Impact Of Globalization On The Economy Of Australia

Globalization is the process that helps a national economy to become more incorporated as well as interdependent with another national economy. Globalization has been a continuing process for centuries. Globalization can also be usefully be imagined as a procedure that exemplifies a transformation in the spatial organization. Four types of changes mainly characterize it. The changes include stretching of social, economical as well as political activities across political borders and continents. Globalization mainly suggests about strengthening as well as growing magnitude and flow of investment. Globalization can also be thought of as a process that Broaden and intensifies the increasing impact of worldwide interconnectedness. To advance an account of globalization it is required to turn from a general concern with the conceptualization to an inspection of the main domains of action and communication in and through which international processes develop. Globalization had also helped global to expand to an unprecedented level both absolutely and relatively in relation to national income. It can also be located on a range lie social and economic association as well as networks that come together on the broader scale of regional and international communication. Globalization can refer to those spatial-temporal procedures of modification that strengthen a alteration in the organization of human relationships by connecting jointly and expanding human movement across regions and continents. However, the idea of globalization is not supported in the Australian economy. This is mainly because; globalization had led to increase in inequality in the developed country like Australia. The economic and social changes that have taken place due to globalization had generated dislocation and hardship in the economy. As the economy of Australia developed further, there was a shift in the manufacturing base industry in Australia. The companies in Australia did not find it feasible to do the regular manufacturing jobs in a high-wage country like Australia that can be easily performed in low-wage countries (Hirst, Thompson and Bromley 2015).

Australia had also faced the problem related to wage immobility that has mainly taken place due to outsourcing of equality. This has mainly taken place due to trading with low-wage countries. These countries could perform the same tasks for subordinate pay. This in turn, intimidates the lower end of the economy of Australia. Due to globalization, the financial markets in Australia also were deregulated and rendered to international competition. Globalization is used to describe the fact that trade has increasingly exceed national borders in their production. Globalization touches every characteristic of economic and social life. Successive Australian Governments have generally moved away from guideline of monetary activity towards liberalization in order to position the Australian financial system (Stromquist and Monkman 2014).

Globalized companies have invariably affected households in Australia. Existing statistics is able to provide some insights into globalization occurrence. The ABS is presently electioneering user views on the requirement and priority for globalization statistics. The user of statistics requires being aware that a business should provide data at diverse level of the business hierarchy. The indicators of globalization measures different attributes of overseas-owned businesses that need to be compared with indicators for Australian owned businesses. The attributes that is chosen could be business accounting data as well as economic measures that includes turnover as well as employment global trade. In respect to Australian owned businesses overseas, various globalization indicators in the areas of industry as well as manufacturing sector and foreign associated trade may be justified. Globalization needs to be classified in such a way so that the country gets benefited rather than being destroyed (Zajda 2013).

The companies in Australia that were formerly performing basic manufacturing have now outsourced their manufacture of commodities either through foreign direct investment or through delegating to low-wage countries. This is mainly because the key factor of production for most of the customer items is economical labor that is scarce in Australia. As a result, Australia would import the commodities that are made from locally scarce factor. As per Porter’s competitive advantage theory, Australia is progressively importing these labor concentrated products that included textiles as well as paper. This resulted in decrease of the manufacturing sector in Australia as a percentage of GDP. Due to globalization, manufacturing in Australia had declined for the 26^th successive month. The increasingly global trade had facilitated the growth in world moneymaking distribution system. This in turn, led to increased international competition amongst the motor vehicle industry manufacturers in Australia (Thangavelu and Chongvilaivan 2013).

(b) Globalization provides great opportunity to all countries in order to improve in many areas. The countries that are engaged in free trade are able to exchange goods and resources. This indicates that the countries can specialize in producing goods where they have a comparative advantage. Once countries specialize in producing goods they are likely to gain from globalization. The countries that are able to produce goods in diverse parts of the world due to globalization are also able to gain from globalization. Countries that are able to attract short-term and long-term investment due to globalization are also able to gain from globalization. This is mainly because; investment by multinational companies plays a big role to improve the economies of developing countries (Jaumotte, Lall and Papageorgiou 2013).

The developing countries mainly losses from globalization as free trade are likely to harm the countries. This is mainly because; free trade mainly benefits the developed countries. The countries, that have increased the use of non-renewable resources also losses from globalization. This is mainly because; increase use of non-renewable energy will lead to increase in global warming and population. Due to globalization, the countries that start losing the skilled workers will lose whereas; the countries that are able to attract the skilled workers with higher wages win from globalization. Globalization had also led to less cultural diversity and as a result, the countries that face less cultural diversity lose due to globalization (Staeheli 2016).

Both the substitution effect and the income effect support each other and as a result, law of demand applies to food just as it applies to other goods and services. Individuals generally substitute to other foods as the price of a particular food increases. If the price of restaurant food increases, some people can substitute the expensive restaurant food with homemade foods. The increase in price of the restaurant food also has a negative effect on income. As a result, people will purchase less food from the restaurants with overall increase in price. The quantity of food demanded is decreased due to higher prices of food (Varian 2014).

Figure: Substitution and Income Effect

(Source: Created by Author)

The diagram shows that substitution effect is the change in pattern of consumption due to change in the value of the relative prices of goods whereas; the income effect is the change in pattern of consumption due to change in purchasing power (Canto, Joines and Laffer 2014).

(b) According to the substitution effect, as the price of a product increases, a person prefers to replace more expensive items with relatively less costly alternatives. The substitution effect mainly represents the change in macroeconomic consumption pattern that takes place due to change in comparative price of goods. The graph shows the substitution effect with units of product A on the Y-axis and units of product B on the X-axis. The demand is concave between two products.

Figure: Substitution Effect

(Source: Created by Author)

As the price of food increases, people will substitute away from some foods and toward other foods and other activities. People might prefer to substitute diet for food and they might prefer to substitute cheaper foods for more costly foods (Phlips 2014).

(c) The graph shows that due to change in consumer income, the overall budget constraint shifts inwards as well as outwards. The shift is always a parallel shift. As the income of the customers decreases, the budget constraint shifts inwards. On the other hand, as the income increases the overall budget constraint will shift outwards. The outward shift of the budget constraint is shown by the budget constraint P₁L.

Figure: Income Effect

(Source: Created by Author)

Due to increase in price of food, the income of the people will decrease, as food is considered as a normal good. Restaurants in the United States mainly suffer as negative income effect from an advanced price of food directs individuals to cut back their trips to restaurants. In the poor countries, residents start eating less food as the price of food increases and in tremendously poor countries starvation rises.

The housing prices in Australia are continuing to increase amidst contemporary monetary growth. Sydney had witnessed the biggest increase with residential property prices swelling by 19.9 percent. Melbourne on the other hand, had witnessed residential property prices enlargement by 9.9 percent. In the year 2015, the average price of residential housing was AU$612,200. As per the International Monterey Fund (IMF), housing market hazard in Australia remain sensitive, especially in Sydney. Houses prices in Australia are predictable to be reasonably overrated by about 10 percent. In the metropolitan cities, land price are increasing because housing prices and affordability are related land price (Kulish, Richards and Gillitzer 2012).

Residential supply of land are affected by factors that include costs of development, the construction of the land development industry, comparative return from non-housing uses as well as efficiency of the land-use development system. Real price of land mainly increased in Australia due to increase in price of construction a residence. The strength of the housing market in Australia is also likely to witness a worst housing market due to overvaluation of housing prices. The increase in house prices had led to severely un affordability in though metropolitan cities of Australia. Out of the major markets in Australia, Sydney had been ranked as the second most unaffordable market. Rental yields in Australia have hit significant lows due to strong increase in housing prices.

The major drivers that are driving the price of houses in these cities are follows:

The rate of interest: At lower rate of interest lower repayments of mortgage takes place. This in turn, allows borrowers to borrow more at any given repayment-to-income ratio. As a result, other things being equal, the price of houses increases. Due to general economic recession, the rate of interest in Australia fell rapidly that in turn, contributed to increased housing price in the metropolitan cities like Darwin, Sydney and Melbourne (Justiniano, Primiceri and Tambalotti 2015).

Investment Demand: The increase in the investment in housing acts as an important driver that drives the price of houses in Australia. Increased investment demand mainly takes place due to tax benefits, fundamental socio-demographic factors, rising rental income as well a wider development in the economy.

Economic Climate: The increased housing prices had also been mainly due to good climatic condition in Australia. The good climatic condition was able to keep the rate of inflation under control and the rate of inflation had been incessantly falling. As a result, the average income of people is also rising. It has been found that the rate of unemployment has an important effect on real prices of housing in Australia.

Economical deregulation and innovation: The financial system in Australia is remarkably deregulated and as a result, the housing prices had increased in Australia.

Demography: Demographic factors had also acted as a major driver that had led to increase in housing prices. In other words, the increase in population growth increases the number of households that in turn increases the demand for housing as well as housing prices (Kiem and Austin 2013).

Economic Growth: There always exists a positive relation between income and demand for housing. In the metropolitan cities like Darwin, Sydney and Melbourne the income elasticity of demand for housing has the probability to be more. The long-term trend in real income is vital in order to explain the housing price.

Wealth Effect: Housing in Australia is considered as a major store of wealth. The gross housing assets in the metropolitan cities like Darwin, Sydney and Melbourne account for more than half of overall individual wealth. Landlord-investors in Australia feel more affluent with the increase in housing prices. This is mainly termed as the effect of wealth that leads to an enhance in consumption expenditure. Increase in housing prices mainly leads takes place through self-reinforcing cycle that is driven by aggregate demand and financial growth.

(b) The graph shows that there is always an inverse relationship between house prices and demand. At higher prices, owning a residence becomes more attractive and as a result, an individual becomes more likely to rent (Wright 2014).

Figure: Inverse relationship between house prices and demand

(Source: Created by Author)

The below graph shows that lower rate of interest insists people with surplus funds to invest more. As a result, they will get a better rate of return by investing in housing as compared to bank deposit account.

Figure: Lower rate of interest on house prices

(Source: Created by Author)

(c) In this case, the supply of land is perfectly inelastic. This is mainly because; sellers are not able to respond to increase in price of the factor of production by rising supply, as it cannot be generated anymore. Sellers mainly sell what they possess with no option of increasing supply that is followed by a rise in price. The supply is also comparatively inelastic as it takes longer time construct a new house (Fallis 2014).

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