The Global Economy

Topic 1 is worth about 15 of the 60 marks in Sections I and II each year, and it regularly appears in the Section IV essay (globalisation and development, international integration, protection). Your case study of a non-Australian economy is the most heavily examined single part of the topic, so have it ready with real detail.

• The global economy: what globalisation is; its features (trade in goods and services, financial flows, foreign direct investment, technology and transport, international division of labour); the role of transnational corporations and international organisations.
• Globalisation and economic development: economic growth versus economic development; measures such as GDP, GNI per capita and the Human Development Index (HDI); the global distribution of income and wealth; the different experiences of advanced, emerging and developing economies; development and environmental sustainability.
• Case study: the impact of globalisation on one economy other than Australia (its growth, development, trade, financial flows, environment and government policy).
• Free trade and protection: comparative advantage and the gains from trade; reasons for and methods of protection; the effects of protection on the domestic and global economy; trading blocs, monetary unions and free trade agreements.

Globalisation is the increasing integration of the world's economies through trade, financial flows, investment, technology, migration and culture. A strong definition names the process (integration) and the channels (flows of goods, services, capital, labour and ideas). The main features:

• Trade in goods and services: world trade has grown faster than world output for most of the past 50 years, so trade is a rising share of global GDP. Services trade (education, tourism, finance, digital services) is the fastest-growing part.
• Financial flows: portfolio investment (shares and bonds), loans and currency trading. Deregulated financial markets and floating exchange rates let capital move quickly, which spreads both investment and financial crises (for example, the Asian financial crisis of 1997 and the global financial crisis of 2008).
• Foreign direct investment (FDI): an investor gains a lasting interest and influence in a foreign business (usually a 10% or larger stake). FDI brings capital, technology and management skills, but profits flow back to the foreign owner.
• Technology, transport and communication: containerisation, cheaper air freight and the internet cut the cost of distance and let firms build global supply chains.
• International division of labour: production is broken into stages and each stage is done where it is cheapest, so a single product may cross many borders.
• Transnational corporations (TNCs): firms producing in more than one country. They drive globalisation by moving capital and technology, organising supply chains and shifting profits to low-tax jurisdictions.

International organisations

Know at least one criticism of each major body. The WTO's dispute settlement system has been weakened because its Appellate Body has been unable to hear appeals since December 2019. The IMF has been criticised for loan conditions that forced spending cuts in crisis economies.

Economic growth is an increase in the volume of goods and services produced, measured by the percentage change in real GDP. Economic development is a broader improvement in living standards and wellbeing: health, education, income, freedom and the environment. Growth can happen without much development (if the gains go to a small group or damage the environment), which is why examiners like this distinction.

• GDP: the value of final goods and services produced within a country in a year.
• GNI: GDP plus net income from overseas. For economies with large foreign ownership, GNI is noticeably below GDP.
• GNI per capita at purchasing power parity (PPP): adjusts for population and for differences in price levels between countries, so it compares material living standards more fairly than converting at market exchange rates.
• HDI: a UNDP index from 0 to 1 that combines life expectancy, education (mean and expected years of schooling) and GNI per capita at PPP.

Limits of GNI per capita as a measure of wellbeing: it is an average and ignores inequality; it leaves out unpaid and informal work; it ignores environmental damage and resource depletion; and it says nothing about health, education or freedom. The HDI fixes some of this, but it is still an average with only three dimensions.

Global distribution of income and wealth

Income and wealth are very unevenly distributed between countries. Advanced economies hold a share of world income far larger than their share of population, while many low-income economies, especially in sub-Saharan Africa, have fallen behind. Since the 1990s the rapid growth of China, India and other emerging economies has lifted hundreds of millions of people out of extreme poverty and narrowed inequality between countries, even as inequality within many countries has risen. A full answer separates the two: between-country and within-country inequality.

Advanced, emerging and developing economies

Globalisation's benefits have been uneven. Economies that attracted FDI, built export manufacturing and invested in education (East Asia) gained most. Economies dependent on volatile commodity exports, with poor governance or debt problems, gained least and are vulnerable to falls in commodity prices and capital flight.

Development and the environment

Rapid industrial growth often brings air and water pollution, deforestation and rising greenhouse gas emissions. Environmental damage is a negative externality: the costs fall on others and on future generations, so markets overproduce it. Problems such as climate change are global, so they need international agreements (for example the Paris Agreement, 2015) as well as national policy. Link this to the idea of sustainable development: meeting present needs without compromising the ability of future generations to meet theirs.

The syllabus asks you to examine the effects of globalisation on one economy other than Australia. Popular choices are China, India and Indonesia. Whichever you pick, prepare notes under these headings so you can use them in multiple-choice, short answer and essay questions:

1. Background: size, income level and structure of the economy.
2. Growth and development: trends in real GDP growth, GNI per capita and HDI over the past few decades.
3. Trade: how trade openness, composition and main partners have changed.
4. Financial flows and FDI: inflows, outflows, special economic zones or investment reforms.
5. Government policies: reforms that opened the economy, plus current policy challenges.
6. Distribution: inequality between regions, rural and urban areas, and income groups.
7. Environment: pollution, emissions and environmental policy.
8. Evaluation: overall, has globalisation helped or hurt this economy?

Use a few figures you are sure of and give each one a year. A judgement supported by two or three accurate trends is worth more than a page of half-remembered statistics. In an essay, the case study is your evidence: do not just describe it, use it to show how a feature of globalisation caused an effect.

A country has a comparative advantage in a good if it can produce it at a lower opportunity cost than another country. Even if one country is better at producing everything (an absolute advantage in both goods), both can gain by specialising in their comparative advantage and trading.

Worked example: comparative advantage

In one day, a worker in Country P can catch 8 tonnes of fish or make 4 solar panels. A worker in Country Q can catch 3 tonnes of fish or make 3 solar panels.

Country P has an absolute advantage in both goods, but Country Q gives up less fish to make a panel (1 tonne versus 2 tonnes). So Q has the comparative advantage in solar panels and P has the comparative advantage in fish. If they specialise and trade at any price between 1 and 2 tonnes of fish per panel, both end up able to consume more than without trade.

Protection is any government action that gives domestic producers an advantage over foreign competitors.

Reasons given for protection

• Infant industry: shield a new industry until it can compete (the risk is that it never grows up).
• Prevent dumping: stop foreign firms selling below cost or below their home price.
• Protect jobs: save employment in import-competing industries in the short term.
• National security and self-sufficiency: keep strategic industries such as defence, food or energy at home.
• Diversification and the balance of payments: reduce reliance on imports or on a narrow range of industries.

Methods of protection

Worked example: the effects of a tariff

A small country can import a good at a world price of $40. Domestic demand and supply (thousands of units) are $Q_d=200-2P$ and $Q_s=-20+2P$. The government imposes a $10 tariff, so the domestic price rises to $50.

The effects (in $ thousand):

Consumers lose $1.1 million, producers gain $700 000 and the government collects $200 000, so the economy as a whole is worse off by $200 000. That net loss, the deadweight loss, comes from inefficient domestic production replacing cheaper imports and from consumers who no longer buy at the higher price. This is the core argument against protection: it transfers income from consumers to protected producers and wastes resources.

Effects of protection

• Domestic economy: higher prices and less choice for consumers; resources stay in inefficient industries; firms using protected goods as inputs face higher costs and become less competitive; jobs saved in protected industries may be lost elsewhere.
• Global economy: less world trade and slower growth; retaliation and trade wars; developing economies are hurt most when advanced economies protect agriculture and textiles, the goods developing economies are most competitive in.

Since 2018, trade tensions between the United States and China, and wider tariff increases by the United States from 2025, have raised protection in the global economy. You can use these as current examples, but explain the mechanism rather than relying on precise tariff rates.

Trading blocs, monetary unions and FTAs

• Free trade agreement (FTA): members remove trade barriers between themselves but keep their own barriers against non-members. Can be bilateral (two countries) or regional.
• Trading bloc: a group of countries with preferential trade arrangements; a customs union also has a common external tariff.
• Monetary union: members share a currency and a central bank (the euro area and the European Central Bank). Members give up their own monetary policy and exchange rate.

FTAs cause trade creation (members switch from high-cost domestic production to lower-cost imports from a partner) and trade diversion (members switch from a low-cost non-member to a higher-cost member because only the member's goods are tariff-free). Multilateral liberalisation through the WTO avoids trade diversion, which is why economists prefer it, but WTO rounds have stalled and countries have turned to bilateral and regional deals.

• Treating growth and development as the same thing. Growth is output; development is wellbeing.
• Defining globalisation only as trade. Include financial flows, investment, technology and labour.
• Saying a country with an absolute advantage in everything cannot gain from trade. Gains come from comparative advantage.
• Claiming protection saves jobs overall. It may save jobs in the protected industry while costing jobs in user industries and exporters.
• Mixing up trade creation and trade diversion.
• Writing the case study as a history essay with no economic analysis or judgement.
• Using statistics without years, or quoting figures you are not sure of.

• Define: one precise sentence. "Globalisation is the increasing integration of national economies through flows of trade, capital, labour and technology."
• Explain (usually 3 or 4 marks): for full marks, give the cause, the mechanism and the effect, and link them with "because" or "which leads to". If the question says TWO effects, write two clearly separate paragraphs.
• Analyse: identify components and show how they interact, for example how FDI raises growth but also increases profit outflows.
• Assess or evaluate: make a judgement ("on balance...") and back it with evidence, including at least one counter-point.
• Draw and label diagrams when they help (a tariff diagram with world price, domestic price, domestic supply and imports is a quick way to earn marks).

Writing a 20-mark extended response

The Section IV essay (no stimulus) often comes from this topic, for example "Analyse the impact of globalisation on economic development in an economy other than Australia". A full-mark response:

1. Introduction: define the key terms and state your judgement in one or two sentences.
2. Body paragraphs (four to six), each starting with a topic sentence that answers the question, then the economic theory, then case-study evidence with years, then a link back to the question.
3. Balance: cover both positive and negative effects, and show how they relate (for example, growth that raised incomes also widened regional inequality).
4. Conclusion: restate and justify your judgement. No new material.

Markers reward sustained, logical answers that use economic terms accurately, link theory to evidence and answer the exact verb. Plan for three or four minutes before writing.

• Topic 2: Australia's trade, financial flows and trade policy apply the Topic 1 ideas of FDI, protection and FTAs to Australia.
• Topic 3: the environmental sustainability issue and the distribution of income extend the development and inequality ideas here.
• Topic 4: global factors (the world business cycle, commodity prices, financial crises) are a key limitation on Australian economic policy.