argument protection will redirect
resources away from areas of more efficient production, which in the long run will
lead to higher unemployment and lower growth rates
o Defence and self-sufficiency:
Major powers generally retain their own defence industries so that in times of war,
they will still be able to produce defence equipment as opposed to relying on
other countries to supply it to them

Methods of Protection:
o Tariff: a government-imposed tax on imported goods, which raises the price of the
imported good, making domestic producers more competitive
Stimulates domestic production and employment domestic producers supply
more of the good
Leads to reallocation of resources towards less efficient producers production
and employment fall
Consumers pay a higher price and receive fewer goods
Tariff raises revenue for the government (however, the more successful the tariff
as a protectionist device, the more imports it restricts, the less revenue it will raise
Retaliation effect in response to tariffs on imports, countries may impose tariffs
on goods exported to them any increased production and employment gains
would be offset by the losses in the nation's export industries)
o Quota: a limit placed on the amount of a foreign good that is allowed to be imported
over a period of time, which guarantees domestic producers a share of the market
Stimulates domestic production and employment
Reallocates resources to less efficient producers
Consumers pay a higher price for fewer goods
Do not directly generate revenue for the government
Possibility of the retaliation effect
o Tariff quotas: goods imported up to the quota play the standard tariff rate, whilst goods
that are imported above the quota pay a higher rate (e.g. in Australia, textiles, clothing,
footwear, motor vehicle industries)
o Subsidies: financial assistance to domestic producers, enabling them to reduce their
selling price and compete easier with imported goods
Stimulates domestic production and employment
Reallocation resources to less efficient producers
CONSUMERS PAY A LOWER PRICE FOR MORE GOODS
Impose direct costs on the government's budget
o Local content rules: goods must contain a minimum percentage of locally made parts,
which guarantees a certain percentage of a good will be locally made (e.g. motor vehicle
industry and televising broadcasting)
o Export incentives: giving domestic producers assistance (e.g. grants, loans, technical
advice) to encourage them to break into the global market or to expand their market
share
Do not technically protect businesses from foreign competition but are an artificial
barrier to free trade

o Effects of Protectionism on the Global Economy:
Overall, protectionism policies reduce trade between nations for individual
economies, protectionism means that exports and imports will be a smaller share
o the national economy
Overall, protectionism policies reduce living standards and reduce global economic
growth, by shielding inefficient producers absence of competition, prices will be
higher for goods
Make it more difficult for individual economies to specialise in production in which
they are most efficient less able to achieve economies of scale, resulting in
lower profits and lower dividends
Developing countries are excluded from access to the markets of advanced
economies continued poverty

Trading bloc: when a number of countries join together in a formal preferential trading
agreement to the exclusion of other countries (e.g. EU, NAFTA, ASEAN)
o Trading blocs could result in global trade fragmenting into self-contained regions,
hindering the spread of global free trade

o European Union (EU):
Helped to dismantle trade barriers within Europe a single market for European
goods and services, resulting in strong growth of trade within the EU
Introduction of the Euro as a common currency monetary union
o North American Free Trade Agreement (NAFTA):
Complete elimination of agricultural protection
Access to the US market has resulted in substantial exports for Mexico and Canada,
whilst the US has benefited by shifting production facilities to Mexico, were labour
is cheaper
The Free Trade Area of the Americas (FTAA) is intended to counterbalance the EU,
however its future prospects seem weak
o Closer Economic Relations Trade Agreement (CERTA):
Led to the elimination of trade restrictions between Australia and New Zealand
o Association of South East Asian Nations (ASEAN):
Acted as a counterweight to the APEC forum, which tends to be dominated by large
advanced economies (e.g. US, Japan, China)
Committed to lowering and eliminating tariffs on 96% of Australian exports to this
region
Free trade agreements (preferential trade agreements): formal agreements between
countries designed to break down barriers to trade between those nations (they can make it
harder for nations outside of the agreement to trade may not create better conditions for
free trade)
o Asia-Pacific Economic Cooperation (APEC) forum:
Formed in response to the formation of trading blocs in other areas of the world
Intended to be a free trade group that supports the WTO and address all obstacles
of free trade and investment in the region
Has not succeeded in creating a regional area of free trade, instead it has
contributed to the liberalisation of trade
Regionalisation: the rapid proliferation of regional trade agreements (3 or more countries;
multilateral) in recent years
International Organisations:
o World Trade Organisation (WTO):
Role is to implement and advance global free trade agreements and to resolve
trade disputes between countries
Proven effective in resolving disputes between smaller countries, although not
effective with the 2 largest forces in the global economy - the US and the EU
In the Doha Round of trade liberalisation issues to be addressed were reducing
agricultural protection, lowering tariffs on manufactured goods and reducing
restrictions on trade in services
o International Monetary Fund (IMF):
Role is to maintain international financial stability, particularly in relation to
foreign exchange market
IMF's policies are to support the free trade of goods and services, and the free
movement of finance and capital throughout world markets
IMF supports the reduction in the size of governments, privatising government
businesses, deregulating markets and balancing government budgets
o World Bank:
Role is helping poorer countries with their economic development, aiming to fund
investment in infrastructure, reduce poverty, and to help economies adjust to the
demands of globalisation
World Bank makes loans to developing nations, at rates that are below standard
commercial rates, to fund infrastructure projects (e.g. power plants, roads, dams)
'Heavily Indebted Poor Countries Initiative' aims to reduce debt by two-thirds in
46 of the world's poorest countries
o United Nations (UN):
Agenda covers the global economy, international security, the environment,
poverty and development, international law and global health issues
Different UN agencies have developed international standards making it easier to
trade and invest
In recent years, the UN has sought to halve global poverty and achieve significant
improvements in other aspects of development for people in the world's lowest
income nations
o Organisation for Economic Cooperation and Development (OECD):
Organisation of 34 countries committed to democracy and to the market economy
Primary goal is to conduct and publish research on a wide range of economic
policy issues, and to coordinate economic cooperation among member nations
Supports globalisation, free markets, privatisation and deregulation

Government economic forums:
o Group of Eight Nations (G8):
+ Russia
World's wealthiest nations meeting annually to discuss conditions in the global
economy
o Group of Twenty Nations (G20):
Leading council of nations responsible for the management of the global economy

Gross National Income (GNI): the total income earned by domestically owned factors of
production over a period of time
o Real GNI: discounting GNI growth for the effects of inflation
o Limitations:
The exchange rate used to make comparisons; by using the US Dollar, an
inaccurate comparison of the living standards of developing countries is made
(e.g. if the cost of products in a country is lower than that in the US, there will be
an underestimation of the true income of the developing nation)
The difference in the size of populations in different countries size of
population and population growth rates differ
o Economists make adjustments using purchasing power parity (PPP) before comparing
GNI levels
Purchasing power parity: exchange rates adjust to equalise the price of identical
goods and services in different economies throughout the world
o To counter the different size in populations between countries, the real GNI of each
country is divided by its population GNI per capita

Economic development: attempts to measure improvements in welfare, rather than simply
how much extra money people in a certain country have
o Takes on other quality-of-life indicators (e.g. health standards, education levels,
domestic work, damage to the environment, inequalities in income distribution) that is
not given a financial value
Human Development Index (HDI): measurement of economic development, taking into
account:
o Life expectancy at birth
o Levels of educational attainment
o Gross National Income per capita

Advanced Economies:
o High levels of economic development
o Close economic ties with other advanced economies
o Liberal-democratic economic and liberal institutions
o 34 advanced economies identified by the IMF make up half of the high income
economies in the world
High income economies are mostly found in North America and Western Europe,
with a small number in the Asia-Pacific region
Developing Economies:
o Low income levels
o Weak human resources
o Only experienced globalisation to a limited extent
o Large numbers of people living in absolute poverty (less than US$1.25 per day)
o High levels of income inequality
o Dependence on agriculture for income, employment and trade opportunities
o Reliance on foreign aid as a major source of income
o Low levels of labour productivity, industrialisation, technological innovation and
infrastructural development
o Weak political and economic institutions
High prevalence of corruption

'Africanisation' of poverty: 33 of the 48 least developed countries (LDCs) are located in sub-
Saharan Africa
Emerging economies:
o In the process of industrialisation
o Experiencing sustained high levels of economic growth
o Includes 'newly industrialised economies' (NIEs) such as Malaysia and the Philippines,
'transition economies' (economies making the transition from socialist economies) such
as China and Hungary, and developing economies with improved prospects such as India
and Indonesia


Type of
economy
Income levels Economic growth Structure of economy Examples
Advanced High income
levels
GNI per capita
above $US
12,276
Slower growth
rates in recent
decades
Large service
industries
Advanced
manufacturing
US
Germany
Korea
Developing Low income
levels
Around half of
population in
absolute poverty
Moderate
growth rates
High population
growth
Heavily reliant on
agriculture and
foreign aid
Banglades
h
Ethiopia
Zimbabwe
Emerging Varying income
levels
All have fast
growth in
income levels
Strongest
growth rates in
the world
Favourable
prospects
Industrialising
Substantial
manufacturing
sectors
China
Brazil
Indonesia

Development economics: attempts to identify the conditions in economies that are required
to achieve economic growth and development
Global factors causes global inequalities (low levels of development):
o Global trade system:
Protectionism in the agricultural sector (developing economies are heavily reliant
on agriculture) in advanced economies as it cannot compete with agricultural
producers in developing economies
Expanding regional trading blocs (e.g. EU, NAFTA) excludes poorer nations from
gaining access to profitable markets
In the WTO's Doha Round for example, advanced economies have rejected the
need to make concessions on issues that would provide the greatest benefits to
developing economies recent WTO negotiations are primarily focused on
developing small packages which tries to expand tariff-free access for exports
form the least developed countries
Benefits of free trade agreements is often inaccessible for developing countries
due to the substantial costs in implementing international trade agreements and
lodging appeals against other countries' protectionist policies
Complexity of the WTO's procedures favour high-income countries, entrenching
global inequalities
o Global financial architecture:
Developed economies account for half of global FDI flows most FDI flows go to
a handful of emerging economies including China, Brazil, India and Russia
In 2010, the world's 48 least-developed countries received just 2% of global FDI
inflows
Short term financial inflows heavily favour prosperous emerging economies, which
offer better financial returns for currency and stock market speculators
however, these emerging economies have experienced the greatest volatility in
recent decades (e.g. East Asian crisis in 1990 and Latin America crises in early
2000s), which set economic development back for year, whilst global financial
market speculators simply invest in other countries
The IMF has been criticised for its 'structural adjustment' policies which have been
said to only benefit the interests of rich countries and may not be appropriate to
the conditions of many developing countries. Additionally, some have argued that
the IMF's motivation for intervention is to bail out richer countries' financial
institutions from suffering losses on their loans to developing countries
Many developing countries have accumulated massive foreign debt, and when
interest is included, significantly reduces the governments' ability to promote
growth and development through expenditure on education, healthcare and
infrastructure. Moreover, debt has bee the result of irresponsible lending
practices by financial institutions in advanced countries to authoritarian leaders in
developing countries (e.g. Uganda, Democratic Republic of the Congo)
o Global aid and assistance:
58% shortfall in development aid provided by developed countries since 1970;
development aid was 0.3 per cent of GDP which was less than half the level to
which high-income economies have been committed to for the past four decades
(0.7 per cent of GDP)
Development aid expenditure may decrease in the coming years as high-income
economies need to cut spending to reduce their large budget deficits
Many argue that a significant proportion of the monetary assistance given to
developing countries is 'phantom aid' - aid funds that do not improve the lives of
the poor, as the aid does not contribute to development 'phantom aid' includes
'technical cooperation', paid to consultants in the donor country; 'debt-related aid'
which relieves or refinances past loans; aid spent on administration; 'tied aid'
which is aid that is spent on overpriced or unnecessary goods and services
provided by the donor country (e.g. when the US provides food supplies to very
poor countries, it generally buys American crops and ships them all they way to
countries in Africa, at a far greater expense than buy local crops thus, the aid is
used in the transportation costs and the costs of American labour)
Distribution of aid usually reflects the donor country's strategic and military
considerations rather than the needs of the world's poorest countries
o Global technology flows:
The World Bank found that around half of the difference in living standards
between the US and developing economies can be linked to the slow adoption of
new technologies in poorer countries
'Digital divide': differences in access to new communications technologies
Most new technologies is designed to address the needs of developed countries.
For example technology such as labour-saving machinery and pharmaceutical
which deal with the health problems of ageing people in developed countries, are
of little benefit to poorer nations that have abundant labour supplies, limited
capital resources and a young population whose main health risks are common
infectious diseases
Intellectual property rights makes it difficult for poorer countries to gain access to
new technologies as they cannot pay the price for those technologies, thus
restricting the benefits of technological transfer to poorer countries
Domestic factors which causes global inequalities:
o Economic resources:
Natural resources:
Economies that have an abundant and reliable supply of natural resources
have better opportunities for economic development as they are important
inputs for the production of high value goods e.g. the Middle East and
Latin America have achieved higher growth rates largely as a result of their
exploitation of natural resources. However, an abundance of natural
resources can also hamper a country's economic development as it could
lead to an overvalued exchange rate, a narrow export base and the
becoming of being over-reliant on a small number of industries for economic
growth
Labour supply and quality:
Developing countries tend to have high population growth, poor education
levels, and low health standards reduction in the quality of labour
Access to capital and technology:
Difficulty in gaining access to capital for investment and development is
another major structural weakness of developing nations which leads to
their lower living standards
Poorly developed financial systems makes it difficult for business to gain
access to loans for investment development of microfinance
organisations which provide small loans to help the poorest people in the
world manage a farm, start a business etc.
With small research organisations and limited funding of business
innovation, developing countries have limited opportunities to develop new
technologies or to pay for patents to use technologies developed in and by
other countries
Entrepreneurial culture:
Evidence suggests that a country's history and social institutions can impact
on its economic successes, particularly the values of individual responsibility,
enterprise, wealth creation and a strong work ethic can assist the
industrialisation process transitioning towards a more sustainable economic
development
o Institutional factors: ranging from political stability, legal structures, central bank
independence, extent of corruption, strength of social institutions and the government's
domestic and external economic policies affect a nation's attainment of economic
development
Political and economic institutions:
Political instability, corruption and a lack of law enforcement by government
agencies tends to undermine the confidence of investors, who will be
reluctant to take risks if their business interests are threatened by an
inadequate structure to resolve legal disputes, corruptions or other
institutional problems
The impact of weak political institutions are hard to quantify one
attempt to do so is the Corruption Perception Index by Transparency
International each year
Economic policies:
If all major economic decisions are left to market forces, a country may
achieve a high level of economic growth but it may not improve education,
healthcare and quality of life
Excessive government control in economic decisions can constrain
entrepreneurship and innovation, reducing economic growth
Countries with the highest economic growth (e.g. Norway, Australia)
strong market forces and government investment in human development
Government responses to globalisation:
Policies relating to trade, financial flows, investment flows, TNCs, and the
country's participation in regional and global economic organisations will
influence an economy's ability to take advantage of the benefits of
integration, such as restructuring, efficiency, access to foreign capital and
technology, and access to overseas goods markets
e.g. East Asian economies, which have been the most open to trade and
foreign investment, have experienced the strongest rates of economic
growth in recent decades

IMPACT OF GLOBALISATION:
Economic growth and development:
o Developing economies have greater opportunities to grow through the production of
goods for global consumer markets, and also benefit from access to new technologies
and foreign investment
o Developed economies, through TNCS, find growth opportunities shifting to global
production processes. However, in some regions, globalisation has caused disruptive
structural changes
o Overall, there is no clear evidence that globalisation has caused an increased
acceleration of economic growth; in actual fact, economic growth seems to be slowing
with it falling to 2.8 per cent in the 1990s from 3.3 per cent in the 1980s and then to 2.6
per cent in the 2000s
o However, globalisation seems to be contributing to a convergence in living standards in
the global economy since 1990, emerging and developing economies have been
catching up to advanced economies
East-Asia and the Pacific have been the fastest growing regions in the world, with
growth rates of 8.7% annually between 1991 and 2010.
Particularly China, with 10.4% per year between 1991 and 2010, showing
the role of industrialisation and globalisation in economic growth
South-Asian economies have also experienced successful growth, at 6.4% between
1991 to 2010.
Notably, India (6.6%) and Bangladesh (5.3%), after its steps towards great
integration with the global economy
The former socialist economies of eastern Europe and Central Asia grew by 4.9% in
the 2000s, after facing an initial contraction in their economies in the 1990s (-
1.5%), due to the difficult process of transitioning to a market-based economy
The Middle East has experienced solid economic growth, at 4.2% during the period
from 1991 to 2010
This has largely been due to strong performances from Egypt (4.6%) and
Syria (5.0%)
The economic growth in the region has been brought about by the increased
competition for energy resources during the globalisation era (e.g. for
petrol, natural gas etc.)
However, many economies in the Middle East are characterised by very high
levels of inequality
Sub-Saharan Africa recorded an average growth rate of (3.6%) during the period of
1991 to 2010
Strong growth from Sudan (6.1%) and Nigeria (4.6%)
However, some African countries have been less successful, including Kenya
(3.0%) and Swaziland (3.1%), which are insufficient in the catching up of the
advanced economies, even if they are faster than the growth during the
1980s (1.7%)
Latin American experienced stronger growth rates, with 3.3% during the period of
1991 to 2010, compared to those in the 1980s (1.4%)
Noticeably, due to Brazil and Argentina
Partly because of greater economic integration, but also due to rising
commodity prices
Advanced economies grew by just 2.1% on average during the 1991 to 2010
period, which was slower than the 3.3% recorded during the 1980s
Average growth rate in the UK was 2.7% per year
Average growth rate in the EU was 1.8% per year
Average growth rate in Japan was 1.1% per year
o There are mixed implications to these trends:
On one hand, the remarkable growth experienced by emerging and developing
economies may indicate that globalisation facilitates higher rates of economic
growth (e.g. sustained economic growth in China and India due to both countries
initiating policies which encourage increased trade and foreign investment)
On the other hand, the most globally integrated economies (advanced
economies), experienced comparatively lower growth rates over the past two
decades and were more strongly impacted by the global recession of the late
2000s
e.g. the US and Europe suffered the worst effects of global recession and
were again at the centre of economic instability in 2011
Additionally, global forces have contributed negatively to other growth outcomes
in recent years, such as foreign indebtedness (in Africa) and exchange rate
volatility (in Latin America)
o Globalisation and economic development:
If globalisation increases economic growth rates in an economy, it also raises
income levels, and provides more resources for education and healthcare, and for
the initiation of programs for environmental sustainability
However, globalisation can cause income inequality to increase and cause damage
to the environment
o Trends in the HDI..
Trade, investment and transnational corporations:
o Globalisation has resulted in substantial increases in the size of trade flows and foreign
investment TNCs are increasingly dominating business activity around the world, due
to their key role in both trade and investment flows
o Changes in technology and government policy have fostered trade growth
international trade in goods and services continues to grow and is now two-thirds of
global output
o Vertical specialisation: when goods are produced in different stages in different
economies many international trade transactions
o Globalisation of financial markets increased reliance on foreign sources of finance for
investment (more countries now have greater access to overseas funds for investment)
Between 1990 and 2010, FDI increased fivefold, particularly for high growth
emerging economies which have reduced barriers to FDI
o Removal of restrictions on foreign ownership and the development of global capital
markets increase in the growth of TNCs
TNCs accounted for over 25% of GWP in 2010
o Some argue that as TNCs do not operate under the laws of one government, they can
move their production facilities to countries with the weakest government regulations
and artificially structure their financial flows to avoid paying taxes
Environmental sustainability:
o Globalisation can have negative environmental consequences for several reasons:
Low-income countries, which are desperate for foreign investment and to earn
high export revenue, may engage in economic activity which is harmful to the
environment (e.g. deforestation for paper/woodchip industries; depletion of
marine life through unsustainable fishing or poisoning of water supplies due to
mining operations; pollution caused by manufacturing industries; increased
carbon dioxide due to the operation of power plants)
Growth in global trade is increasing consumption of non-renewable fuels
In recent years, problems that involve global environmental resources have
proved difficult to overcome (e.g. fish stocks, climate), with progress in making
agreements slow
o Globalisation offers opportunities to protect the world's environment:
Can force individual nations to face up to their global responsibility for
environmental preservation
Makes it possible for the costs of preservation of the environment to be shared
Increased scrutiny of the environmental practices of TNCs
Facilitated the transfer of environmentally friendly technology
Over time, globalisation could lead to the formation of an international body
which has the power to enforce the promotion of environmentally sustainable
practices
o Most significant issue of the 21st century is climate change, as it has potentially
catastrophic impacts on all aspects of the natural environment
As the impacts of climate change are global, countries have to work together to
address climate change
Efforts to reach agreements between economies on reducing carbon emissions
are coordinated by the United Nations Framework Convention on Climate Change
(UNFCCC)
1997: UNFCCC summit of world leaders produced the Kyoto Protocol on
Climate Change, which set carbon emission reduction targets for
industrialised countries
Does not include developing countries, which are a large source of
emissions
US refused to ratify the agreement (US is a large contributor of carbon
emissions)
Japan, Russia and Canada have refused to extend the Protocol when it
expires in 2012
Recent UNFCCC meetings have failed to produce a new global climate
change agreement, however less significant agreements have been made
2009: countries agreed on the need to work collectively to confine
global temperature increase to below 2 degrees Celsius, which is the
benchmark scientists believe is necessary to prevent the dangerous
impacts of climate change
2010: countries agree to establish a Green Climate Fund to help
developing countries respond to climate change and a Technology
Mechanism to assist with the transfer for clean technologies between
countries
2011: little progress towards a new climate change agreement due to
the overshadowing of deteriorating global economic conditions
The contribution of developing countries to carbon emissions has been substantial
in recent years
China is now the largest carbon dioxide emitter
India is the third largest carbon dioxide emitter
Together they account for nearly 30% of the world's carbon emissions

The international business cycle:
o Benefit of integration:
Allows countries to achieve fast rates of economic growth by specialising in certain
types of production and by engaging in trade
Particularly during times when global economic growth is higher, individual
economies are likely to benefit from an upturn in growth
One of the reasons for the strong global economic growth in the mid-2000s
was the simultaneous upswings in the US and China, propelling the global
economy to its fastest growth rate in 30 years
o Risks of integration:
Economies are more exposed to downturns in the international business cycle and
to developments in their regions
Downturn in the US economy in the late 2000s spread quickly to other
developed and developing economies
As trade and financial integration continues to increase, there is likely to be
greater synchronisation of the international business cycle, intensifying upswings
and downturns in the global economy
With the increase of the synchronisation of business cycles between different
countries, this has led to the increased need for macroeconomic policies to be
coordinated
Following the recession of the late-2000s, the IMF recommended that
countries use their combined budgets to stimulate the world economy by
2%, in response to the recession major countries coordinated budget
policies like never before
In 2011, the finance ministers of the G20 committed to coordinate action to
promote financial stability and economic growth to address the
consequences of government debt problems in the US and the EU

Many economists argue for the need for greater coordination of economic
management and financial regulation in the global economy, to better
manage the international business cycle and avoid a repeat of events
following the GFC

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