Economics Solutions For Principles And Applications

Introduction to Globalization

Discuss about the Economics Solutions for Principles and Applications.

The process by which businesses or other organizations develop international influence or start operating on an international scale is called globalization. It is the interchange between countries in terms of culture, commodities, views, ideas, finance, labor investment or the movement of technology (Investopedia, 2016).

In recent times globalization has had its effect in both positive and negative ways for both developed as well as developing countries. Developing countries like India and China has benefitted via various ways. The openness between countries with increase in trade of goods and services has helped in boosting the balance of payments which boosts economic growth in the countries. Being introduced to new opportunities, there had been changes in economic performances in countries, their trade and political scenarios, change in ideologies and cultures, etc.  Increase in growth in these countries has also helped in dealing with poverty with the benefits of trade being experienced by more of the mass population. But yes, globalization has also increased poverty in certain countries or areas in countries causing diversified inequality like that in Africa and rural areas of China, which have not been able to experience the benefits of globalization. Improvemnets in health systems has caused greater life expectancy rates as stated by World Bank (2004), 85% of world population has seen rise in life expectancy rates to more than 60 years. Just like globalization has resulted researchers to come up with better scientific or medical solutions to diseases it has also caused spread of diseases across nations. On the other hand, it has cause greater awareness too along with increase in demand for labor. As globalization increases production of goods and services, it creates a derived demand for more labor thus increasing employment. The phenomenon has also caused the desire to pursue higher education and get more skilled among individuals improving the human capital of nations. But one of the most critical impacts of globalization is on the domestic industries. Globalization is a boon for a nation only if the government or the nation itself adopts needful reforms and policies along with the changes globalization brings forward. Many developed countries like USA and Australia have domestic industries which on facing the competition from international markets have suffered from globalization. If the nations adopt the required policies and reforms to adapt to th economic changes caused by globalization, then it can experience the benefitial effects without any hurdles. Even though in these developed countries, globalization has tremendously benefitted in terms of trade and other factos, boosting economic growth and income, but the domestic industries had suffered.

Impacts of Globalization on Developing and Developed Countries

Turning towards Australia, globalization had made significant contributions to Australia’s growth with its diversification in the world markets but had affected its domestic industries. One of the sectors that suffered the most is the auto motive sector of Australia. The automotive industry of the country had been under considerable protection from international competition for many years, being one of the strongest components of the national manufacturing industry and cherished by the government. With international trade, since 1970, the auto motive industry had been facing tremendous competition from foreign producers along with its reduced efficiency. Among all developed countries, the highest tariff of 22% is imposed in Australia to protect its domestic auto-motive industry(Ilahi, 2014). The large Australian firms could not compete because of lack of economies of scale with the big OECD states like USA and Japan. Producers like the Chrysler, Nissan, VW and British Leyland ceased production completely and soon to follow are the big four American firms like Ford, GM/Holden and Toyota and Mitsubishi from Japan (Market watch, 2014). Now these effects on the industry by globalization has caused Australia to impose high tariffs to keep off competition from domestic industry which has affected the economy in the following ways:

• Tariff increased the cost of goods and services to the consumers and reduced the national income.
• With the expansion of the industry protected by tariff involves more employment and investment. But all of this takes place in an inefficient sector of the economy.
• Excess profits earned by producers protected under tariff attract further investments driving away investments from the efficient sectors which do not need protection.
• Tariff alone is said to be not affecting in helping an industry grow and is said to be only followed for infant industries which have prospects of growing on its own in the longer run.
• After the second World War, the positive effect of tariff to protect the growing manufacturing industry was temporary for Australia as efficient industries faced lack of investments.

Hence we see that necessary microeconomic and macroeconomic reforms were supposed to be taken by the Australian government to protect its domestic industry without pushing off the benefits of globalization. Excessive protection of the domestic industry gave rise to driving off resources to inefficient sectors making the efficient sectors suffer. Hence, globalization is completely beneficial for Australia and should be supported but legitimate reform and policy measures should also be adopted to adjust with the economic changes caused by Australia.

Globalization has benefitted the world in several ways with increasing export demand, contributing resources through imports, helping in changing political scenarios with trade agreements between nations, etc. The current ad capital account improvements had helped the GDP growth of all nations opening up to the world market. If we consider the global economy as a broader perspective then the winners had been Asian countries like Malaysia, Singapore, South Korea, India, China or countries like Australia or USA who all have experienced greater economic growth due to globalization whereas countries like Africa had turned out to be losers suffering from the effects of globalization or not been able to experience the complete benefits from the phenomenon. Parts of Eastern Europe or sub Saharan Africa had also not benefitted much along with the Islamic region (Harris, 2002).

Effects of Globalization on Domestic Industries in Australia

As for Australia there had been a section of gains as well as losses which we list as follows:

Strengthening of industrial base with restructured capital markets, advanced technology and more of export markets.

Increase in GDP per person ranking Australia has the fourth highest.

Ratio of exports rising from 15 to 20% (Downer, 2003)

Higher living standards and rise in real income with economic growth

Labor outsourcing to low waged countries decreased the wages of unskilled workers. Unskilled workers from traditional industries had also been unemployed due to shut down of the industries on facing competition (Market Watch, 2014)

Heavy industries and manufacturing plants suffered due to competition from international markets (Royer, 2014)

The country is also facing growing inequalities with the increasing globalization since the 1980s. In 1996 the 72% of the nation’s wealth was the top most 20% of the population with the top 50% holding 98.4% of the wealth, hence not leaving out enough for the remaining half.

The law of demand applies to all goods and services and similarly to food too. The law of demand states that with rise in price of a particular product the consumer would demand less of that product which implies that the overall demand of the product would fall. In such cases both substitution and income effects take place. There occurs both an income effect and substitution effect in case of food too. With rise in price of certain food products, consumer’s purchasing power falls which is like a negative income effect, consumer reduce their consumption of that particular product and shift to other substitutes or other products(Varian, 2010). This shows, how the law of demand applies to food too.

As per the substitution effect, when price of a particular kind of food rises within the diverse division of food products, consumers shift from that particular food product to some other food product. For example, with rise in price of fish, consumers may shift to the consumption of more meat or chicken (Pindyck et al, 2009). As the price of tea rises, consumers would consume more of coffee or with rise in price of meat consumers may shift to fish or more vegetables or even eggs.

If there occurs any changes in a consumer’s income which affects the demand for a particular product then that is an income effect. When the price of food rises, consumers feel poorer with the available money in hand this is like a negative income effect. In other words the purchasing power of consumers falls. For instance, if there occurs a rise in price of a particular food product then the consumer’s purchasing power for that particular food product falls and that acts like a negative income effect (Mankiw, 2007). This also implies the fact that food acts like a normal good. Just like all other normal goods, with rise in income, a consumer would consume more of food and vise versa.

Housing prices are closely related to land prices. The growing land prices have been a crucial reason for the increasing housing prices. Now, if we consider a market for a product then its price is generally determined by the demand and supply conditions in the market. The same holds for land too. The supply and demand factors of land determine its prices. Use of land is dependent on the condition of land whether it is developed or non-developed and hence the cost of developing the land for making it usable also determines its supply. Similarly there are many other factors that affect the supply of land like land development industry structure, governmental taxes or levies on land, the non-housing uses relative returns and the effectiveness and rules of the planning system of land use. These factors affects both the supply of developed land and also the cost of land. Land being a natural resource of limited amount and of characteristics which needs time to change this result in taking more time for the supply of developed land to increase compared to the increasing demand (Rahman, 2014). As demand goes on increasing for land to incorporate various land uses with the fixed supply of developed land in the short run, it gives to a rise in price of land. This inelastic supply of land in the short run leads to increase in land prices which are transferred to increase in housing prices. There are many other factors that affect housing prices like interest rates, economic conditions, demographic conditions, population statistics, geographic conditions, demand for investments, etc. For instance, low interest rates, induce higher demand for housing as this gives the incentive of consumers to buy new houses as the cost of getting a housing mortgage falls. Similarly, geographic and population conditions also affect housing prices. If the population is on an increasing trend then families with increasing members wish to switch to bigger houses and hence the overall demand for housing increases whereas geographic conditions if improved with more developed land induces people to buy more houses. The country’s economic conditions also matter as in with controlled inflation and unemployment and increasing income drives up housing demand and prices too (Helle, 2016). It is seen that since 1995, increased investment demand and tax benefits has induced housing prices to rise whereas a financial system deregulation with more of foreign banks and brokers has increased housing demand(ABS, 2005). Now, with rise in housing prices, if we look from the side of land owners or landlords, there occurs a wealth effect , i.e., these individuals feel more wealthier increasing their consumption and maybe even increasing their housing demand hence a further pressure on rising demand and prices. Lastly, a country with high economic growth rate is seen to have an overall increasing aggregate demand which also includes increase in housing demand due to increase in income.

Microeconomic and Macroeconomic Reforms in Australia

With the above answer it is clear to us that the main factors that are affecting the land prices and in turn housing prices are related to the fixed supply of land and the simultaneous increase in demand of land due to increase in housing demand. In such a case the increase in demand for land is represented by a shift of the demand curve upwards as here all things remaining the same the demand for land increases as it is derived from the increase in housing demand. Hence we see in the figure below the demand for land shifts from D’ to D’’, i.e., it shifts upwards. We also see that the supply of land is a straight line S representing the land supply to be inelastic in nature with change in prices as the supply of developed land in the short run is inelastic (Samuelson et al, 2010). Hence, with the shift in the demand curve upwards and the inelastic supply of land, the price of land rises from P’ to P’’ with the equilibrium quantity of land remaining the same as Q, but the equilibrium point changes to E’’ which shows the same quantity of land is now available at higher price.

The supply of land in the metropolitan cities is perfectly inelastic in nature considering land to be a natural resource. Now housing is dependent on developed land, hence, land development takes time and would be seen in long run. Thus, with land development having its effects on land supply in the long run, the supply of land in the short run is perfectly inelastic in nature (Lipsey et al, 2011).

References:

Pindyck, R. Rubinfeld, D. & Mehta, P. (2009). Microeconomics. South Asia: Pearson

Varian, H. (2010). Intermediate microeconomics. New Delhi:Affiliated East-West Press

Samuelson, P. & Nordhaus, W. (2010). Economics. New Delhi: Tata McGraw Hill

Mankiw, G. (2007). Economics: principles and applications. New Delhi: Cengage learning

Lipsey, R. & Chrystal,  A. (2011). Economics.  New Delhi : Oxford

Market watch.(2014). How globalization destroyed Australia’s automotive industry?. Available at: https://www.marketwatch.com/story/how-globalization-destroyed-australias-auto-industry-2014-12-16. [Accessed 12 September. 2016]

Rahman, M.(2014). Australian housing market. Available at: https://www.researchgate.net/publication/228384641_Australian_housing_market_causes_and_effects_of_rising_price. [Accessed 12 September. 2016]

ABS, 2005. Impact of rising house prices on the WA economy, Available at: https://www.abs.gov.au/AUSSTATS/[email protected]/9e1dd9680bdd9821ca257090002029cc/9a108c68979298b0ca256fe8007df2ad!OpenDocument. [Accessed 12 September. 2016]

Helle, M. (2016). Land prices now highest. Available at: https://www.perthnow.com.au/realestate/news/perth-wa/perth-real-estate-land-prices-now-highest-median-per-square-metre-in-australian-capital-cities/news-story/cd775fd475848160c204ca6cb2698556 . [Accessed 12 September. 2016]

Investopedia. (2016). Globalization. Available at: https://www.investopedia.com/terms/g/globalization.asp. [Accessed 12 September. 2016]

Ilahi, R. (2014). Globalization in Australia. Available at: https://ryanilahi.wordpress.com/2014/11/01/globalization-and-its-impact-on-australia/ . [Accessed 12 September. 2016].