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1. HSC Task 1 - TOPIC 1 HSC
Year 12 Economics (ECO12)
University of New South Wales
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Government Economic Forums
Organisations which exist as forums for world leaders play an important role in coordinating policies between major economies especially during times of economic or financial crisis The aim of these forums is to enable heads of state along with their treasurers and central bank governors to discuss global economic issues with particular attention to economic stability and growth
Group of Seven Nations (G7)
In recent decades the most important government economic forum has been the group of the 7 largest industrialised nations including the US, UK, France, Germany, Canada, Japan and Italy. The inclusion of Russia in the group between 1997-2014 meant that it was known as the G8, until its membership was suspended The G6 has effectively operated as the economic council of the wold’s wealthiest nations, meeting annually to discuss conditions in the global economy The G7 has been the unofficial forum coordinating global macroeconomic policy because of its influence over the fiscal and monetary policies of the world’s largest economies Because of G7’s status as the forum for the world’s most powerful economies, its agenda has often included general political issues and current priorities such as climate change, global poverty and security The significance of the G7 is not declining, reflecting the shift in the global balance of power towards emerging economies in particular China (which on some measures is now the world’s largest economy). The membership of the G7 is no longer representative of the most important forces int eh global economy (nations like China and India are more important to future global economic growth than economies like Canada and Italy) The G7’s share of global GDP shrunk from 68% in 1992 to 46% in 2016, and G7 nations cover only 10% of the world’s population. For this reason, there have been recent attempts to expand the group to include 5 developing countries referred to as the Outreach Five (O5): Brazil, China, India, Mexico and South Africa
Group of Twenty Nations (G20)
G20 emerged as the leading forum for coordinating the global response to avert a depression after the GFC THE G20 agreed to coordinate fiscal stimulus around the world, as well as improve supervision of the global financial system and international financial institutions The G20 includes 19 of the world’s largest national economies plus the EU, covering 80% of the world GDP and two thirds of the world’s population. Importantly, the G20 membership includes several emerging economies who have become the driving force behind world economic growth The extent to which the G20 or the G7 plus O5 becomes the forum for international economic cooperation in future years is unclear, but at the moment the G20’s main activity is its annual summit and it does not have any permanent leadership or headquarters. The limited effectiveness of the G20 was highlighted in the annual summit in 2014 held in Brisbane. Although G20 members agreed to a goal of increasing economic growth by 2%, many of policy changes pledged in support of the goal were not implemented and so global growth was even weaker 2 years after the summit
Chapter summary
Free trade is a situation where there are no artificial barriers to trade imposed by governments that restrict the free exchange of goods and services between economies Protection is any type of government action that has the effect of giving domestic producers an artificial advantage over foreign competitors. Arguments in favour of protection : it can help "infant industries" to establish themselves, protect local jobs being lost because of cheaper imports, allow a country to remain self- sufficient in important areas such as defence and can help to prevent foreign companies dumping goods on domestic markets at unrealistically low prices.
The arguments against protection : it results in a distortion in resource allocation towards less efficient sectors of the economy and in the longer term can lead to a less internationally competitive economy, higher unemployment and a lower standard of living. The main methods of protection are: tariffs (a tax on imports); subsidies (a payment to local producers); local content rules (a requirement that a proportion of goods are made locally); quotas (a limit on the quantity of goods imported) and export incentives (other means to encourage local production). Trade agreements are a way of reducing barriers to trade between nations. Recent years have seen the growth of multilateral agreements (such as the TPP and the ASEAN free trade agreement) and bilateral agreements (such as with China and Japan). The World Trade Organisation is a global organisation that enforces the existing WTO agreement, resolves trade disputes and Is the major forum for global trade negotiations pursuing the goal of global free trade. The International Monetary Fund is a global organisation whose main role is to maintain international financial stability. The IMF plays a key role in monitoring the international financial system and assisting economies who face major economic crises. The World Bank is a global organisation whose main role is to assist poorer nations with economic development through loans development assistance and technical advice with the goal of reducing extreme poverty to 3 per cent of the global population by 2030 and raising income levels for the lowest 40 per cent of income earner The G7 and the G20 are the two most important forums for global economic policy coordination through annual meetings of national leaders. The G7 includes the major advanced economies white the G20 includes the large emerging economies that have recently been driving global economic growth.
Globalisation and Economic Development
Differences in income and economic growth
The most common method for comparing living standards between different economies is income, because it measures the ability of a nation’s citizens to satisfy their material wants Gross National Income (GNI) is the sum of value added by all resident producers in an economy plus receipts of primary income from foreign sources. Real GNI figures are obtained by discounting GNI growth for the effects of inflation The US economy is by far the largest in the world – it is over one and a half times the size of the next largest economy China, and almost 4 times the size of the 3rd largest, Japan One of the limitations in making such comparisons between the size of economies is the exchange rate used to make the comparisons. By using the measure of the US dollar, can make inaccurate comparisons about the living standards of developing countries. Economists usually make an adjustment using what is known as purchasing power parity (PPP) before comparing GNI levels between countries PPP is a theory that states that exchange rates should adjust to equalise the price of identical goods and services in different economies throughout the world Measuring PPP is to adjust measurements of the size of an economy to reflect the purchasing power of currencies within a national economy. Using PPP-adjusted figures allows a standard comparison of real income levels between countries. A limitation to making comparisons on the overall size of economies like this – the difference in the size of populations in difference countries. The size of population and the rate of population growth vary between countries and allowances can be made for this by dividing the real GNI of each country by its population generating a GNI per capital figure. Almost all nations have experienced some economic growth in recent decades, enjoying higher incomes as a result often increase in their GDP. While the gap in income between the richer and poorer countries appears to be lessening, the reduction of income inequality in the global economy is occurring very slowly. Another dimension to global inequality is the unequal distribution of global wealth. According to Credit Suisse, in 2016, the top 10% of the world’s population accounted for 89% of the world’s wealth. Most of this wealth is concentrated in households across Europe, North
o Low levels of labour productivity, industrialisation, technological innovations and infrastructure development o Weak political and economic institutions and a high prevalence of corruption The United Nations Conference on Trade and Development (UNCTAD) ha also identified a sub-group of 47 least developed countries (LDCs) which suffer from the lowest GNI per capita levels in the world, weaken human assets and high economic vulnerability. 34 of the 47 LDCs are located in Sub-Saharan Africa, highlighting what is sometimes called the “Africanisation” of poverty Another classification for economies is emerging economies. These economies are in the process of industrialisation or modernisation and experiencing sustained high levels of economic growth. This classification includes a range of economies that are neither high income, nor share the traditional characteristics of developing economies. They include the economies previously known as newly industrialised economies (such as Malaysia and the Philippines), economies previously known as transition economies which were making the transition from socialist economies such as China and Hungary, and developing economies with improved prospects (such as India and Indonesia)
Type of Economy
Income Levels Economic Growth
Structure of Economy
Examples
Advanced High income levels with GNI per capita above US$23,
Slower growth in recent decades
Large service industries and advanced manufacturing
Singapore Portugal Czech Republic
Developing Low income levels with around half of population in absolute poverty
Moderate growth rates but population growth also high
Heavily reliant on agriculture and (in more extreme cases) foreign aid
Madagascar Yemen Myanmar
Emerging income levels vary but what these economies have in common is fast growth in income levels
Strongest growth rates in the world (5- 10%) and favourable prospects
Industrialising usually with substantial manufacturing sectors
China Brazil Indonesia
Limitations of classifications systems: classifications are very broad and can group dissimilar economies together. o Eg. Brazil and Indonesia might both be considered emerging economies but they have very different living standards. Likewise, some economies do not fit nearly into one of these 3 categories. o Bulgaria is much better off than a developing economy yet is not quite an advanced economy or emerging economy Despite these limitations, classifying economies is still an important step towards understanding the reasons for economic inequalities between nations
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1. HSC Task 1 - TOPIC 1 HSC
Course: Year 12 Economics (ECO12)
University: University of New South Wales
