Economics Summary Notes1

7/28/2019 Economics Summary Notes1

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HSCEconomics2010SummaryNotes

JamieKennedy

LastUpdated22/12/2010


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EconomicsSummaryNotes2010 JamieKennedy 2

D:\Documents\School\SchoolWork\Economics\EconomicsSummaryNotes.docx

TABLEOFCONTENTS

TheGlobalEconomy....................................................................................................................................................8

Featuresoftheglobaleconomy.............................................................................................................................8

Natureoftheglobaleconomyandglobalisation...............................................................................................8

TheGlobalEconomy........................................................................................................................................8

GrossWorldProduct.......................................................................................................................................8

Globalisation....................................................................................................................................................8

TheInternationalBusinessCycle...................................................................................................................10

Tradeandfinancialflows....................................................................................................................................11

ChangesInTheSize,PatternAndDirectionOfTradeAndInvestment........................................................11

TheForeignExchangeMarket........................................................................................................................11

TheMainParticipantsInForeignExchangeMarkets...................................................................................12

TheImpactOfChangesInTradeAndFinancialFlowsOnEconomies.........................................................12

Freetradeandprotection..................................................................................................................................12

TheBasisOfFreeTradeItsAdvantagesAndDisadvantages..................................................................12

ReasonsForProtection..................................................................................................................................13

MethodsOfProtectionAndTheEffectsOfProtectionistPoliciesOnTheDomesticAndGlobalEconomy

.........................................................................................................................................................................14

Contemporarytradingblocsandagreements..................................................................................................14

TheRole,ImportanceAndInfluenceInTheGlobalEconomyOfBlocsAndAgreements..........................14

EU,NAFTA,APEC,ASEAN,CERTA..................................................................................................................15

Internationalorganisations................................................................................................................................15

TheRole,ImportanceAndInfluenceInTheGlobalEconomyOfInternationalOrganisations..................15

WTO,IMF,WorldBank...................................................................................................................................16

ImpactOfGlobalisationOnTheStandardOfLivingInTheGlobalEconomy......................................................17

Variationsin

the

standard

of

living

in

the

global

economy

..............................................................................

17

IncomeAndQualityOfLifeIndicators...........................................................................................................17

Contrastsinlevelsofdevelopment...................................................................................................................17

DifferenceBetweenGrowthAndDevelopment...........................................................................................17

ReasonsForDifferencesBetweenNations...................................................................................................17

DevelopingEconomies,NewlyIndustrialisedCountries(NICS),TransitionEconomies,HighIncome

Economies.......................................................................................................................................................19

Impactofglobalisation.......................................................................................................................................20


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InternationalConvergence............................................................................................................................20

EconomicGrowth,DevelopmentAndTheQualityOfLife...........................................................................20

Trade,InvestmentAndTransnationalCorporations....................................................................................20

DistributionOfIncomeAndWealth..............................................................................................................21

EnvironmentalConsequences.......................................................................................................................21

FinancialMarkets............................................................................................................................................21

TheInternationalBusinessCycle...................................................................................................................21

ImplicationsForGovernmentEconomicPolicies..........................................................................................21

Casestudy...........................................................................................................................................................22

AcasestudyontheimpactofglobalisationonVietnam,alongwiththestrategiesthatVietnamisusing

topromoteeconomicgrowthanddevelopment.........................................................................................22

AustraliasPlaceintheGlobalEconomy....................................................................................................................23

AustraliasTradeAndFinancialFlows...................................................................................................................23

Value,CompositionAndDirectionOfAustraliasTradeAndFinancialFlows..................................................23

TrendsInAustraliasTradePattern...............................................................................................................23

TrendsInFinancialFlows...............................................................................................................................23

AustraliasBalanceofPayments........................................................................................................................24

Structure.........................................................................................................................................................24

Links

Between

Key

Balance

Of

Payments

Categories

..................................................................................

25

TrendsInTheSizeAndCompositionOfAustraliasBalanceOfPayments..................................................25

ReasonsForTheseTrends.............................................................................................................................25

Issuesassociatedwithtrendsinthebalanceofpayments..............................................................................26

TermsOfTrade...............................................................................................................................................26

SizeOfTheCurrentAccountBalanceAsAPercentageOfGrossDomesticProduct..................................26

ForeignDebtAndForeignLiabilities.............................................................................................................27

InternationalCompetitiveness.......................................................................................................................27

StructuralChange

In

The

Australian

Economy

..............................................................................................

27

Exchangerates.......................................................................................................................................................29

measurementofrelativeexchangerates.....................................................................................................29

FactorsAffectingTheDemandForAndSupplyOfAustralianDollars.........................................................29

ChangesInExchangeRates..........................................................................................................................30

DeterminationOfExchangeRatesIncludingFixed,FlexibleAndManagedRates....................................30

TheInfluenceOfTheReserveBankOfAustraliaOnExchangeRates........................................................30

TheEffectsOfFluctuationsInExchangeRatesOnTheAustralianEconomy.............................................31


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Freetradeandprotection......................................................................................................................................31

AustraliasPoliciesRegardingFreeTradeAndProtection...........................................................................31

TheImplicationsOfAustraliasPoliciesForIndividuals,FirmsAndGovernments......................................31

ImplicationsForAustraliaOfProtectionistPoliciesOfOtherCountriesAndInternationalOrganisations.

.........................................................................................................................................................................31

EconomicIssues.........................................................................................................................................................32

EconomicissuesintheAustralianeconomy.........................................................................................................32

EconomicGrowth...............................................................................................................................................32

AggregateDemandAndItsComponents:Y=C+I+G+XM..........................................................................32

InjectionsAndWithdrawals(I+G+X;S+T+M).................................................................................................33

TheSimpleMultiplier:K=1/(1MPC).............................................................................................................33

MeasurementOfGrowthThroughChangesInRealGrossDomesticProduct...........................................33

SourcesAndEffectsOfEconomicGrowthInAustralia................................................................................33

BusinessCycleTrends................................................................................................................................34

Unemployment...................................................................................................................................................34

Measurement..................................................................................................................................................34

Trends..............................................................................................................................................................35

TypesAndCauses:..........................................................................................................................................35

Natural

Rate

Of

Unemployment

...................................................................................................................

36

MainGroupsAffectedByUnemployment...................................................................................................36

EffectsOfUnemploymentEconomicAndSocialCosts..........................................................................36

Inflation...............................................................................................................................................................37

MeasurementCurrentAustralianBureauOfStatisticsMeasure............................................................37

Trends..............................................................................................................................................................37

Causes............................................................................................................................................................38

Effects............................................................................................................................................................38

PoliciesTo

Sustain

Low

Inflation

...................................................................................................................39

Externalstability.................................................................................................................................................39

Measurement..................................................................................................................................................39

Trends.............................................................................................................................................................40

CausesAndEffects.........................................................................................................................................41

Distributionofincomeandwealth....................................................................................................................41

MeasurementLorenzCurveAndGiniCoefficient....................................................................................41

SourcesOfIncomeAsAPercentageOfHouseholdIncome........................................................................42


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SourcesOfWealth..........................................................................................................................................43

DimensionsAndTrends,AccordingToGender,Age,Occupation,EthnicBackgroundAndFamily

Structure.........................................................................................................................................................43

EconomicAndSocialCostsAndBenefitsOfInequality................................................................................43

GovernmentPoliciesToAddressInequality.................................................................................................44

Environmentalmanagement............................................................................................................................44

EcologicallySustainableDevelopment..........................................................................................................45

PrivateAndSocialCostsAndBenefitsMarketFailure.............................................................................45

PublicAndPrivateGoodsFreeRiders.......................................................................................................45

Issues:.............................................................................................................................................................46

EconomicPoliciesandManagement.........................................................................................................................47

Economicobjectives...............................................................................................................................................47

EconomicGrowth...........................................................................................................................................47

FullEmployment.............................................................................................................................................47

PriceStability..................................................................................................................................................47

ExternalStability.............................................................................................................................................47

Environment..................................................................................................................................................48

DistributionOfIncome..................................................................................................................................48

Goals

of

government

policy

in

2010

..................................................................................................................

48

SustainingEconomicGrowthDuringTheGlobalRecessions......................................................................48

SupportingEmploymentDuringTheGlobalDownturn..............................................................................48

MaintainingStabilityAndInternationalConfidenceInAustraliasEconomyAndFinancialSystem.........48

KeepingInflationStable,WithinTheRangeOf23%....................................................................................49

BoostingAustraliasProductivityGrowthAndInternationalCompetitiveness.........................................49

IncreasingTheSustainableRateOfGrowthInTheLongTerm..................................................................49

PromotingEnvironmentalSustainability......................................................................................................49

Potentialconflicts

between

objectives

............................................................................................................

49

AchievingASimultaneousReductionInUnemploymentAndInflation.....................................................49

AchievingEconomicGrowthAndExternalBalance.....................................................................................50

OtherConflicts...............................................................................................................................................50

Themainpoliciesavailableforeconomicmanagement......................................................................................50

Macroeconomicpolicies....................................................................................................................................50

RationaleForMacroeconomicPoliciesStabilisationAndShiftsInAggregateDemand.......................50

Microeconomicpolicies.....................................................................................................................................50


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RationaleForMicroeconomicPoliciesIncludingShiftsInAggregateSupply,Efficiency..........................50

Fiscalpolicy.........................................................................................................................................................51

FederalGovernmentBudgetsAndBudgetOutcomes.................................................................................51

EffectsOfBudgetaryChangesOnResourceUse,IncomeDistributionAndEconomicActivity................51

MethodsOfFinancingDeficits.......................................................................................................................52

UseOfASurplus.............................................................................................................................................52

CurrentStanceOfFiscalPolicy......................................................................................................................52

ImpactOfRecentFiscalPolicy.......................................................................................................................52

Monetarypolicy..................................................................................................................................................53

PurposeOfMonetaryPolicy..........................................................................................................................53

Implementation

Of

Monetary

Policy

Reserve

Bank

Of

Australia

............................................................

53

ImpactOfChangesInInterestRatesOnEconomicActivity,ExchangeRate..............................................53

CurrentStanceOfMonetaryPolicy...............................................................................................................54

Structuralchange...............................................................................................................................................54

EffectsOfMicroeconomicPoliciesOnIndividualProductAndFactorMarketsAndTheEconomy..........54

RegulationAndDeregulation.........................................................................................................................54

Tradepolicy.........................................................................................................................................................54

DirectAndIndirectPoliciesToPromoteOrRestrictTrade..........................................................................54

TradeAnd

Industry

Policies

In

Australia

........................................................................................................

54

Pricesandincomespolicy..................................................................................................................................54

ReasonsForPricesAndIncomesPolicies......................................................................................................54

PossiblePricesAndIncomesPoliciesInAustralia.........................................................................................54

AdvantagesAndDisadvantagesOfCentralisedAndDecentralisedPolicies...............................................54

Labourmarketpolicies.......................................................................................................................................54

CurrentIndustrialRelationsFramework.......................................................................................................54

WorkPractices................................................................................................................................................54

DisputeResolution.........................................................................................................................................55

EducationAndTraining,EmploymentPrograms..........................................................................................55

Limitationsonpolicyimplementation...................................................................................................................55

TimeLags........................................................................................................................................................55

GlobalInfluences............................................................................................................................................55

PoliticalConstraints........................................................................................................................................55

Policyresponsesandtheireffectsindealingwiththeeconomicissues.............................................................55


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EconomicGrowth...........................................................................................................................................55

Unemployment...............................................................................................................................................55

Inflation...........................................................................................................................................................55

ExternalStability.............................................................................................................................................55

DistributionOfIncomeAndWealth..............................................................................................................55

ManagementOfTheEnvironment................................................................................................................55


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TheGlobalEconomyFEATURESOFTHEGLOBALECONOMY

NATUREOFTHEGLOBALECONOMYANDGLOBALISATION

THE GLOBAL ECONOMY

TradeinGoodsandServiceshadgrownrapidlyincreasingfrom38%ofGWPin1990to63%ofGWPin2007.

GWPisnow9timesthelevelin1950howeverthevolumeofworldtradehasgrown33timesits1950level

During

times

of

economic

downturns,

the

growth

of

global

trade

has

contracted

faster

than

world

economicoutputhighlightingthegreatervolatilityoftradecomparedtoGWP.

ImportantdevelopmentthathascontributedtotheseflowsistheincreasedinfluenceofTransnationalCorporations.

TransnationalCorporations:globalcompaniesthatdominateglobalproductandfactormarkets.TNCshaveproductionfacilitiesinatleasttwocountriesandareownedbyresidentsofatleasttwo

countries.

Tradehasalsoliftedinresponsetomajortradeagreements:o WorldTradeOrganisation(WTO): isanorganisationof153membercountriesthat

implementsandadvancesglobaltradeagreementsandresolvestradedisputesbetween

nations.Establishedin1995

o NorthAmericanFreeTradeAgreement(NAFTA)o AssociationofSouthEastNations(ASEAN)o EuropeanUnion(EU)

GROSS WORLD PRODUCT

GrossWorldProduct(GWP):thesumoftotaloutputofgoodsandservicesbyalleconomicsintheworldoveraperiodoftime.

Intheindustrialisedworldthevalueofwhatmanycountriesbuyandsellfromoverseasisgreaterthanhalfofthecountryseconomicoutput

GLOBAL ISAT ION

Globalisation:theprocessofincreasedintegrationbetweendifferentcountriesandeconomiesandtheincreasedimpactofinternationalinfluencesonallaspectsoflifeandeconomicactivity.

Involveslayersofinfluencesinalldirections Majorindicatorsofintegrationbetweeneconomicsinclude:

o Internationaltradeflowso Internationalfinancialflowso Internationalinvestmentflowsandtransfersoftechnologyo Themovementofworkersbetweencountries


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InternationalFinance

Financeisthemostglobalisedfeatureoftheworldeconomyasmoneycanmoveinsecondsaroundtheworld,farmorequicklythangoodsandservicesorpeople

Internationalfinanceflowshaveexpandedfollowingfinancialderegulationaroundtheworld(mainlyduringthe70sand80s)

Technologicalchangealsoplayedarolewithnewtechnologiesandglobalcommunicationallowingfinancialmarketstobelinkedthroughouttheworld.

InternationalfinancialflowshaveallshownadramaticincreaseduringtheglobalisationeraGrowthofinternationalinvestmentandtechnology

Anotherindicatorofglobalisationistherapidgrowthofinvestmentbetweencountriesoverthepast20years.

OnemeasureofglobalisationinvestmentistheexpansionofForeignDirectInvestment(FDI).o ForeignDirectInvestment(FDI):themovementoffundsbetweeneconomiesforthepurpose

ofestablishinganewcompanyofbuyingalargeportiononsharesinanexistingcompany

(10%+).FDIisconsideredtobealongterminvestment.

o FDIflowsarestronglyinfluencebythelevelofeconomicactivity.o FDIflowshaveheavilyfavouredthedevelopednationsoftheOrganisationforEconomicCo

operationandDevelopment(OECD).

Asignificantcauseofthegrowthofinternationalinvestmentistheincreasedlevelofinternationalmergersandtakeovers.

However,FDIin2007onlyaccountedfor18%oftotalinvestment,80%stillcamefromwithinnationaleconomies.

Technology

has

played

a

significant

role

in

the

expansion

of

trade

and

investment

between

countries.

Countriescanexporttheirtechnologiesandothercountrieshavetopayroyaltiesforthemuntilthey

areabletoproducethetechnologythemselves.

TheInternationalisationofthelabourmarket

Labourmarketsarefarlessinternationalised.Peopledonotmovejobsfreely. Arecenttrendinindustrialisedcountrieshastobecomemorerestrictiveaboutimmigrationofpeople

frompoorercountries.

WorldBankestimatesthat3%oftheworldspopulationhavemigratedtoworkindifferentcountriesintheworld.

Movementappearstobeatthetopandlowendofthelabourmarket.o Atthetopend,skilledworkersareattractedtojobsincountriesthatpayahigherincomeo Thebraindraineffectwhereskilledworkersleaveacountrytoworkinanothercountry.o Atthelowend,thereisdemandofunskilledlabourtoperformjobsthatpeoplebornlocally

maynotwanttoperform

Therearemanyrestrictionstothemovementoflabourincluding:immigrationrestrictions,culturalfactors,andeducationandprofessionalqualifications.

Shiftofbusinessesbetweeneconomies:justaspeoplemovetofindjobs,businessesmaymovetoothercountriestofindlabour.Producersmayoperateaglobalsupplychainwithproductionfacilities

inmanycountries.Thisiscalledoffshoringandallowsproducerstoreducecosts.Thismeansthat

exportorientedeconomiescancompeteduetolowlabourcosts.


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Factorsthatinfluencethebusinesscyclebutdifferbetweeneconomies:o Interestrates:aredeterminedbyeachcountry(butcanbeinfluencedbyothers)o Fiscalpolicy:significanteffectoneconomicgrowthintheshorttomediumterm.Setby

individualgovernments

(but

may

be

influenced

by

others)

o Exchangerates:differbetweencountriesandimpactontheleveloftradecompetitiveness.o Structuralfactors:differentlevelsofresilience,populationgrowthrates,regulations,

educationetc.

o Regionalfactors:someeconomiesarecloselyintegratedwiththeirneighboursandareinfluencedbytheeconomicperformanceoftheirmajortradingpartners

TRADEANDFINANCIALFLOWS

CHANGES IN THE S I ZE , PATTERN AND D IRECTION OF TRADE AND INVESTMENT

Globaltradeflowshavechangedduringtheglobalisationera,increasinginoverallsizeandasaproportion

of

world

economic

activity.

The

composition

and

direction

of

trade

flows

has

also

changed

duringrecentyears.

Compositionofinternationaltrade:themixofgoodsandservicesthatnationstradewitheachother.Mainlymanufacturedgoods.

Directionoftradeflows:Duringtheglobalisationera,highincomeeconomiessawtheiroverallsharefallwhichfastgrowingeconomiesinEastAsiaandthePacificsawtheirsharerise.

THE FOREIGN EXCHANGE MARKET

ForeignExchangeMarkets(FOREX):anetworkofbuyersandsellersexchangingoncecurrencyforanotherwherethevalueofacurrencyisexpressedintermsofanothercurrency(i.e.:theexchange

rate).

Thevalueofacountryscurrencyhassignificantimpactsupontheinternationalcompetitivenessofthecountry.

o Countrieswithovervaluedeconomiestendtoexperienceadeclineinexportso Currencyvaluescanalsoinfluencethelevelofinflationandinterestrateso Changesinthevalueofexchangeratesalsohaveaneffectonfinancialflowsintheshorttermo Ifalargernumberofinvestorsselltheirholdingsofacountryscurrencytomakeaquick

profit,itcandestabiliseanentireeconomy.

Factorsthatstrengthentheinternationalbusinesscycle

Factorstheweakentheinternationalbusinesscycle

Tradeflows Domesticinterestrates Investmentflows,investor

sentiments

Governmentfiscalpolicies Transnationalcorporations Otherdomesticeconomicpolicies Financialflows Exchangerates Technology Structuralfactors Globalinterestrates Regionalfactors Internationalorganisations


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THE MAIN PART IC IPANTS IN FOREIGN EXCHANGE MARKETS

Threemaincategories:speculators,traders,thosewhoaremakinglongterminvestments.o Currenciesareboughtandsoldtomakepossiblethepurchaseandsaleofgoodsandservices

betweenan

economy

and

other

economies.

Exporters

in

world

trade

want

to

be

paid

in

their

owncurrency;importersneedtobeabletoconverttheircurrencyintoaforeigncurrencyto

makeapayment.Thisonlyrepresentsasmallportionofoverallforeignexchange

transactions.

o ForeignInvestors:purchaseassetsinanothercountrysuchaspropertyorsharesandneedtoconvertintothelocalcurrency.Onlyrepresentsasmallamountofforeignexchange

transactions.

o Speculators:makeshorttermcurrencytradesthroughshiftingmoneyinandoutofacurrencyorthroughderivatives.Theaimistomakegainsfromshorttermmovementsinthecurrency.

Representsover95%ofthedailytradeonFOREXmarkets.

THE IMPACT OF CHANGES IN TRADE AND F INANC IAL FLOWS ON ECONOMIES

Shiftsintradewillaffectthestructureofadomesticeconomyovertime.o Ifaneconomyisexperiencingincreaseddemandforparticularexports,resourcesinthat

economywillshifttowardsincreasingtheproductionofthegoodorservice

o Ifaneconomyisexperiencingadeclineinoverseasdemandforagoodorservice,producersmayshiftresourcesawayfromtheproductionofthegoodorservice

o Trendsinthedirectionoftradecanhaveanimpactonindividualeconomies(i.e.:AustraliarespondingtotheincreasingdirectionoftradetoChina)

Changesinfinancialflowsintheshorttermcanhaveaneffectonthefinancialmarketsbutinthelongterm

they

can

have

a

substantial

effect

on

the

real

economy.

Theyhaveaneffectonconfidencewithinacountry.Weakconfidencemayslowdowntherateofeconomicgrowthandviceversa.

LargecurrencymovementscanalsodestabilisefinancialmarketsFREETRADEANDPROTECTION

THE BASIS OF FREE TRADE ITS ADVANTAGES AND D I SADVANTAGES

Fundamentalassumptionthattradeisagoodthingandthateconomieswillachievethefastestlevelofgrowthinafreetradeenvironment.

Freetrade:asituationwheregovernmentsimposenoartificialbarrierstotradethatrestrictthefreeexchange

of

goods

and

services

between

countries.

Argumentforfreetradeisbasedontheideaofcomparativeadvantage:o Comparativeadvantage:economicprinciplethatnationsshouldspecialiseinareasof

productioninwhichtheyhavethelowestopportunitycostandtradewithothernations.

o Opportunitycost:thealternativeuseofresources.Representsthecostofsatisfyingonewantoveranalternativewantthecostofthealternativeforegone.


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Advantagesoffreetrade advantagesoffreetrade

Allowscountriestoobtaingoodsandservicesthattheythemselvescannotproduceorinsufficientquantities.

Increaseinshorttermunemploymentasdomesticcompaniesfinditdifficulttocompete

Allowscountriestospecialiseintheproductionofgoodsandservicesforwhichtheyaremoreefficient

Moredifficulttoestablishbusinesses

Encouragestheefficientallocationofresources(allocationefficiency)whenspecialising

Productionssurplusesmaybedumped

Specialisationleadstogreatereconomiesofscaleloweringaveragecostsofproduction

Mayencourageenvironmentallyirresponsibleproductionmethodsifgoodsareproducedatalowercostduetoenvironmentallydamagingpractices

Internationalcompetitivenesswillincreaseasdomesticbusinessesfacegreaterinternational

pressure

increased

efficiency

Encouragesinnovationsthespreadoftechnologyandproductionprocesses

Leadstohigherlivingstandards,increasedconsumerchoice

REASONS FOR PROTECT ION

Protection:anytypeofgovernmentactionthathastheeffectofgivingdomesticproducersanartificialadvantageoverforeigncompetitors

Mainmethodsare:tariffs,importquotasandsubsidies Mostcountriestendtohavesomesortofprotectionofprotecttheirlocalindustries Thereareafewargumentsinfavourofprotection:

o Infantindustries:newindustriesfacemanydifficultiesandrisksintheirearlyyearssogovernmentsprotecttheseindustriesuntiltheyarelargeenoughtobemorecompetitive.

Thistypeofprotectionshouldonlybetemporary.

o Dumping:whenforeignfirmsattempttosellthisgoodsinanothercountrysmarketatunrealisticallylowprices.Thiscouldbeusedtogetridoflargesurplusestoestablishamarket

positioninanothercountry.Usingprotectionistmethodstopreventdumpingisoneofthe

fewacceptedargumentsbyeconomists.However,theWTOhasbeenquestioningifsome

countrieshavebeenabusingtheirentitlementtopreventdumpingbyfalselyaccusinglow

costproducers

of

dumping.

o Protectionofdomesticemploymentisoneofthemostpopularargumentsinfavourofprotectionisthatitsaveslocaljobs.Iflocalfirmsareprotectedagainstcheaperforeign

importsthendemandforlocalgoodswillbegreaterleadingtomoredomesticemployment.

o Defenceandselfsufficiencyisoneofthenoneconomicreasonsthatacountrymaywanttoretaincertainindustries.Forexample,theUSwouldwanttoretainitsdefenceproductionin

timesofwartoensurethatithasreadyaccesstodefenceequipmentintimesofwar.Japan

placeshightariffsonriceimportsbecausetheywanttoprotecttheirlocalindustrytoensure

thattheyhaveareliablesupplyoffoodifeverablockadewereplacedonit.

Otherfactorscaninclude:


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o Tradeunionsagainstlowcostlabourfromothercountrieso Environmentalfactorssuchastheenvironmentalhazardinvolvedintheproductionofsome

goods.

o Spillovereffectsthatcertainindustriesmayhaveonotherindustrieswithinacountry.METHODS OF PROTECT IONAND THE EFFECTS OF PROTECT IONISTPOLIC IES ON THE DOMEST IC AND GLOBAL ECONOMY

Tariff:agovernmentimposedtaxonimports.Ithastheeffectofraisingthepriceoftheimportedgoodmakingthedomesticproducermorecompetitive.

Quotas:controlthevolumeofagoodthatisallowedtobeimportedoveragivenperiodoftime.Thismeansthatthedomesticproducersareguaranteedashareofthemarket

Subsidies:involvefinancialassistancetodomesticproducerswhichenablesthemtoreducetheirsellingpriceandcompetemoreeffectivelywithimportedgoods.Economistsgenerallyprefer

subsidies

instead

of

tariffs

as

it

is

government

expenditure

and

not

a

tax

so

it

will

be

more

likely

to

be

reviewed.

VoluntaryExportRestraints:Aspartoftradenegotiations,somecountriesmayvoluntarilyagreetorestrictthenumberofexportstoanothercountryinreturnforasimilarconcession.

LocalContentRules:Specifythatagoodmustcontainaminimumpercentageoflocallymadeparts.Inreturn,theimportedgoodwillnotattractatariff.

Exportincentives:programsthatgivedomesticproducersassistancesuchasgrants,loansortechnicaladvicetoencouragebusinessestopenetratetheglobalmarketorexpandtheirmarketshare.

CONTEMPORARYTRADINGBLOCSANDAGREEMENTS

THE ROLE , IMPORTANCE AND INFLUENCE IN THE GLOBAL ECONOMY OF BLOCS AND AGREEMENTS

Countrieshaveformedagreementstoattempttogainfromgrowingtradeopportunitiesandavoidbeingexcludedfromregionaltradingblocs.

Twomajortypesexist:o Preferentialfreetradeagreements(regionalorbilateral)o Multilateralagreementswhichareopentoallnations

AtradingblococcurswhenmultiplecountriesjointogetherandformapreferentialtradeagreementtotheexclusionofothercountriessuchastheEuropeanUnion

Freetradeagreementsareformalagreementsbetweencountriesdesignedtobreakdownbarrierstotrade

between

those

nations.

The

agreement

is

said

to

be

bilateral

when

it

is

between

two

countries

andregionalwhenitisbetweenthreeormorecountriesinclosegeographicalproximity.

ThesepreferentialfreetradeagreementsdonotbenefitnonmembersanddonotcreateabetterenvironmentforfreetradeatallwhereasmultilateralagreementsconductedthroughtheWTOare

designedtobreakdownalltraderestrictionsandfreeupworldtrade.

Manyeconomistsarguethatregionalandbilateraltradeagreementsthatleadtotheformationoftradingblocsandhindertheprogressofworldtradebecausetheyslicetheworldupintoseparate

tradingareas.Othereconomistsarguethatregionaltradingagreementsareasteppingstonetowards

freetrade.


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RegionaltradeagreementshavegrowninrecentdecadeswithMongoliatheonlyWTOcountrythatisnotasignatorytoaregionalorbilateraltradeagreement.Economistshavetermedthisregionalisation

insteadofglobalisation.

Regionaltradeagreementshavenotdonemuchtohelpsmallerdevelopingcountriesaccessingrichcountriesmarkets.Regionaltradeagreementstendtoentrenchglobalinequalities.

EU, NAFTA, APEC, ASEAN, CERTA

APEC(AsiaPacificEconomicCooperation)Forum:madeupof21membernationsintheAsiaPacificestablishedinresponsetootherregionaltradingblocssuchastheEUandNAFTA.Accountsfor40%of

theworldspopulation,53%oftheworldGDPand48%ofworldtrade

EU(EuropeanUnion):MembercountriesspanacrossEuropewith27membercountries.TheaimistohaveasinglemarketforEuropeangoodsandserviceshowevertheEUhasalsoraisedtariffsagainst

nonmembercountries(resultinginaccusationsthattheEUisaclosedtradingbloc).Itsprotectionist

methods

have

forced

other

larger

players

(such

as

the

US)

to

response

with

similar

methods

forcing

outsmallerplayerssuchasAustralia.

NAFTA(NorthAmericanFreeTradeAgreement):wasestablishedin1994inwhichagriculturalprotectionisbeingcompletelyeliminatedandothertariffsarebeingphasedoutoveraperiodof515

years.NAFTAhasresultedinasignificantincreaseintradeamongitsmemberswithaccesstotheUS

resultinginsignificantexportsforothermemberswhiletheUShasbenefittedbyaccessingthe

cheaperlabourmarketsavailableinsomeoftheothermembernationssuchasMexico.

BilateralTradeAgreements:agreementsbetweentwocountriessuchasCloserEconomicRelationsTradeAgreement(CERTA)betweenAustraliaandNZwhichhasledtotheeliminationoftrade

restrictionsbetweenthetwocountries.CERTAhasbeenextendedinrecentyearstoincludebusiness

regulationsandtaxlaws

ASEAN(AssociationofSouthEastAsianNations):coverstheNIEsinSouthEastAsiabutdoesnotincludeanyofthelargeeconomies.ASEANisacounterweighttoAPEC.

INTERNATIONALORGANISATIONS

THE ROLE , IMPORTANCE AND INFLUENCE IN THE GLOBAL ECONOMY OF INTERNAT IONALORGANISAT IONS

Oneoftheproblemscreatedbyglobalisationistheinabilityofdomesticinstitutionstoregulatetheincreasingcomplexnatureofbusinesstransactions.Manyeconomicproblemscanonlybeaddressed

atagloballevelsuchas:

o Managingglobalinstabilityinfinancialmarketso Providingeconomicassistanceo Developingglobalstandardsforenvironmentalprotectiono Freeingupworldtradeandresolvingtradedisputes

Inthelongterm,theglobaleconomywillneedastrongglobalinstitutiontodealwiththeseproblems.However,todaytherearethreemajorinstitutionsintheglobaleconomy.Theseare:

o WTO:WorldTradeOrganisationo IMF:InternationalMonetaryFundo WorldBank

Inadditionthereareseveralothergroups:


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o G8:GroupofEightnationso WorldEconomicForumo UNbodies

WTO, IMF, WORLD BANK

WTO(WorldTradeOrganisation):o 153membernationsin2009o RoleoftheWTOistoimplementandadvanceglobaltradeagreementsandtoresolvetrade

disputes.

o Generallyeffectiveinitstask.o QuestionsraisedabouttheWTOdisputeresolutionmechanismasshownbytheUSandEU

lodgingappealsanddelayinganyrulings.

o RecentfocushasbeenontheDohaRoundoftradeliberalisationhowevertherehavebeenmanydisagreementsandtalksbrokedownin2008.

IMF(InternationalMonetaryFund):o Consistsof186memberso Roleistomaintaininternationalfinancialstabilityparticularlyintheforexmarketso IMFplaysaroleinminimisingtheimpactsofafinancialcrisisanywherearoundtheworldo Playedasignificantroleduringthe2008GFCbysuspendinginterestpayments,injectingcash

intotheglobaleconomytopromoteliquidity.

o IMFsupportsthefreetradeofgoodsandservicesandoftenrequirescountriestostructurallychangetheirpolicybeforereceivingfinancialassistancefromtheIMF.Thestructural

adjustmentpolicieshaveplayedakeyroleintheglobalisationprocess

o IMFhasbeencriticisedforsometimesformakingincorrectdecisionseg:demandingthatgovernments

adopt

a

contradictory

macroeconomic

policy

during

the

Asian

Financial

Crisis

of

the1990s

WorldBank:o Roleisprimarilyconcernedwithhelpingpoorercountrieswiththeireconomicdevelopment.

Fundinvestmentforinfrastructure,reducepoverty,helpcountriesadjusttheireconomiesto

thedemandsofglobalisation

o Fundedbycontributionsfrommembercountriesanditsownborrowingso Makesloanstodevelopingcountriesatbelowstandardrateso Recently,themajoraim(aspertheMillenniumDevelopmentGoals)hasbeentoreducethe

proportionofpeoplelivingonlessthan$1/dayaswellasachieveuniversalprimaryeducation,

reduce

child

mortality,

preserve

the

natural

environment,

improve

the

status

of

women.

o SupportofHeavilyIndebtedPoorCountriestoreducedebtby2/3oftheworldspoorestcountries.


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IMPACTOFGLOBALISATIONONTHESTANDARDOFLIVINGINTHEGLOBALECONOMY

VARIATIONSINTHESTANDARDOFLIVINGINTHEGLOBALECONOMY Despitetheadvancesoverthepastcentury,thereareharshinequalitiesbetweenwealthyandpoor

countries:

o 1.4billionpeopleliveinextremepovertyonlessthanUS1.25/dayo Richest5%ofpeopleintheworldearn165xtheincomeofthepoorest5%o 30,000childrendieeachdayfrompovertyrelatedpreventablediseases

However,livingstandardshavebeenimprovinginbothdevelopinganddevelopednations:o Between19822005thoselivinginextremepovertyfellfrom52%to25%o Lifeexpectancyindevelopingnationsfrom56to67yearsbetween1970and2007o Primaryeducationcompletionrateincreasedindevelopingcountriesto85%in2007

INCOME AND QUAL ITY OF L I FE INDICATORS

Themostpopularmethodtocomparelivingstandardsbetweennationsistocompareincomeasitmeasurestheabilityofcitizenstosatisfytheirneeds.

GrossNationalIncome(GNI)isthesumofvalueaddedbyallresidentproducersinaneconomyplusreceiptsofprimaryincomefromforeignsources.

RealGNIiscalculatedbyaccountingfortheeffectsofinflation PurchasingPowerParity(PPP):usedtomakeadjustmentsbeforecomparingtheGNIbetween

countries.PPPadjustsmeasurementsofthesizeofaneconomytoreflectthepurchasingpowerof

currencieswithinanationaleconomy.

ThesizeofthepopulationandrateofpopulationgrowthvarybetweencountriesandallowancescanbemadebydividingtherealGNIofeachcountrybyitspopulationGNIpercapita.

HumanDevelopmentIndex(HDI):AnalternativetotheGNIistheHDItomeasureeconomicdevelopment.Ittakesintoaccount:

o Lifeexpectancyatbirth:Indicativeofthehealthandnutritionstandardsofacountryo Levelsofeducationattainment:HDImeasuresadultliteracyandratioofpeoplethathave

completedprimary,secondaryandtertiaryeducation

o GDPpercapita:Usedasameasureofadecentstandardoflivingandisessentialindeterminingaccessthatpeoplehavetogoodsandservices

CONTRASTSIN

LEVELS

OF

DEVELOPMENT

D I FFERENCE BETWEEN GROWTH AND DEVELOPMENT

EconomicgrowthissimplyapercentageincreaseinGDP/capita Economicdevelopmentisbroadmeasureofwelfareinanationthatincludesindicatorsofhealth,

education,andenvironmentalqualityaswellasmateriallivingstandards.

REASONS FOR D I FFERENCES BETWEEN NATIONS

GlobalFactors:


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GlobalTradeSystem:Somefeaturesoftheglobaltradesystemreinforceratherthanreduceglobalinequalities

o Westerneconomiesprotecttheirdomesticagriculturesectorbecauseitisnotcompetitivewith

producers

in

developing

nations.

Developing

countries

experience

high

levels

of

global

protectionismintheagriculturalsector.

o ExpandingregionaltradeblocssuchastheEUandNAFTAexcludepoorernationsfromaccesstotheselucrativemarkets.Thishasanenormousimpactonpoorcountries.

o HighincomenationshaveresistedmakingconcessionsonissuesthatwouldprovidegreatbenefittodevelopingcountriessuchasattheDohaRound.Theycanthenuseregionaland

bilateralagreementstogainaccesstomarketswheredevelopingnationscannotbargainasa

group.

o BenefitsoffreetradeagreementsarenotalwaysavailabletodevelopingnationsduetothehighcostsofadministrationandthecomplexityoftheWTOsprocedures.

GlobalFinancialArchitecture:o Longterminternationalflowsofinvestmentheavilyfavourdevelopedcountries.Highincome

economiesreceivedaround2/3ofallFDIin2007

o Shorttermfinancialflowsoftenfavourthoseemergingmarketsthatofferbetterreturnsforspeculatorshowevertheseareasalsoexperiencethegreatesteconomicvolatilitywhich

cansetbackeconomicdevelopmentdecadeswhilespeculatorsmoveontoothermarkets.

o TheIMFiscriticisedthatitsstructuraladjustmentpoliciesservetheinterestsofhighincomeeconomies.

o Asaresultofgreateraccesstofinancialmarkets,manydevelopingcountrieshavemassiveforeigndebtburdensirresponsiblelendingpractisesbyrichcountryfinancialinstitutions.

GlobalAidandAssistance:o Thetotallevelofdevelopmentaidprovidedbyhighincomeeconomieswasonly0.3%ofGWP

in2008.Thisleveliswellbelowthegoalof0.7%ofGDPthathighincomeeconomieshave

beencommittedto.Thereisalsoariskthathighincomeeconomiesmaycutaidtohelppay

offthedeficitscausedbytheGFC.

o Criticsclaimthatthemajorityoftheaidgivenisphantomaidaidthatdoesnotimprovethelivesofthepoor.Moneyisspentonpayingfortechnicalcooperation(consultants)as

wellasbeingwastedonadministrationcosts

o Thedistributionofaidusuallyrepresentsstrategicandmilitaryconsiderationsratherthantheneedoftheworldspoorestcountries.

GlobalTechnologyFlows:o

High

income

economies

choose

the

priority

areas

of

scientific

research

and

development.

Muchofthistechnologydealswiththehealthproblemsofanageingpopulationinrich

countriesandlittletodowithpoornationswhosehealthrisksinvolvecommoninfectious

diseases.

o Developingnationsfinditdifficulttogainaccesstonewtechnology.IPrightsrestrictthebenefitsoftechnologicaltransfertopoornationsbecausetheycannotpaydeveloped

countrypricesforthetechnology.


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DomesticFactors:

EconomicResources:o Naturalresources:areimportantinputsfortheproductionofhighervalueadded

manufacturedgoods

and

services.

Economies

that

have

an

abundant

and

reliable

supply

of

cheapnaturalresourceshavebetteropportunitiesforeconomicdevelopmentthanthose

whodonot.Abundanceofnaturalresourcesmayalsobeanegativewhichcanhampera

countryseconomicdevelopmentifitleadstoanovervaluedexchangerate,narrowexport

baseandbecomingoverreliantonasmallnumberofindustriestodriveeconomicgrowth

o Laboursupplyandquality:Labourisanimportantfactorinbecomingthemostimportantinputtotheproductionprocess.Highincomeeconomiestendtohavehighlyeducatedand

skilledlabourresourceswhereaslowincomenationsarecharacterisedbyhighpopulation

growth,pooreducationlevelsandlowhealthstandardswhichreducesthequalityoflabour.

o Accesstocapitalandindebtedness:Difficultyingainingaccesstocapitalforinvestmentanddevelopment

in

low

income

nations

also

contributes

to

lowered

living

standards.

Low

levels

ofsavingsarelargelyaresultoflowincomelevelsandthiscreatesaselfperpetuatingcycleof

lowinvestmentlevelsandslowexpansion.Enterprisesincountrieswithhighlevelsofforeign

debtoftenfinditdifficulttogainaccesstofunds.

Entrepreneurialculture:o Evidencesuggeststhatacountryshistoryandsocialinstitutionscanimpactonitseconomic

successsuchasthevaluesofindividualresponsibility,enterprise,wealthcreationandastrong

workethic.Thesevaluescanassiststheindustrialisationprocesstowardssustainable

economicdevelopment

Institutionalfactors:o Institutionalfactorsinindividualeconomiescanhaveinfluencesforbusinesses.Political

instability,corruption,andlawoflawenforcementtendtoundermineinvestorconfidence

whowillbereluctanttoundertakerisksiftheybusinessinterestsarethreatenedby

inadequatestructureforresolvinglegaldisputes.

DEVELOPING ECONOMIES , NEWLY INDUSTR IAL ISEDCOUNTRIES (NICS), TRANS IT IONECONOMIES , H IGH INCOME ECONOMIES

DevelopingEconomies:Thesecountriessufferfromlowincomelevels,weakhumanresourcesandhaveonlyexperiencedlimitedindustrialisation.Alargenumberofpeopleliveinabsolutepoverty(less

thanUS1.25/day).

o Highlevelsofincomeinequalityo Dependenceonagriculturalproductionforincome,employmentandtradeo Relianceonforeignaidanddevelopmentassistanceo Lowlevelsoflabourproductivity,industrialisation,technologicalinnovationand

infrastructuredevelopment

o Weakpoliticalandeconomicinstitutions NewlyIndustrialisedCountries:Economiesexperiencingrapideconomicchangeandintransitionfrom

beingdevelopingeconomiestohighincomeeconomies.NICshavebeenthefastestgrowinggroupof

economiespursuinggrowththroughexportleddevelopmentandencouraginglargeinwardflowsof

FDI.


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TransitionEconomies:Weresocialisteconomiespriortothecollapseofsocialism.Theseeconomieshaveattemptedandextraordinarytransformationfromcentrallyplannedeconomiestomarket

economies.Reformsincludeprivatisationofstateownenterprises,financialmarketliberalisationand

shifttowards

western

style

economic

and

political

institutions

HighIncomeEconomies:Countrieswithhighlevelsofeconomicdevelopmentandcloseeconomictieswitheachotheraswellasliberaldemocraticpoliticalandeconomicinstitutions.Highincome

countrieshaveaGNIpercapitaaboutUS$11,906.Includes27/30oftheOECDcountries.

IMPACTOFGLOBALISATION

INTERNAT IONALCONVERGENCE

Globalisationappearstobecontributingtoaconvergenceinlivingstandards.Overthelastfewdecades,developingeconomieshavebeencatchinguptodevelopedhighincomeeconomies.

TransitioneconomiesarenowgrowingfasterandeconomicgrowthinthefirstwaveofNIEshasslowednowthatlivingstandardsinthosecountrieshaverisentosimilarlevelsasforhighincome

economies.

ECONOMIC GROWTH , DEVELOPMENT AND THE QUAL ITY OF L I FE

Globalisationissaidtoofferthenationsoftheworldtheopportunitytoexperienceeconomicgrowthanddevelopmentandtoimprovethequalityoflifefortheircitizenshowever,notallcountrieshave

benefittedequallyfromglobalisation.

Thewinnersfromglobalisationarethosecountriesthathaveembracedinternationaltrade,foreigninvestmentandtheparticipationofTNCshoweversomefeaturesofglobalisationhavehadnegative

impactsontheglobaleconomy.Forexample,countriesinAfricahavesufferednegativegrowthdueto

highlevels

of

foreign

indebtedness.

Ifglobalisationraiseseconomicgrowthandthereforeraisesincomelevelsthenthiscanhaveapositiveeffect.Ifhowever,thedistributionofincomeisuneventhenthiswillhaveanegativeeffecton

thequalityoflife.

TRADE , INVESTMENT AND TRANSNAT IONALCORPORAT IONS

Theprocessofglobalisationhasresultedinsubstantialincreasesinthesizeoftradeflowsandforeigninvestment.BecauseofthekeyroleplayedbyTNCsintradeandinvestmentflows,theyare

increasinglydominatingbusinessactivityaroundtheworld.

Duetothenatureoftheglobaleconomy,therecanbemultipleinternationaltradetransactionsintheprocess

of

manufacturing

a

good.

Theglobalisationoffinancialmarketshasseenanincreasedrelianceonforeignsourcesoffinanceforinvestment.FDIisnowplayingagreaterroleincreatingmoreeconomicactivityaroundtheworld.

However,theflowisFDIfundsareusuallytargetedatthosecountrieswithfavourableeconomicprospectsandonlyatrickletothoseLDCs(LeastDevelopedCountries).

AmajorcriticismofTNCsisthatbecausetheydonotoperateunderthelawsofonecountry,theycanmoveproductionfacilitiestocountrieswithweakgovernmentregulations.


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D I STR IBUT IONOF INCOME AND WEALTH

Globalisationhasresultedinincreasedworldincomeandwealthbutthedistributionofthisincreasehasbeenveryunequal.Anumberofcountrieshavegainedverylittleorevennothingfrom

globalisation.

EventhoughincreasedFDIflowsfueleconomicgrowth,theytendtobefocusedonthehigherskilledandtechnologysectorsfavouringthosewhoarealreadybetteroffincreasedinequality.

Globalisationhasincreasedopennesstotradewhichprovidesmoreexportopportunitiesraisingtheincomeofagriculturalworkersindevelopingcountries.Alowertariffonimportsreducesthepricesof

goodsandimproveslivingstandards.

ENVIRONMENTAL CONSEQUENCES

Globalisationcanhaveanegativeimpactontheenvironment.Developingcountriesmayengageineconomicbehaviourthatisdetrimentaltotheenvironmenttoattractforeigninvestors.

Globalisationalsooffersthechancetoprotecttheworldsenvironmentfromharmbyforcingcountriestoownuptotheirenvironmentalresponsibilities.

Itmakesthecostsofpreservationabletobesharedandfacilitatesthetransferofenvironmentallyfriendlytechnology.

F INANCIAL MARKETS

Financialmarketsshiftlargeamountsofmoneyveryquicklyandthiscansometimeshavedevastatingeffectswhenasuddenlossinconfidencearises.Theexchangeratecancollageleadingtoashockin

theeconomy,recession,risingunemploymentandincreasedpoverty.

Thefinancialmarketsbehaveinunpredictablewaysandthiscanposealargethreattotheglobaleconomy

like

a

giant

wrecking

ball.

THE INTERNAT IONALBUS INESS CYCLE

Closelinkagesbetweeneconomiesholdbothbenefitsandrisks:o Benefits:achievefasterratesofgrowthbyspecialisationandengagingintradeo Risks:exposedtodownturnsintheinternationalbusinesscyclesanddevelopmentsinthe

region.

IMPLICAT IONSFOR GOVERNMENT ECONOMIC POLIC IES

Globalisationhasledtogreatersimilarityofeconomicpoliciesaroundtheworld.TheWashingtonConsensus

outlines

market

friendly

policies:

o Fiscaldisciplineo Redirectionofpublicexpendituretowardseducation,healthandinfrastructureinvestment.o Taxreformbroadeningthetaxbaseandcuttingmarginaltaxrateso Interestratesdeterminedbymarketforcesandarepositivebutmoderateo Competitiveexchangerateso Tradeliberalismo Opennesstoforeigndirectinvestmento Privatisationofstateenterprises


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o Deregulation:suchasthosethatimpedeentryorrestrictcompetitionexceptforthosejustifiedonsafety,environmentalandconsumerprotectiongrounds.

o LegalsecurityforpropertyrightsCASESTUDY

A CASE STUDY ON THE IMPACT OF GLOBAL ISAT IONON V I ETNAM, ALONG WITH THE STRATEG IES THAT V I ETNAM I S US ING TO PROMOTE ECONOMIC GROWTH AND DEVELOPMENT


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AustraliasPlaceintheGlobal

Economy

AUSTRALIASTRADEANDFINANCIALFLOWS

VALUE,COMPOSITIONANDDIRECTIONOFAUSTRALIASTRADEANDFINANCIALFLOWSTradingPartner %ofAustralianImports %ofAustralianExports

USA 12 5

EU 21 10

ASEAN

20

9

China/HongKong 18 19

SouthKorea 3 8

Japan 8 23

NewZealand 3 4

TRENDS IN AUSTRAL IA S TRADE PATTERN

AustraliaprimarilytradedagriculturalgoodsasacountrytonationssuchastheUnitedKingdomandotherEuropeanNationsduetoourtraditionalroots.However,whentheUKjoinedtheEUitwas

requiredtoimposetariffsonAustralianexports.

Afterthis,AustraliachangedthefocusofexportstothedevelopingcountriesinSouthEastAsiawhichrequiredresourcestogrow.

Ourexportshavedecreasedintheagriculturalsector(asapercentageoftotalexports)buthaveincreasedsignificantlyintheminingandresourcessectorwithashiftawayfromcountriessuchas

JapantowardsChinaandotherASEANcountries.

AlthoughwestillexporttotheEU,UKandUSwemainlyimportfromthesecountries(aswellascountrieslikeChinaandJapan)

TRENDS IN F INANC IAL FLOWS

Duetoglobalisationandthefloatingofcurrenciesaroundtheworld,therehasbeenanincreasedamountofforeigninvestmentintoAustralia.

Globalisationandtechnologyhasallowedthetransferofmoneyveryquicklyaroundtheglobebenefittingforeigninvestment(ascapitalmoveseasilybetweennations).

Australiahasalwaysbeenanetcapitalimporter.ThefinancialflowsintoAustraliaareabouttwicethatofflowsoutofAustraliareflectingonthelackofdomesticsavingsinAustralia.

Arecenttrendhasbeentheshiftinthecompositionoffinancialflowsbetweendirectinvestmentandportfolioinvestment.Duringthe1980s,directinvestmentwasgreaterthanforeigninvestmentas

governmentsregulatedfinancialflows.Today,thereverseistruewiththeremovalofrestrictions

injectingmoneyintoAustraliancompaniesthroughloansandsharepurchases.


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AUSTRALIASBALANCEOFPAYMENTS ThebalanceofpaymentssummariesallthetransactionsthatAustraliahaswiththerestoftheworld

overaperiodoftime.

STRUCTURE

CurrentAccount

Thecapitalaccountshowsthemoneyflowfromallexportsandimportofgoodsandservices,incomeandcurrenttransfersforaperiodoftimeinoneyear.Itessentiallycoversallexternaltransactionsthat

arenotreversible.

Netgoods:ReferstothedifferencebetweenwhatAustraliareceivesforitsexportsandpaysforitsimports.

Netservices:Referstotheservicesthatareboughtandsoldwithoutpeoplereceivinganactualgoodsuch

as

transport,

telephone

calls,

accommodation.

Services

Australia

sells

are

an

inflow

and

services

Australiabuysareanoutflow.

Balanceongoodsandservices:Arrivedatbyaddingnetgoodsandnetservices NetIncome:Referstoearningsoninvestmentscoveringinterestpaymentsonborrowingsandreturns

onotherforeigninvestments.WhenforeignersinvestinAustralia,incomeflowsoverseas(debits).

WhenAustraliansinvestabroad,thereisaflowofmoneybackintotheAustralianeconomy(credit).

Netcurrenttransfers:occurwhenproductsorfinancialresourcesareprovidedwithoutaspecificgoodorservicebeingprovidedinreturn.

Balanceoncurrentaccount:Additionofthebalanceongoodsandservices,netincomeandnetcurrenttransfers.

Capitaland

Financial

Account

TheCapitalandFinancialAccountisconcernedwithfinancialassetsandliabilitiesthemoneyflowsthatresultfrominternationalborrowing,lendingandpurchasingofassets.Thesetransactionsare

reversible.

CapitalAccount:Consistsofcapital(money)transferswiththreemainparts:o CapitaltransfersfrompeoplemigratingintooroutofAustraliao Capitaltransfersintheformofforeignaidtoothercountrieso Purchaseandsaleofnonproduced,nonfinancialassetssuchasintellectualproperty.

FinancialAccount:showsAustraliastransactionsinforeignfinancialassetsandliabilitiesandischaracterisedbyfourtypesofinvestment.Creditsrepresentnetinflowssuchasincreasedforeign

investmentin

Australia

or

reduced

foreign

investment

overseas.

Debits

represent

net

outflows

and

Australiaconsistentlyrecordsapositivefinancialaccountbalanceaswedrawonthesavingsofthe

restoftheworldtofinanceadeficitonthecurrentaccount.

o Directinvestment:ForeignfinancialtransactionstofundnewinvestmentinAustraliaoroverseasortobuymorethan10%ofsharesinexistingAustraliancompanies

o PortfolioInvestment:Buyingofland,shareandothermarketablesecuritiesinexistingcompanies(mostforeigndebtrecordedhere).

o Otherinvestment:investmentnotcapturedinothercategoriessuchasloans,deposits,tradecredits


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o ReserveAssets:Foreignassetsthatareavailabletoandcontrolledbythecentralauthoritiesforfinancingorregulatingpaymentimbalances.GoldheldbytheRBA,FOREXheldbythe

RBA,SpecialDrawingRights.

Balanceoncapitalandfinancialaccount:addingthecategoriestogether.TheamountshouldbeapproximatelyequaltothedeficitontheCA.

L INKS BETWEEN KEY BALANCE OF PAYMENTS CATEGORIES

$ = $

Supplyisrepresentedby:

Paymentsforimportsofgoodsandservices(M) Income/transfersoverseas(Ydebits) Capitalandfinancialoutflow(Koutflow)

Demandisrepresentedby:

Receiptsforexportsofgoodsandservices(X) Incometransfersoverseas(Ydebits) Capitalandfinancialinflows(Kinflow)

+ + = + +

+ =

=

Overaperiodoftime,ahighlevelofKFAsurpluseswillresultinawideningCADbecauseoftheservicingcostsassociatedwithincreasedforeignliabilities.TheViciousCycleofAccumulatingDebt.

TRENDS IN THE S I ZE AND COMPOSITION OF AUSTRAL IAS BALANCE OF PAYMENTS

TheBalanceofPaymentsisakeyindicatorofthehealthofaneconomy.AustraliahasexperiencedconsistentlylargeCADsincethemid1980s.Eachyear,Australiahaspaidoutmoreforgoods,services

andotherincomeandtransferpaymentsthanithasreceived.

ThedegreetowhichahighCADissustainableissubjectofgreatdebate.AhighCADcouldresultfromhighlevelsofdirectinvestmentthatallowsforhighereconomicgrowthandexportsinthelongterm.

TheCurrentAccountBalanceandBalanceongoodsandservicesisheavilyinfluencebycyclicalfactorssuchaschangedinglobaldemandforcommoditieshoweverthelongtermstructuralcomponentof

theCAD,thenetincomedeficit,remainshighregardlessofthecyclicalswingsintheCAD.

REASONS FOR THESE TRENDS

TherearemanyreasonsforhavingahighCAD.Someeconomistsbelievethatduringthemid80sand90sAustraliaslackofinternationalcompetitiveness(i.e.:thecurrentaccount)ledtothecurrent

situationweareinnow.


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Recently,therehasbeenafocusonthelackofdomesticsavinglevelsbecauselowsavingsmeansthatforeigncapitalinflowsarerequiredtofindinvestmentinAustralia(i.e.:acapitalandfinancialaccount

problem)

ISSUESASSOCIATEDWITHTRENDSINTHEBALANCEOFPAYMENTS TherearesomeassociatedrisksofrunningahighCAD:

o Thegrowthofforeignliabilities:contributetoanincreasedlevelofforeignliabilityovertime.LendersmaybecomemorereluctanttolendtoAustraliaorinvestinAustralia.Decisionsmade

thataffectAustraliawillbecomeincreasingmadebyinternationalbusinesses.

o Increasedservicecosts:AhighlevelofforeignliabilityimposessubstantialservicingcostslargernetincomedeficitonCAD.Higherlevelsofforeigndebtcanresultinforeignlenders

demandriskpremiumsonloans(i.e.:higherinterestrates).Thereisariskoffallingintothe

debttraporVCADwhereweneedtoborrowmoremoneytoserviceourforeignliabilities.

o Increasedvolatilityforexchangerates:ThismayunderminetheconfidenceofoverseasinvestorsintheAustralianeconomy.Thisreduceddemandforcurrencymaydepreciatethe$A

leadingtoincreasedimport/decreasedexportpriceswhichinturnworsenstheCAD

o Constraintonfutureeconomicgrowth:ahighCADcansloweconomicgrowthinthefutureashigheconomicgrowthusuallyinvolvesanincreaseinimportsleadingtodeteriorationinthe

CAD.EconomieswithaCADproblemlimitgrowthtokeeptheCADsustainable(knownasthe

balanceofpaymentsconstraint).

o Morecontractionaryeconomicpolicy:IftheCADneedstobereducedintheshortterm,macroeconomicpolicyneedstobetightenedwhilemicroeconomicpolicyneedstobe

reformed.TighterfiscalpolicycanalsolowertheCADbutalsoreduceeconomicgrowth.In

thelongterm,sloweconomicgrowthcanleadtoincreasedunemployment.

o LossofInternationalInvestorsConfidence:InvestorconfidencecanshiftrapidlyandcountrieswithahighCADaremorevulnerabletoshifts.Theseshiftscanoftenhaveadramaticeffect

andsometimescantriggeramajorcrisis.

TERMS OF TRADE

ThetermsoftradeshowtherelationshipsbetweenthepricesAustraliareceivesforitsexportsandthepricesthatitpaysforitsimports.

Thetermsoftradeimprovewhenexportpricesarerisingrelativetoimportpricesanddeterioratewhenimportpricesarerisingrelativetoexportprices

=

ChangesintheTOTIcaninfluenceAustraliasbalanceofpayments.Ifthetermsoftradedeteriorate,thenthesamevolumeofexportsbuysfewerimports.Thiscanleadtoalargedeficitonthebalanceof

goodsandservicesincreasingtheCADandforeignliabilities.

S I ZE OF THE CURRENT ACCOUNT BALANCE AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT

Byanycomparison(CADasaproportionofGDP),AustraliasustainsahighCADaveraging2.7%inthemid80stoover4%ofGDP.


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FOREIGN DEBT AND FOREIGN L IAB I L I T I ES

AustraliasforeignliabilitiesarewhatAustraliaowestotherestoftheworld.Thisincludesthemoneythatwehaveborrowedfromoverseas.Wemustpayinterestonthismoneyandthecostofservicing

theseloans

(interest

payments)

appears

as

a

debit

on

the

Current

Account.

Ifwehavelargeforeignliabilitiesthenthismeansthatwehavelargerdebitsonthecurrentaccount.Ifthisdebitexceedsthebalanceongoodsandservicesandthecreditonthenetincometransfersthen

havewillhaveaCAD.

AprolongedCADcanresultinthedebttrapwheremoneyneedstobeborrowedtofundthecostsofservicingtheloansandthenmoreneedstobeborrowedagainresultingingreaterforeignliabilities

andahigherCADetc.theVCAD

Lowlevelsofnationalsavingscontributetohigherlevelsofforeignliabilitiesaswell.Overthelasttwentyyears,thelevelofnationalsavingshasbeendroppingfrom15%ofhouseholdincomein1980/81

to 3%in2002/03andbackupto3%in2008/09.

BecauseofthelowlevelofsavingswithinAustralia,wemustrelyonthesavingsofothercountriestofundlocalinvestmentandbudgetdeficits.Byborrowingfromoverseaswemustthenservicethese

loansandtheinterestpaymentontheseloansmakeupasignificantportionofourCAD.

Foreignborrowingsaresubjecttochangesinoverseasinterestratesandotherfluctuationsintheexchangerateofthe$Aunlikelikedomesticborrowings.

DebtandEquity

NetForeignDebt:isthetotalstocksofleansowedbyAustralianstoforeignersminusthetotalstockofloansowedbyforeignerstoAustralians

NetForeignEquity:isthetotalvalueofassetsinAustralia(land,shares)minusthetotalvalueofassetsoverseas

that

are

owned

by

Australians.

INTERNAT IONALCOMPET IT IVENESS

STRUCTURAL CHANGE IN THE AUSTRAL IAN ECONOMY

ToimproveAustraliasCADweneedtodiversifytheexportbaseandmovefrommainlycommoditybasedexportsintootherareassuchasservicesandElaboratelyTransformedManufactures(ETMs).

MicroeconomicreformintheshorttomediumtermcanalsoimproveourinternationalcompetitivenessbyloweringcostsandimprovingthequalityandreliabilityofAustralianproducts.

Microeconomic

reform

measures

include:

o Reducingtheinflationratetothatofonebelowcountrieswecompetewith.Thisadvantagesourexportersbyreducingtheircostsofproduction.

o Innovationrequiresahighlyeducated,highlyskilledworkforce.HighlevelsofinvestmentinR&Dforexportsuccessinhighvalueaddedservices.

o Tocompeteinternationally,Australiamustsustainproductivitygrowthtouseresourcesandtheworkforcemoreefficiently.

o Competitivelabourcostsaslabouristhelargestcomponentofbusinesscosts.Excessivewagegrowth(when > )willincreasethecostsofproduction.


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o Changeroleofgovernmentandmoreefficientpublicsectorincludingkeepingbudgetdeficitsundercontrolandaminimallevelofgovernmentownershipinbusiness.


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EXCHANGERATES

MEASUREMENTOF RELAT IVE EXCHANGE RATES

Exchangeratesarenecessarybecauseexportingfirmswanttobepaidintheirowncurrencysoimportersneedtobeabletoconverttheirdomesticcurrencyintotheforeigncurrency.

Theexchangerateworksduetothefloatingexchangeratemechanisminwhichthevalueofacountryscurrencyisdeterminedbythefactorsofdemandandsupplyinforeignexchangemarkets.

ToOtherIndividualCurrencies

TheexchangerateisthepriceofAustraliascurrencyintermsofanothercountryscurrencye.g.:1AUD=0.97USD.

TradeWeightedIndex

TheTradeWeightedIndexgivesanindicationofhowthevalueofthe$Aismovingagainstallcurrenciesingeneral.Itiscalculatedbymeasuringthevalueofthe$Aagainstthecurrenciesof

Australiasmajortradingpartnerscomparedwithabaseyear.

ThecurrenciesofthecountriesthataremoreprominentinAustraliastradearegivenahigherweightingsothattheyhaveagreaterinfluenceontheTWI.

OneweaknessoftheTWIisthatitisweightedaccordingtovolumesoftraderegardlessofthecurrencyinwhichexportandimportcontractsareinvoiced.Mustofourtradeisin$USandthe$A/$US

exchangerateismoreimportantthantheweightitreceivesintheTWI.

FACTORS AFFECT ING THE DEMAND FOR AND SUPPLY OF AUSTRAL IAN DOLLARS

Demandfor$Aisrepresentedbyallthosepeoplewhowishtobuy$A.Demandisaffectedby:o ThesizeoffinancialflowsintoAustraliafromforeigninvestorswhowishtoinvestinAustralia

andneedtoconverttheircurrencyinto$A.

ThelevelofAustralianinterestratesrelativetooverseasinterestrates. Theavailabilityofinvestmentopportunities.

o Expectationsofafutureappreciationofthe$Awillincreasedemandbyspeculators.o ThedemandforAustralianexports:

Changesincommoditypricesandinthetermsoftrade Demandforexportsinfluencedbythedegreeofinternationalcompetitiveness Changesinglobaleconomicconditions. Tastesandpreferencesofoverseasconsumers.

Supplyfor$Aisrepresentedbythosepeoplewhowishtosell$A.o TheleveloffinancialflowsoutofAustraliabyAustralianinvestorswhowishtoinvest

overseasandmustsell$Atopurchaseforeigncurrency.

ThelevelofAustralianinterestratesrelativetooverseasinterestrates Theavailabilityofinvestmentopportunities.

o Expectationsofafuturedepreciationofthe$Awillfuelspeculatorstosell$Acontributingtotheexpecteddepreciation.

o Domesticdemandforimports: Levelofdomesticincome


30/55

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Dirtyingthefloat:o TheRBAcanbecomeabuyerandsellerintheforexmarketifitfeelsthatalargeshortterm

changeintheexchangeratewillbeharmfultotheeconomy.

o TopreventarapiddepreciationTHE EFFECTS OF FLUCTUAT IONS IN EXCHANGE RATES ON THE AUSTRAL IAN ECONOMY

FREETRADEANDPROTECTION

AUSTRAL IAS POLIC IES REGARDING FREE TRADE AND PROTECT ION

THE IMPLICATIONS OF AUSTRAL IA S POLIC IES FOR INDIV IDUALS, F I RMS AND GOVERNMENTS

IMPLICAT IONSFOR AUSTRAL IA OF PROTECTIONIST POLIC IES OF OTHER COUNTRIES AND INTERNAT IONALORGANISAT IONS


32/55



EconomicIssues

ECONOMICISSUESINTHEAUSTRALIANECONOMY

ECONOMICGROWTHL Economicgrowthcreatesjobs,allowsindividualstoincreasetheirconsumption Economicgrowthisusuallyseenasthesinglemostimportantmeasureofaneconomysperformance. Economicgrowth:anincreaseinthevolumeofgoodsandservicesthataneconomyproducesovera

periodoftime.

AGGREGATE DEMAND AND ITS COMPONENTS: Y = C+I+G+XM

Aggregatedemandisthetotallevelofexpenditureintheeconomyoveraperiodoftimeincludingconsumption,investment,governmentspendingandnetexportspending(exportsimports)

AD=C+I+G+(XM) AggregateDemand=Consumption+Investment+GovernmentSpending+(eXportsiMports) EconomyisinequilibriumwhenAD=AS Factorsinfluencingconsumerconsumption:

o Consumerexpectations:ifconsumersexpectpricestorise,highrealincomesorfutureshortages,theywilltendtospendmoreandsaveless.Appliesinreverse.

o Levelofinterestrates:increaseininterestrateswilldiscourageindividualsfromspendingtheir

money

and

encourage

saving.

A

decrease

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have

an

opposite

effect.

o Distributionofincome:themoreequitablethedistributionofincome,thehighertherateofspendingandviceversa.PeopleonlowerincomeshaveahigherMPCthanthoseonhigher

incomes.

Factorsinfluencingbusinessinvestmentarethecostofcapitalequipmentandbusinessexpectations:o Changesininterestrates:lowerratesmakesitcheapertoborrowfundstopurchasecapital

equipmentandviceversa

o Governmentpolicies:relatingtoinvestmentallowancesandtaxconcessionsoncapitalgoods.Ahigherratesofdepreciationoncapitalmeansthatcapitalbecomesrelativelycheaper

o Priceorproductivityoflabour:relativecostsoflabourcomparedwithcapitalandlabourisacapital

substitute.

If

the

cost

of

labour

increased

while

price

of

capital

remained

the

same,

capitalhasbecomerelativelycheaper

o Businessexpectations:Ifbusinessesexpectmoredemandforaproducttheywillinvestmenttoboostproduction.Iftheeconomyisexpandingthenbusinesseswillinvesttoasrisk

associatedisdeclining.Newertechnologieswouldencouragegreaterbusinessinvestment.

Inflationleadstouncertaintyaboutthefutureleadingtoreducedinvestment

Factorsinfluencinggovernmentspendingandtaxation:thegovernmentwishtochangetheirlevelofspendingtoinfluenceADdependingontheeconomicactivityinaneconomy.

FactorsinfluencingExportsandImports:Thelevelofoverseasanddomesticincome,exchangerates,consumertrendsandpreferences.


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Economi

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Employment:economicgrowthcreatesjobsandcanensurethateveryonewhoiswillingandabletoworkisableto.

Inflation:highlevelsofeconomicgrowthcanresultinpricesincreasesandlargerwageclaimscontributing

to

inflation.

Happens

when

growth

in

AS

cannot

keep

pace

with

growth

in

AD.

ExternalStability:strongereconomicgrowthisusuallyassociatedwithincreasedconsumerandbusinessspendingleadingtohigherlevelsofimports.Duetoproportionallyhigherspendingon

imports,thiscanresultinariseintheCADposingarisktotheexternalstabilityoftheeconomy.

Incomedistribution:economicgrowthcontributestohigherlivingstandardsandbetteroutcomesbutnotnecessarilyforeveryone.Some

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