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Home > Economics > The global economy > What is globalisation?

Outcomes
Overview
Content
Review exercises
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Outcomes

HSC topic: The Global Economy is covered in the Board of Studies NSW Stage 6 Economics Syllabus (June 1999) on pages 31-33. The specific outcomes for this tutorial are:

H1:	demonstrates understanding of economic terms, concepts and relationships.
H3:	explains the role of markets within the global economy.
H4:	analyses the impact of global markets on the Australian and global economies.
H8:	applies appropriate terminology, concepts and theories in contemporary and hypothetical economic contexts.

Overview

We are confronted with the buzz word globalisation everyday of our lives, on the television, with advertising slogans, in web sites and magazines. In a world of shrinking space, time and disappearing borders the impacts of globalisation are being felt by all countries.

This tutorial introduces the concept of globalisation and examines some of the impacts the process has had on the world economy.

Content

What is globalisation?

1. The global economy

   “The global economy is the world economy. It reflects the total amount of measurable economic activity going on in the world. For the global economy to exist a rising share of economic activity in the world is taking place between people who live in different countries.

   This includes all production, trade, financial flows, investment, technology, labour and economic behaviour in nations and between nations.”

   Source: IMF World Economic Outlook May 2001

2. The nature of globalisation

   An historical perspective

   Although the term globalisation came into common use in the 1980s, the concept stretches back decades, even centuries, if you consider the trading empires built by Spain, Portugal, Britain and Holland. During the worldwide depression of the 1930s countries were reluctant to expand into international markets as governments and business were concerned about poverty and unemployment. The strengthening of international ties, and the scale of world economic activity, after World War II laid the foundation for today’s global economy.

   Globalisation defined:

   Globalisation can be defined as the increasing economic and financial integration of economies around the world.

   The term broadly refers to the worldwide changes that are taking place to remove national boundaries from the financing, production, sale and distribution of goods and services. Transnational corporations that see the world as a single market have facilitated the process. Another way to think of this process is the global supply and value chain. For example, fashion garments are designed in Sydney. Orders for materials are sent to China where the material is manufactured. The materials are exported to Fiji, where the fashion garments are sown and finished. They are then imported to Sydney and distributed to stores for sale. These global supply chains are globalisation in action.

   It is important to note that globalisation not only refers to the actual movement of trade but also to the capacity and the potential to move across the borders of nations, investment, technology, finance and labour.

   International bodies such as the World Trade Organisation (WTO) and the International Monetary Fund (IMF) have facilitated globalisation by respectively reducing trade barriers (such as tariffs and subsidies) and the deregulation of world financial markets. Countries that have been able to take advantage of this trade liberalisation are now seeing higher levels of economic growth and reduced poverty.

   However some see globalisation in both developing and developed countries as a cause for loss of national identity, increasing environmental problems and the exploitation of labour.

   
   
   

3. Measuring the size of the world economy and Gross World Product

   Gross World Product (also referred to as World Real GDP or Real World Gross Product) is measured by adding together the outputs of the world economies.
   An IMF report in 1999 estimated that the total output of the world economy was valued at US$40 714 billion. In 2008 the Gross World Product was calculated at $US62. 250 billion (62.25 trillion dollars)

   It is important to note that these Gross World Product figures may vary significantly and are difficult to measure as:

   • inflation rates vary from country to country
   • exchange rate differences exist between countries
   • there are variations in statistical methods for calculating asset values from country to country
   • government policies relating to taxation can be very different from country to country
   • inaccuracies may occur in the collection of statistical data.

   The developing countries account for 80% of the world’s population. They have:

   • 20% of World's GDP
   • 15% of World's Education spending
   • 65% of World's Refugees
   • 95% of People living with HIV/Aids
   • 30% of the World's Food
   • 5% of the World's Spending on Science and Technology
   • 7% of World's Health Spending
   • 38% of World's CO2 Emmissions
   • 18% of World's Export Earnings
   • 95% of World's Wars
   • 61% of World's Cereal Production
   • 25% of World's Industrial Production
   • 26% of World's Electricity consumption
     
     
4. Case study
   
   Australia: a successful global economy

   A recent report by the Centre for International Economics (CIE)  has identified Australia as one of the countries that had made the greatest gains from globalisation and the gradual reductions in protections and tariffs that promoted growth in world trade. As a small open economy, Australia was highly likely to benefit from increases in world trade. In the late 1990’s the Australian Department of Foreign Affairs also indicated that Australia had made positive gains from globalisation, trade liberalisation and economic reforms. Some of those gains are outlined below.

   Tariff reductions over the last ten years have increased GDP by around 1.5% or on average $1000 per family each year. This level of growth has continued into  2008 as continued tariff reductions increase the real income of consumers through falling prices

   One in four jobs are now linked to exports. Australian exporters on average paid their employees $14700 per annum more than non-exporters. In many businesses that export the fall in tariffs reduced their costs of imported parts and supply. These sorts of changes allowed those businesses to be more successful and pay higher wages for manufacturing workers . As a result the CIE report suggests that the average real wage for manufacturing workers has risen 6% a year since 1988.

   A recent OECD report indicated that Australia was the world’s sixth fastest growing economy. The Australian economy grew very strongly in the 2000’s as a result of increased trade, microeconomic reform and reduced tariffs and protection.

   Information Technology spending as a share of GDP, and per capita ownership of computers, is second highest in the world.

   Australia has experienced a higher rate of growth than the G7 economies over the mid to late 1990s and well into the 2000's, and performed comparatively well through the GFC and global recession as indicated by positive GDP growth.

Review exercises

1. Choose whether the following questions are True or False.

   Questions	Answers
   The global economy is the world economy.	True	False
   Globalisation involves the removal of trade barriers between countries.	True	False
   The economic term globalisation came into common use in 1990.	True	False
   Australia is considered one of the wealthier nations in the world.	True	False
   World War II laid the foundations for today’s global economy.	True	False
   Trade liberalisation means that countries are increasing tariff protection.	True	False
   World Real GDP is an acceptable measure of World Output.	True	False
   The global economy can include production, trade, financial flows, investment and technology.	True	False
   Globalisation has had a positive effect on both developing and developed countries.	True	False
   The advanced economies of the world have 50% of the population and 15% of World GDP.	True	False
   The gaps between the richest and poorest countries have decreased over the last century.	True	False

   
   
   
2. What are the problems associated with the measurement of Gross World Product figures?
   
   
3. List the main forms of protection that have been used by countries that reduced competition in global markets.
   
   
4. Outline the economic benefits of trade liberalisation for the Australian economy.
   
   
5. Write in your own words a definition of globalisation.

Answers

More

Extension activity: According to some observers globalisation can be bad news for economies of smaller population centres and even smaller economies, such as Australia . Read the appendix C in the CIE report (page 44 – 50) on the impact of trade on the dairy, automotive, aluminium and light metals and services industries.

The IMF article Globalisation: Threat or Opportunity is a good source of information on this topic.

Business Review Weekly has a number of other articles on globalisation.

The most recent IMF World Economic Outlook can be accessed by visiting the International Monetary Fund Site. The site http://www.imf.org/external/index.htm has a good section for students that is worth visiting.

Alternatively, for September 2004 World Economic Outlook figures go to the World Development Report World Bank.