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Economics

Home > Economics > The global economy > Global aspects of finance and labour

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 (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
H7	evaluates the consequences of contemporary economic problems and issues on individuals, firms and governments
H8	applies appropriate terminology, concepts and theories in contemporary and hypothetical economic contexts.

Being up to date and aware of contemporary issues

This tutorial is based on figures available in 2002 and although the concepts and information included are still relevant you should keep this in mind when looking at statistics included. Students of Economics should be aware of contemporary economic issues so you are encouraged to visit the Australian Stock Exchange website and the others included at the bottom of the page in the section 'MORE'. You may like to find out for instance, the current value of the global derivatives market.

Overview

This tutorial will enable students to apply their knowledge and economic skills to analyse statistical information and case studies to assess the economic impact of globalisation on finance and labour.

Content

1. Finance

   Risk management techniques

   The growth of international financial flows has played a very important role in the process of globalisation.

   Financial flows have expanded substantially since the deregulation of financial controls in the 1970s and 1980s. The growth in foreign currency markets, flows of foreign capital, banking interest rates and overseas investments are part of the process of globalisation and have long played a role in shaping business cycles.

   With deregulation came the development of the global village where time, space, and international borders have disappeared allowing financial dealers to use new technologies to obtain up-to-date information in money markets from London to Jakarta and from Tokyo to New York.

   International corporations and investors wanting to remove the risks in global trading and investment, especially in the area relating to international currency movements contributed to the development of what is known as the derivative markets.

   A derivative is a tradeable security whose value is derived from the actual or expected future price of some asset such as a commodity, for example agricultural products, metals, and petroleum, a security or currency.

   Derivatives can be used as a hedge, (that is to reduce risk), or for speculation.

   Derivatives include:

   1. Futures contracts

      Futures contracts are legally binding agreements, to buy or sell a commodity or financial instrument sometime in the future.

      Futures contracts are standardised according to the quality, quantity, delivery time and location for each commodity.

      Both domestic and international traders use these contracts to protect themselves from unfavourable movements in prices.

   2. Forward contracts

      Forward contracts are contracts in which a seller agrees to deliver a specific commodity to a buyer sometime in the future. Forward contracts, in contrast to futures contracts, are privately negotiated and tailor-made between two parties.

      They are not standardised according to the quality, quantity, and delivery time and location for each commodity.

      Forward contracts on currencies are the most commonly used derivative security.

      Graph 1

      Source: Bank for International Settlements, Quarterly Reviews.

      The growth in the global derivatives market has been very rapid over the past decade (Graph 1). In 1992, the value of the global derivatives market was US$10 000 billion increasing to US$88 000 billion in 1999 and US$95 000 billion in 2000. However, this growth slowed due to the downturn in the global economy during 2001.

   3. Options

      A contract giving the holder the right but not the obligation to trade in a commodity, a share, or currency on some future date at a certain price.

      There are a variety of option types including put options (the right to sell) and call options (the right to buy).

      Options are traded on the Australian Stock Exchange and may be investigated on the Australian Stock Exchange web site www.asx.com.au

   4. Swaps

      These can take the form of an interest rate, currency and even commodity swaps

      A currency swap is an agreement to exchange a certain amount of money e. g. AUS$100 million now for Japanese Yen and to reverse the exchange in two months.

      The Reserve Bank of Australia (RBA 1999) used a currency swap to cover the shortage of cash in the economy during the Telstra 2 float in October 1999.

2. Labour

   Some facts

   Workers move between countries to find better employment opportunities.

   • The numbers involved are still quite small.
   • Most labour migration occurs between developing countries.
   • The international movement of labour has been growing since the 1960s.
   • About 2.3% of the world population live outside their country of birth and 1.5% of the world’s workforce works in countries other than those of its citizenship.

   Shrinking time, shrinking space, disappearing borders-but for whom?

   The collapse of space, time and borders may be creating a global village, but not everyone can be a citizen. The global, professional elite, can move freely around the world, but billions of other workers find it impossible.

   Highly skilled labour travels the global village with Internet access in nearly every country. The highly educated are increasingly online and in touch around the world.

   In 1999 and 2000 immigrants with skills in computing technologies were in high demand. In the European Union alone, 50 000 information technology jobs went unfilled because of lack of adequate skills. The United States was also offering a special visa to professional immigrants to keep high-tech industries staffed.

   Unskilled labour, by contrast, runs up against barriers. As a result of the increasingly tight immigration restrictions in many richer countries against unskilled labour, many families are divided, creating tensions between countries and social unrest.

   A good example is in the United States. There are an estimated four million undocumented migrants, people without correct documentation to travel abroad.

   Lacking correct papers, illegal immigrants face not only discrimination but also denial of human rights. Many end up in activities that are dirty, dangerous and demeaning.

   Trafficking of illegal immigrants is a booming business, involving over four million people and generating US$7 billion a year.

   The Tampa Crisis in August 2001 illustrates this problem for Australia. The Tampa, a Norwegian freighter rescued 460 asylum seekers from a sinking boat in the Indian Ocean. The captain of the Tampa with a crew of only 27, believed the Australian territory of Christmas Island was the nearest country, and feared that the refugees, mainly Afghans would take over his ship if he did not take them into international waters. The freighter did enter Australian waters near Christmas Island, and the reaction of the Australian government created an international incident.

   In both poor and rich countries economic and corporate restructuring has often meant greater incomes but has also resulted in greater employment insecurity.

   The pressures of global competition have forced many countries to adopt more flexible labour policies and reduce social protection for their workers.

Review exercises

Exercise 1

1. “The down turn in global economic activity and the recession in the major economies in 2001 have had far reaching impacts on the global labour force.”

   Explain this statement using the information from the case study.Answer

Exercise 2

Read the extract and answer the following question.

1. Outline the economic reasons for Windsor Smith’s (Victoria) decision to import shoes from China.  Answer

2. Outline some of the impacts on the economy of the resulting job losses.  Answer

Exercise 3

Source BRW September 1999 http://www.brw.com.au . Your school or public library may be the best location to access a hard copy of this issue.

1. What are the views of Richard Martin on the globalisation of the workforce.  Answer

Exercise 4

1. Calculate the value of the US$50 000 export contract at the new exchange rate.  Answer

2. Describe one appropriate method that the company could use to reduce the financial risks in global trading.  Answer

Exercise 5

Use the information in the tutorial to answer the following questions.

1. Outline the problems faced by “unskilled workers”.  Answer

2. Suggest one reason for the rapid growth in the global derivatives market in the past ten years.  Answer

More

Australian Stock Exchange web site has very detailed information on options trading.

The Sydney Futures Exchange has a very good section on how to trade on the futures market.

The Chicago Board of Trade web site has an excellent glossary and information relating to futures trading.

Community Aid Abroad’s Nike Watch Campaign web page has some good press releases on the operation of the company in China, Vietnam and Indonesia.

Sydney Morning Herald web site.

Search the archives for articles relating to the corporate collapses of One Tel and Ansett Airlines. Research the impact of the corporate failure on the workforce and how recent labour market reforms in Australia may have contributed to the problem.