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International Economic Integration The World Economy Is all the
economic activity in the world. That is the combination of each
domestic economies production and the links between individual
economies such as trade, financial flows, technology and labor
movement. Globalization Is the integration of national economies
through Trade flows Capital flows (finance) Migration (labor flows)
The spread of technology Why is it Happening? Increase in the trade
of goods and services beyond national boundaries Increase in the
movements of capital, labor and technology between nations The
related increase in the interdependency between national economies
The growth in the size and number of transnational corporations in
multiple nations Tendency for consumer trends to be worldwide and
westernized Increasing environmental damage which does not stop at
the national boarders Gross World Product GWP= the sum of total
output of goods and services produced by all economies in the world
over a period of time. Calculated by adding up the GDP of every
domestic economy. In 2009, GWP was $69 809 billion USD PPP
Purchasing Power Parody is a method used to convert all values into
the same currency, so they can be compared. Real GDP- adjusted to
take into account inflation and exchange rates. 48% of GWP comes
from the top 5 countries. Australia contributes approximately 1%
Trade In Goods and Services World trade as a percentage of GWP has
risen from 12% in 1962 to 53% in 2008
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Germany is the world leader in exports with 9.1%, China is
second with 8.9%, followed by the US, Japan and the Netherlands
Australia has 1.2% of exports Half of the worlds exports come from
the top 10 countries China has made rapid progress in past few
years. USA has slumped form 11.9% in 2001, to 8.1% in 2008 Types of
International Financial Flows Direct Investment- involves the
purchase of a significant degree of control (10%+) over foreign
assets. Portfolio Investment- purchasing equity in foreign assets
without gaining any significant control over the issue of these
assets. Direct has grown from 32 billion to 418 billion from 1980
to 1997 Portfolio has grown from $34 billion to $1002 billion from
1980 to 1997 This is due to deregulation of financial markets in
the 80s and 90s. International trade has expanded at roughly twice
the rate of real GDP International direct investment has grown by 3
times the rate of real GDP International portfolio (equity)
investment has grown 10 times the rate of real GDP. World private
capital flows have leaped from 3% of GWP in 1978 to 32% in 2005.
85% of direct investment involved high-income countries in 1990,
the figure has fallen to 67% in 2008. Australia saw a net inflow of
$47 billion in 2008, compared $7billon in 2003. This is due to the
mining boom and foreign investors want a piece. Examples of
financial products- Futures- a contract that you can effectively
lock in the price at which you sell of by an asset, at a set day in
the future. Options- same as future, but an option to bail out.
Swaps- a currency swap is an agreement to exchange a currency
during a specified period of time. For example swapping 100 million
Australian dollars for US dollars now and an agreement to reverse
the swap within a set period of time. Transnational Corporations A
corporation that delivers a good or service in more than one
country They are responsible for the bulk of direct investment as
they set up subsidiaries in other countries. Many have a large
influence on employment, production, and play a large role in the
international economy Top 5 cities for TNCs Tokyo, Paris, Beijing,
New York and London
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Enticing TNCs- Many governments offer tax incentives, government
assistance, infrastructure etc. Example of Ireland in the 1990s
They can increase the technological know how and encourage
development of local economies and provide valuable taxation
revenue for the government. Technological Process The birth of
e-commerce has had benefits to business: Stock ordering systems
Client/employee records- databases Time saving- less need to travel
Reduction of wholesalers and middle men Innovation and product
development The International Business Cycle The ups and downs of
world economic growth, which refers to the changes in the level of
economic activity in the global economy over time. Most countries
experience booms while others are, and vice versa. This is due to
increased levels of globalization and economic integration. This
was explained during the GFC. 63% of our output levels can be
explained by changing economic condition in the G7 Factors that
Strengthen International Business Cycle: Trade flows, investment
flows, TNCs, financial flows, technology, global interest rates and
international organizations. Factors that weaken international
business cycle (differ between economies): Domestic interest rates,
government fiscal policy, other domestic policies, exchange rates,
structural factors and regional factors.
Trade, Financial Flows and Foreign Investment 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 form foreign
competitors. Protectionism- Is the economic policy of restraining
trade between countries through methods such as tariffs on imported
goods, restrictive quotas, and a variety of other restrictive
government regulations designed to discourage imports, and prevent
foreign take over of local markets and companies.
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Comparative Advantage Theory Pretend there are only two goods,
and two countries. Have a look at production. Assume they each used
the same amount of resources to produce these figures. Computers
Wheat China 300 (2.6) 800 (0.375) USA 200 (2) 400 (0.5) USA should
produce computers because they lose less wheat (opportunity cost of
producing computers from wheat is lower) than if china were to
produce computers. In this way they have a comparative advantage
over China in the production of computers. They should sell
computers to China, and use this money to buy wheat from China.
China should specialize in wheat because the lose less computers
when producing wheat. They have a comparative advantage over USA in
Wheat production. In economics, absolute advantage refers to the
ability of one country to produce more of a good or service than
competitors, using the same amount of resources. China has the
absolute advantage in both areas above. Comparative Advantage: A
country has a comparative advantage in producing a good if the
opportunity cost of producing that good is lower in that country
than it is in other countries. USA has a comparative advantage in
producing computers. Trade between two countries can benefit both
countries if each country exports the goods in which it has a
comparative advantage. The total output of the world economy
increases when countries specialize in the production of goods in
which they have a comparative advantage. Factor Endowments- Each
country has different amounts or types of resources that will
determine what they can or cannot produce. The combination of these
resources is referred to as a countrys factor endowment. Advantages
of Free Trade Each country can specialize in good in which they
have a
comparative advantage, and trade for the good in which they
dont. Leads to higher world output.
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Better foreign relations, less conflict. Increase standard of
living due to higher output (higher incomes) Increase in enterprise
and innovation (increasing sales increases
R and D) Increases competition (innovation, better quality,
reduced prices
leading to lower inflation) Lower prices with no tariffs, reduce
inflation. Low inflation = low interest rates Increase sales for
exporters because of wider market Allows economies of scale for
large companies with access to
more customers Efficient allocation of resources Allows
countries to trade for goods they cannot produce themselves
Disadvantages of Free Trade
New industries may find it difficult to establish if they are
not protected from larger foreign companies. They cannot achieve
economies of scale required to compete, therefore will fail to
establish. (infant argument)
Production surplus from other countries can be dumped onto other
markets, undermining domestic producers.
The most efficient and competitive producers attract resources
away from less efficient industries, creating structural employment
in those industries.
If a country is reliant on another country for goods, a conflict
will restrict supply of the good. (military self sufficiency)
Trading Blocs and Agreements What is a trading bloc? When a
group of countries join a formal preferential trade relationship to
the exclusion of other countries. They tend to be discriminatory to
outsiders because they provide free trade for those on the inside
but keep protection from goods and services from outsiders.
Examples- European Union, North American Free Trade Area (NAFTA),
Asian Free Trade Area (AFTA) European Union With almost 500 million
citizens, the EU generates a 30% share ($US 18.4 trillion in 2008)
of the normal GWP 27 countries Most use the same currency (Euro)
NAFTA Is an agreement between the USA, Canada and Mexico creating a
trilateral trade block in North America.
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Spectrum of Free trade- Free Trade Area- where a group of
countries abolish trade restrictions between themselves but retain
restrictions against non-members. (each country is free to have its
own unique tariffs set against outsiders) Customs Union- free trade
area, but the member countries adopt a common set of trade
restrictions against all other non-members. Called a common
external tariff (CET). Common Market- is a customs union, but also
allows for the free movement of labor and capital. Monetary Union-
is a common market, that also shares the same currency and monetary
system i.e. common central bank. Advantages of trade Agreements
(EU- monetary union) Reduced transactional costs by using single
currency to do all
business, estimated at 1% of GDP in EU. (eliminates exchange
fees)
Elimination of exchange rate uncertainty increases investment
across boarders
Price transparency- easy to compare prices across boarders.
Should increase competition and lower prices and inflation in the
EU zone.
Disadvantages Loss of national currency controls. Reckless
behavior by Greece
saw the Euro lose value for all other nations. Loss of monetary
policy as a tool to solve specific issues in your
domestic economy. (The European Central Bank will make decisions
on the basis of the whole European economic situation, not just
your own country)
Difficult to reach consensus on decisions. Free Trade Area- Are
They Beneficial to World Trade? Trading blocs are beneficial to
world growth if trade created within regions is larger than the
amount of trade that is diverted because of the blocs. Trading
Bloc- A type of intergovernmental agreement where the regional
barriers to trade are reduced or eliminated for participating
members
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Members Influence on world economy
Advantages Disadvantages
EU Most of Europe 21% of total world output. Largest importer.
161 0f largest 500 corporations based in EU
Reduced transactional costs by using single currency to do all
business, estimated at 1% of GDP in EU. (eliminates exchange
fees)
Elimination of exchange rate uncertainty increases investment
across boarders
Price transparency- easy to compare prices across boarders.
Should increase competition and lower prices and inflation in the
EU zone.
Loss of national currency controls. Reckless behavior by Greece
saw the Euro lose value for all other nations.
Loss of monetary policy as a tool to solve specific issues in
your domestic economy. (The European Central Bank will make
decisions on the basis of the whole European economic situation,
not just your own country)
Difficult to reach consensus on decisions.
APEC Pacific Rim 54% of world output,
44% of trade. Greatly increased trade and investment in the Asis
Pacific Region
Political relations within Asia Pacific. Has increased
investment etc. among Pacific
Is yet to establish free trade agreements. Debatable whether it
has accomplished much.
ASEAN Association of South East Asian Nations (south east
Asia)
1.8 Trillion GDP Free trade area, common market for certain
good. Also has established free trade agreements with other
nations, including Australia
NAFTA USA, Canada, Mexico
Largest bloc in the world (in terms of ppp). Second largest in
terms of GDP.
Has not caused trade diversion. Movement of professional labor
among boarders. Free trade area
Bi-lateral Agreement- Australia-United States Free Trade
Agreement came in to effect in 2005. Australias third largest
import and export partner, two way trade of over 48 billion
dollars, and outward investment of 788 billion dollars. World
Organizations (role, influence and work) World Trade Organization
Monitors developments in world trade and reviews barriers to world
trade such as tariffs and subsidies. It is the most important
multilateral trade treaty, governing the rules or world trade.
Ability to negotiate trade agreements with the 153 members. They
advocate for trade liberalism (free trade), work to stabilize trade
relationships, and allow discussions and scrutiny of trade
relationships at forums.
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Uruguay Round- worked to decrease tariffs and subsidies, to
increase world trade. Doha Round- Further cuts to tariffs, but also
gave developing countries more access to free trade. International
Monetary Fund Improve international financial stability. 5 main
responsibilities: 1. Promoting international monetary cooperation.
2. Facilitating expansion of international trade 3. Promoting
exchange rate stability 4. Supporting multilateral payments system
5. Making resources available for member countries
Three main influences. Surveillance of global economy and member
economies. Technical Assistance- especially for low-income
economies. Fiscal and monetary policy advice. Lending- at low
interest rates to help countries meet their international payments,
and reduce poverty. Global Financial Crisis- lending money to
developing countries, who had no access to private funds. Boosted
global liquidity by increasing the amount of Special Drawing Rights
to members. Provided financial assistance countries in times of
disasters (tsunami)
World Bank Long-term development projects in emerging countries.
Influence economies to donate, to help them achieve their
objectives. Ability to give aid to countries in need Aid programs
etc. United Nations Efforts for peace, human rights, democracy,
strong governance, environmental sustainability and eradication of
poverty. Peacekeeping, getting nations to work together for the
benefit of humanity. Aid programs for developing nations,
Millennium Development goals. Organization for Economic Cooperation
and Development Sustainable economic and employment growth and
raising living standards in member countries, while promoting world
development. Contains the biggest economies of the world Used
monetary and fiscal stimulus to reduce effects of the GFC
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G7 Largest seven economies in the world who discuss economic and
trade issues Account for half of the worlds GDP Use fiscal and
stimulus policies to reduce effects of economic downturns G8 Eight
largest economies discuss economic and trade issues. Work with
world bank to reduce poverty. Policies to increase economic growth
G20 Six monthly forum for finance ministers from the G8 nations and
12 other nations. Discussed re-capitalizing the financial system
and more regulation of financial markets. Support expansionary
fiscal and monetary policy to increase global spending.
Protectionism Different Types of Protectionist Methods Tariff: a
tax on imports Quota: only allowing a certain number of goods into
a country Embargo: complete ban on a certain good entering a
country Subsidies: payments from the government to keep local
industries strong and competitive relative to overseas
competitors.
Technical Standards: Forcing importers to comply with health,
safety, quality or packaging regulations simply to make it
difficult for them to qualify to import to Australia.
Quarantine Regulations: A country could potentially fake reasons
for preventing foreign good into our country under the guise of
saying that they are dangerous to Australia. Reasons for
Protection
1. Infant Industry Argument Is the oldest argument for
protection. It argues that import barriers are required to help
protect new domestic industries who cant produce at the necessary
economies of scale to drive costs low enough to compete. After they
establish themselves the import barriers should be removed allowing
free trade. There should only be temporary protection.
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In reality this rarely happens as they are immune from
competition and never have to innovate and always suffer from
inefficiency.
2. Protects Domestic Employment If protection was reduced
unemployment would rise. Increases in protection therefore should
reduce unemployment. In the short term this appears to be true.
Protection does save Australian Jobs. The problem is, by exporting
less, trading partners will see a rise in their unemployment
figures. In the long run, reductions in protection have potential
to create more jobs as those structurally unemployed workers
retrain in more efficient areas. Having workers in jobs that are
inefficient is bad for Australian growth.
3. Dumping Argument Dumping refers to selling a product in a
foreign market at a price below its cost of production. It is
usually a temporary phenomenon used to dispose of surplus stock. It
undermines the prices of local producers and can put them out of
business.
4. Defence Need to ensure that Australia can still provide
protection for itself in terms of war. This means we should retain
industries such as ship building, aircraft construction and
communications. Note this is not an economic argument, it is a
military argument.
Method of Protection and Effects on Domestic and Global
Economies Tariff Diagram
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example of shirt industry in Australia: 1. The price of the
shirts have risen after the tariff was imposed 2. This sees a rise
in the level of inflation as higher prices are now
being paid by consumers. Price effect 3. Domestic producers were
producing Q1, but after protection now
produce Q2. This should lead to greater local employment.
Protection effect
4. The quantity demanded falls from Q3 to Q4f after the
introduction of the tariff. This is a non desirable outcome for
consumers. Consumption effect
5. The government receives tariff revenue equal to Pw-Pt x
Q2-Q4f. Tax effect
6. Income is redistributed from foreign exporters and consumers
towards government and local producers. Redistribution effect Quota
Diagram
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Quota is he size of the red line. Domestic production rises from
y axis to blue to y axis to red. Demand has fallen due to the
higher prices that result from a quota. The more extreme the quota
the less imports and higher the price. Quota diagram type 2
Subsidy Diagram
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Imports make up the difference between supply and demand at P2.
After the imposition of a subsidy , supply increased (as production
costs are lowered) and the level of domestic producers increased.
Therefore less imports are needed to meet the demand. Effects of
subsidies- anti inflationary (lower prices, and increase domestic
production. Subsidies are preferred by economists because it does
not raise the price of the good, and the government (because it is
a cost to them) are more likely to remove a subsidy. Local Content
Rules A regulation that requires that some specified fraction of a
final good be produced domestically. In return for guaranteeing a
certain percentage of a good be made locally, the imported
components may not attract a tariff. For example, the Australian
motor vehicle industry may not attract tariffs on certain imported
good, provided that certain percentage of the vehicle be Australian
made. Local content rules apply for television (55% from 6 am to
midnight) Export Incentives Grants, loans, tax concessions and
technical advice that is available to encourage local exporters to
penetrate foreign markets.
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Focus on capturing foreign markets rather than protecting
imports. Provides an artificial advantage to exporting firms
overseas. E.g. Export Market Development Grants Considered part of
protection because it restricts free trade by giving domestic
producers an unfair advantage.
Globalization and Economic Development Differences Between
Economic Growth and Development Growth has to do with GDP and GDP
growth rates. While development measures the human side, that is
the HDI (GDP per capita, mortality rates and adult literacy rates).
Economic Growth Measured by GDP or GNI (the sum of all value added
by resident producers in an economy plus the receipts of primary
income from foreign sources. Figures are converted into PPP for
fair results. (a theory that states that exchange rates should
adjust to equalize the price of identical goods and services in
different economies throughout the world. Allows for a standard
comparison between countries) High income earners ($38 000) make up
1 billion of the worlds seven billion. Economic Development
Economic development is a broad measure of welfare in a nation that
includes indicators of health education and environmental quality
as well as material living standards (GDP per capita) Quality of
life indicators are factors that measure the living standards of
people in a nation such as:
Health standards, education levels, domestic work that is not
given a financial value, the level of damage to the environment and
inequalities in income distribution.
HDI- is a measure of economic development devised by the UN. It
takes into account life expectancy, levels of education(quality of
workforce) and, material living standards (GDP per capita)
Categories Of Development Developing Economies- also known as low
income nations since their income range from $975- 3 855, according
to the world bank. Most are located in Africa. Common
Characteristics:
Limited industrialization Agricultural societies High income
inequality Reliance on foreign aid
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Low levels of labor productivity , technological innovation and
infrastructure
Weak political and economic institutions, with high levels of
corruption
Emerging Economies- BRIC (Brazil, Russia, India, China) have
become very dominant in world trade and experienced high economic
growth compared with developed nations. Incomes between $3856-11905
per capita Rapid increase in development due to opening up of
markets and increased output and great improvements in living
standards. 30% of world output Advanced Economies- economies that
have been through the process of industrialization, experience high
output, incomes and living standards. Incomes over $11905 per
capita. Account for 54% of world output. Usually have close
economic ties with each other. Liberal/democratic economic and
political institutions. Most are members of the OECD. Includes a
subgroup called Newly Industrialized Economies (Singapore, Hong
Kong etc.) Transitional Economies- is an economy which is changing
from a centrally planned economy to a free market. Most are still
emerging or developing Causes of Inequality in the Global Economy
Global Factors Global Trade System- advanced economies tend to
subsidies their industries so they can compete with developing
nations. Subsidies to OECD farmers totaled $265 billion. Expanding
regional trading blocs also tend to discriminate poor nations (if
developing economies increased trade by 1% in the world , 120
million people are predicted to escape poverty). Failure of Doha
round also means that poor nation have little ability to negotiate
trade agreements Global Financial Architecture- International
financial flows favor high income economies (over half of FDI
inflows went to advanced economies). Short term financial flows
favor emerging economies (speculators on share markets). IMF has
been criticized to have implemented policies to favor rich
countries. Access to global financial markets have created massive
foreign debt burdens for poor countries (2008 poor nations debt =
3.7 trillion). This means
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domestic governments are not able to spend money on pressing
issues such as health and education. Global Aid and Assistance-
only 0.3% of GDP of rich nations is given as aid (0.7% was
promised, difference between money promised and money delivered was
4 trillion). Reductions in aid have been caused by the recession.
In addition, most aid is phantom aid and does not help standards of
living. Most American aid is given to aid war efforts in
Afghanistan and Iraq. Global Technology Flows- Technology is geared
towards the needs of high income nations (health needs in rich
nations sorted before needs of poor nations). Poor nations also
cannot afford the technology that would help them. Domestic Factors
Natural Resources- countries have different levels and quality of
resources, countries with an abundance have an advantage. Labor
Supply and Quality- low income nations have poorly educated work
force. Heath issues also reduce supply of labor. Access to Capital
and Indebtness- low savings rate, less money for investment and
capital goods. Businesses in poor economies cannot find funds to
expand. Entrepreneurial Culture- low innovation in poor nations
Political and Economic Institutions- political instability and
corruption undermines investor confidence (corruption index:
Somalia 1.1) Government Responses to Globalization- policies
relating to trade , investment flows, TNCs and participation will
influence an economies ability to take advantage of globalization.
Impact of Globalization Economic Growth East Asia and Pacific 8.7%
(China 10.5%) South Asia 6.3% (India growing at approx 6.8%) Europe
+ Central Asia (soviet states) 6.8% Middle East 4.2% (Egypt 4.5%)
Sub-Saharan Africa 3.6% (Sudan 6.5% ,not enough to catch up) Latin
America 3.9% (Brazil and Argentina 3-4%) High Income Economies
staying around 1-2% Globalization has led to increased economic
growth
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This statement is partly true, that is, it is true for some
economies and not for others. Economic growth has increased in
emerging economies due to increased markets, foreign investment and
access to new technologies (China 10.5% growth). High income
economies and Least Developed Countries (LDCs) have experienced
very little change during the globalization era. Economic
Development Globalization has led to economic growth and therefore
may benefit economic development. Economic growth leads to more
money and higher incomes in an economy. Therefore the extra money
will improve GDP per capita and could be used to improve health,
education etc. Rapid industrialization in China has increased
incomes, health and education, improving economic development.
Globalization can be detrimental to economic development as cheap
labor and the environment may be exploited. Trade, Investment and
Transnational Corporations Vertical Specialization- how goods are
produced in different stages in different countries. Motor Vehicle
example: material manufacturing, components manufacturing and final
assembly occurring in three different countries. There are
approximately 82 000 TNCs operating in the global economy. They
have a profound effect on the economy including:
Responsible for one third of world exports Employ over 77
million people Top 100 TNCs account for 4% of GDP Dominate major
industries
Criticisms include: Move operations to areas with weak
government
regulation, especially tax Exploit lower labor standards and
environmental protection
law, especially in developing economies. Environmental
Sustainability Disadvantages of globalization- more exploitation of
environment to improve growth, especially in developing countries.
Also, TNCs will move operations to exploit countries with weak
environmental laws. Advantages of Globalisation- environmentally
friendly technologies are able to be shared, international
conferences set up to achieve solution, cost of protecting
environment shared amongst many countries International Business
Cycle
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Advantages of globalization- allows for countries to specialize
in certain types of production (export what they produce, and
import goods and services in which they are inefficient). Also
allows nations to benefit from the growth of other economies
Disadvantages- a recession in one economy will affect global
economy (example of GFC), increased reliance on solid domestic
policy setting
Case Study-Brazil Economic Growth Statistics- 2-3% growth during
90s, increasing to 4% in 2009. Increasing to 7% after the GFC
Economic Linkage- Globalisation begun during the 1980s as Brazil
borrowed funds from overseas to finance their industrialisation
process. This increase of funds (especially FDI), through the
deregulation of financial markets, helped increase economic
activity. However the economic issues of stagflation (inflation
coupled with unemployment) and foreign debt in the 80s, and
protection of trade kept growth moderate as investors preferred the
fast growing Asian region. The policy of pegging the Brazilian
currency against the US dollar helped stabilise the economy,
coupled with the liberalisation of trade, aided faster growth
during the 90s and early 00s, becoming a hotspot for FDI. An early
recovery from the recession, sound economic policy, increased wages
leading to more consumption and the prospects of the World Cup and
Olympics have further increased growth, predicted at 7%. Economic
Development Statistics- 0.813 HDI, 0.7s in 80s. Literacy rate from
82% (1990) to 90%. Life expectancy 67 (1990) to 73. GDP per capita
5000 to 10 000. Economic Linkages- Globalisation has increased
economic growth and therefore employment and wages, effecting
economic development in two ways. Firstly, people are now able to
provide for themselves and live above the poverty line (high demand
for labor put workers in a better bargaining position with wages).
Secondly, with more people in jobs, earning higher wages, the
government will receive more income tax revenue and company tax
revenue and therefore be able to provide better service in
education and health. This has resulted in higher literacy rates,
life expectancy and GDP per capita, thus increasing Brazils score
on the HDI. Unemployment Statistics- 8.1%. 10-20% in 80s
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Economic Linkages- Labour is a derived demand, therefore
increases in economic growth caused by globalisation will amplify
demand for jobs. Also, as TNCs set up subsidiaries, new jobs are
created. Distribution of Income Statistics- Gini coefficient 2002
0.596, 2007 0.550 Economic Linkages- Brazil is historically one of
the most unequal societies, however globalisation and government
policies have reduced this inequality. As globalisation increased
employment, the lower classes of Brazil were given jobs, therefore
raising their incomes (when supply of labour is low, and demand is
high, employees are in the bargaining position when negotiating
wages), thus reducing inequality in Brazil. However the most
important contributor to reduced inequality has been presidents
Lulas policy developments. These were to raise the minimum wage,
and social security payments to poor families. This has reduced
brazils Gini coefficient. Trade, Investment and Transnational
Corporations Statistics- Trade balance surplus of 25 billion,
negative during 80s and 90s. FDI 2 billion in 1990, 26 billion in
2009. Economic Linkages- Trade in Brazil has changed significantly
due to the globalisation era. In the early period of globalisation,
in the 80s, Brazil did not actively engage in word trade.
Attempting to protect domestic industries, encouraging them to
mature. This resulted in a negative trade balance. Although, to
rectify this, Brazil reduced their tariffs from 32% to 11% and
abolished all quotas, liberalising their trade to increase economic
prosperity. This has resulted in a trade balance surplus of over
$25 billion in 2009. Brazil is now a vital trading partner in the
Latin America region, a vital part of the MERCOSUR customs union
and the WTO (world trade organisation) Investment has been the
cornerstone of Brazils economic integration, which started from
borrowing funds from overseas. Investment, especially FDI, and TNCs
have played a major role in the growth of the Brazilian economy.
Investment in the early years of globalisation remained minimal as
issues such as stagflation and external debt drove away investors
to the higher performing Asian region. However, as these problems
were fixed, Brazil became a hotspot for FDI, growing from $2billion
in 1990, to $26 billion in 2009. Responsible for this is the many
TNCs, especially in the automotive and pharmaceutical industries.
Theses companies such as Ford and Mercedes Benz, have increased
technology flows, employment and growth and thus are vital to the
Brazilian economy.
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International Business Cycle Due to globalisation and economic
integration, domestic economies usually follow the pattern of the
international business cycle. However, Brazil has shown resilience
and has not followed these patterns. During the international boom
periods of the 90s and early 00s Brazil only experienced moderate
growth of 2-3%. Whilst at the same time economies such as China
were growing at over 10%. This was mostly due to their issues
surrounding foreign debt; meaning investors were reluctant to
pursue Brazil. Conversely, the most meaningful test of Brazils
resilience has been its response to the GFC. Many countries have
significantly slowed their economic growth, some even recorded
negative growth, while Brazil is expected to not only recover, but
record 7% growth. This has been caused by the new wave of
confidence in the Brazilian economy due to good economic policies,
fiscal surplus and the comfort of the Olympics and Fifa World Cup
on the horizon. Furthermore, many TNCs in Brazil are Brazilian
based, therefore they were not affected by retreating such as that
in Ireland. External Stability Statistics- negative trade balance
and CAD in 80s 90s. Trade surplus of 25 billion 2009. External debt
reduced from 49% of GDP in 1985 to 12% in 2009 Economic Linkages-
One of the few negative impacts that globalisation has had on
Brazil includes the impact on External Stability. As Brazil
borrowed heavily from overseas, foreign debt accumulated to be
almost half of GDP in 1985. This coupled with negative trade
balanced severely weakened Brazils external stability. Although,
fiscal surpluses, the Economic Stabilisation Program (pegging
currency against USD) and increasing incomes have aided the paying
off of these debts and increasing stability, while liberating trade
has helped improve the Current Account Deficit. Environment
Statistics- 18% of rainforest area has been cleared since 60s
Economic Linkage- Increasing demand for Brazilian exports such as
timber, soy beans and coffee have necessitated clearing of
rainforest area for farms etc. which has had a significant impact
upon the natural environment of Brazil. However, president Lula
announced plans reduce deforestation by 70% by 2017. This has had
immediate affect, as Brazil has skyrocketed up the Happy Planet
Index from 63rd to 9th in just the year from 2009 2010.
Furthermore, TNCs have exploited the poor local environment rules
prior to Lula, releasing many negative externalities.
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Policy Developments President Lulas plan to decrease income
inequality (Zero Hunger, and Family Fund programs) by increasing
minimum wage and social security payments Liberalisation of Trade,
to help external stability and economic growth Deregulation of
financial markets and industries to attract investment President
Lulas plan to reduce deforestation Economic Stabilisation Program,
pegged currency against USD to control inflation and increase
stability Sustained Fiscal surplus (Aimed at 4% of GDP), attract
investment, pay of debts Brazilian Central Bank inflation targeting
framework, aimed at 4.5% inflation. Need high interest rate to do
so PAC (Growth Acceleration Program), increase growth to 5%, main
reforms were 250 billion of infrastructure projects, and tax
concessions to businesses to promote business. Federal Value Added
Tax (similar to GST) raise funds for government and decrease tax
evasion. Pension system (similar to superannuation) help people
retire on more Progressive Tax System