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Study Guide in GE 5: Contemporary World Module No.2

STUDY GUIDE FOR MODULE NO. 2

THE GLOBAL ECONOMY

MODULE OVERVIEW

What is meant by the global economy? We see the term and its offshoots in newspapers and
we hear about globalization on television. We see images of protesters railing against its perceived
evils, while the Chairman of the Federal Reserve Bank praises it for economic growth here in the
US and also abroad. Well, the first thing to do is to define what we in this course mean by the global
economy. There are a variety of definitions, all of which have at their core, the economic interactions
among the community of nations. In this module overview of the global economy we have two major
tasks. First is a description of the community of nations and peoples who are its citizens. We will
become more familiar with this community as we do our journals. The second task is a description
of the economic interactions that occur between nations. These include international trade in goods
and services, the international flow of financial capital, investments by multinational corporations,
migration of workers.

MODULE LEARNING OBJECTIVES

• Discuss economic globalization.

• Identify the global actors/international financial institutions and explains their
roles in the creation of a global economy.
• Discuss international trade, the concept of comparative advantage, and the benefits and
drawbacks free trade.
• Identify the actors that facilitate economic globalization.

MODULE CONTENT

The International Economy and Globalization from International Economics by Robert J.

Carbaugh

In today’s world, no nation exists in economic isolation. All aspects of a nation’s economy—
its industries, service sectors, levels of income and employment, and living standard—are linked to
the economies of its trading partners. This linkage takes the form of international movements of goods
and services, labor, business enterprise, investment funds, and technology. Indeed, national economic
policies cannot be formulated without evaluating their probable impacts on the economies of other
countries.
The high degree of economic interdependence among today’s economies reflects the historical
evolution of the world’s economic and political order. At the end of World War II, the United States
was economically and politically the most powerful nation in the world, a situation expressed in the
saying, ‘‘When the United States sneezes, the economies of other nations catch a cold.’’ But with the
passage of time, the U.S. economy has become increasingly integrated into the economic activities of
foreign countries. The formation in the 1950s of the European Community (now known as the
European Union), the rising importance of multi-national corporations in the 1960s, the 1970s market
power in world oil markets enjoyed by the Organization of Petroleum Exporting Countries (OPEC),
and the creation of the euro at the turn of the twenty-first century all resulted in the evolution of
the world community into a complicated system based on a growing interdependence among nations.

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Recognizing that world economic interdependence is complex and its effects uneven, the
economic community has made efforts toward international cooperation. Conferences devoted to
global economic issues have explored the avenues through which cooperation could be fostered
between industrial and developing nations. The efforts of developing nations to reap larger gains from
international trade and to participate more fully in international institutions have been hastened by the
impact of the global recession on manufacturers, industrial inflation, and the burdens of high-priced
energy.
Over the past 50 years, the world’s market economies have become increasingly integrated.
Exports and imports as a share of national output have risen for most industrial nations, while foreign
investment and international lending have expanded. This closer linkage of economies can be mutually
advantageous for trading nations. It permits producers in each nation to take advantage of
specialization and efficiencies of large-scale production. A nation can consume a wider variety of
products at a cost less than that which could be achieved in the absence of trade. Despite these
advantages, demands have grown for protection against imports.
Protectionist pressures have been strongest during periods of rising unemployment caused by
economic recession. Moreover, developing nations often maintain that the so-called liberalized trading
system called for by industrial nations serves to keep the developing nations in poverty.
Economic interdependence also has a direct consequences for a student taking an introductory
course in international economics. As consumers, we can be affected by changes in the international
values of currencies. Should the Japanese yen or UK pound appreciate against the U.S. dollar, it would
cost us more to purchase Japanese television sets or UK automobiles. As investors, we might prefer to
purchase Swiss securities if Swiss interest rates rise above U.S. levels. As members of the labor force,
we might want to know whether the president plans to protect U.S. steel and autoworkers from foreign
competition.
In short, economic interdependence has become a complex issue in recent times, often resulting
in strong and uneven impacts among nations and among sectors within a given nation. Business, labor,
investors, and consumers all feel the repercussions of changing economic conditions and trade policies
in other nations. Today’s global economy requires cooperation on an international level to cope with
the myriad issues and problems.
(Carbaugh 2009)

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International Trade
from Edexcel Economics
by Quintin Brewer

Globalization has led to a phenomenal increase in world trade. One measure is to consider exports as
a proportion of world GDP.

The pattern of world trade has also been greatly affected by the entry of China as a major manufacturer.

The law states that, even if one country has an absolute advantage in the production of all
goods, it can
still benefit from specialization and trade, if it specializes in the production of goods in which it has a
comparative advantage.
A country has a comparative advantage in producing a product if the opportunity cost of

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producing it is less than its potential trading partner.

Say the UK take 5 hours to make cheese, and China 1. Also, the UK takes 15 hours to make
cars, but China 2. China clearly has an absolute advantage in producing both cars and cheese. However,
look at the opportunity cost. The UK gives up 3 cars if it producing 1 cheese. China gives up 2 cars if
it’s producing 1 cheese. Therefore China has a comparative advantage in cheese production. The UK
gives up 1/3 a car if it produces one cheese, and China gives up 1/2. So, the UK has a comparative
advantage in car production. Therefore, the UK should specialize in producing cars, and China should
produce cheese. For trade to be beneficial, the terms of trade must lie between the opportunity cost
ratios. In other words, the UK will only trade for cheese with china if the price is above 1/3 of a car,
and China will only trade if its below ½ of a car.

Terms of trade = (index of export prices / index of import prices) x 100

You should note that, if opportunity costs were the same, then there would be no benefit from
specialization and trade.
However, widespread acceptance of the law of comparative advantage amount economists and
thebenefits of free trade, various criticisms can be made:
• Free trade is not fair trade i.e. the rich countries might exert their monopsony power to force
producers indeveloping countries to accept low prices.
• The law of comparative advantage is based on unrealistic assumptions such as constant costs
ofproduction, zero transport costs, and no barriers to trade.

Limits of free trade: the case for protectionism

The term protectionism refers to measures designed to limit free trade. Arguments supporting the need
for protectionism might include the following:

• To protect infant industries: this argument might be particularly relevant to developing

countries that are inthe process of industrialization. Without protection, infant industries might
be unable to compete becausethey have yet to establish themselves and are too small to benefit
from economies of scale.
• To protect geriatric industries: these are industries that might demand protection so that they
have time torestructure and rationalize production so that they can become competitive again.
Typically, these occur indeveloped economies that are losing their comparative advantage.
• To ensure employment protection: cheap imports might threaten jobs in the domestic economy
andworkers might demand that the government takes action to limit imports.
• To prevent dumping: the term dumping refers to goods exported to another country below at a
price below the average cost of production. It is a form of predatory pricing and, if it can be
proved, it is illegal under WTO rules. This is one of the few arguments in favor of protectionism
that can be justified under economic theory because it unfairly distorts comparative advantage
• To correct a balance of payments deficit on current account: restrictions on imports might help
to reduce the imbalance of between the value of import and the value of exports. However,
under the floating exchange rates system, it is possible that this correction will happen
automatically
• To restrict imports from counties whose health and safety regulations and environmental
regulations areless stringent: some argue that developing countries have an unfair comparative
advantage because production is not under the same laws and regulations as developed
countries, so enabling them to produce at lower average cost
• For strategic reasons: a country might introduce protectionist policies on goods of strategic

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importance in time of war so that it is not dependent on imports. Food, defense equipment and
energy are items frequently used as examples of such goods.
• To raise tax revenues: tariffs may be an important source of tax revenue for developing
countries.
• In retaliation: barriers to trade may be imposed by a country because another country has
restricted theimports of its goods.

Types of protection/import barriers

There are numerous ways by which free trade can be prevented. The most common are tariffs,
quotas and subsidies to domestic producers and administrative regulations. In countries where the
exchange rate is not freely floating, the authorities might also hold down the value of the currency
artificially to give their good a competitive advantage.

Tariffs

Before the tariff is imposed:

• the price paid by consumers is P1, domestic output is Q1, imports are Q1 to Q2.
Once the tariff is imposed:
• the price paid by the consumer increases to P2, reducing consumer surplus
• domestic output rises to Q4, increasing producer surplus
• imports fall to Q4Q3
• tax revenue collected by the government is KLMN
• net deadweight welfare loss is the loss in consumer welfare that is not made up for by producer
welfare or government revenue – X and Y

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Quotas

Import quotas place a physical restriction on the amount of goods that can be imported. They
have a similar effect as tariffs, in that the price of imported goods will rise and domestic producers
should gain more business.
However, unlike tariffs, the government does not gain any extra revenue.
Subsidies to domestic producers

Grants given to domestic producers artificially lower their production costs, so enabling their
goods to become more competitive. Subsidies therefore act as a barrier to trade

Administrative regulations
These take a variety of forms, including labelling, health and safety regulations, environmental
standards and documentation on country of origin. In effect, such regulations increase the costs of
foreign producers and so act as a barrier to trade.

The case against protectionism

There are several problems with protectionism including:

• Inefficient resource allocation: trade barriers distort comparative advantage and reduce
specialization, which will result in lower world output and therefore reduce living standards
• Higher prices and less choice for consumers
• Less incentive for domestic producers to become more efficient in order to compete on a global
scale
• Difficulty of removing trade barriers. Once such barriers are introduced, it might prove to be
difficult to remove them because of the adverse effect on domestic producers (Brewer 2012)

Global Actors

A global actor refers to any social structure which is able to act and influence and engage in
the global or international system. These specific actors include:

• International Economic and Financial Organizations. International economic and financial

organizations provide the structure and funding for many unilateral and multilateral
development projects. Such organizations deal with the major economic and political issues
facing domestic societies and the international community as a whole. Their activities promote
sustainable private and public sector development primarily by: financing private sector
projects located in the developing world; helping private companies in the developing world
mobilize financing in international financial markets; and providing advice and technical
assistance to businesses and governments. (Lund University Libraries, 2018)

• International Governmental Organizations (IGOs). IGOs have international membership,

scope and presence. Their primary members consist of sovereign states. These organizations
bring member states together to cooperate on a particular theme or issues that have global
impacts and implications such as human rights, trade, development, poverty, gender or
migration.

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• Media. Media are the communication outlets or tools used to store and deliver information or
data. The termrefers to components of the mass media communications industry, such as print
media, publishing, the newsmedia, photography, cinema, broadcasting (radio and television),
and advertising. (Wikipedia “Media,” 2019)

• Multilateral Development Banks. Multilateral development banks are international financial

institutionsowned by countries. In addition to the World Bank Group, there are four regional
multilateral developmentbanks: the Inter-American Development Bank, the African
Development Bank, the Asian Development Bank,and the European Bank for Reconstruction
and Development. These institutions provide loans, grants,guarantee, private equity and
technical assistance to public and private sector projects in developingcountries. (Lund
University Libraries, 2018)

• Nation-States. Nation-states refer to a certain form of state that derives its political legitimacy
from serving asa sovereign entity for a nation within its sovereign territorial space. The state is
a political and geopolitical entity while the nation is a cultural and/or ethnic entity. The term
"nation-state" implies that the two geographically coincide, and this distinguishes the nation
state from the other types of state, which historically preceded it. (Lund University Libraries,
2018)

• Non-Governmental Organizations (NGOs). Non-governmental organization (NGO) refers

to a legally constituted organization created with no participation or representation of any
government and driven. These organizations are task-oriented perform a variety of service and
humanitarian functions. Some are organized around specific issues such as human rights,
environment, gender, or health. In many jurisdictions these types of organization are defined
as "civil society organizations." (Lund University Libraries, 2018)

• Trans-National Corporations (TNCs). "Transnational Corporations exert a great deal of

power in theglobalized world economy. Many corporations are richer and more powerful than
the states that seek toregulate them. Through mergers and acquisitions corporations have been
growing very rapidly and some ofthe largest TNCs now have annual profits exceeding the
GDPs of many low and medium income countries. Itis important to explore how TNCs
dominate the global economy and exert their influence over global policy making." (Global
Policy Forum, 2005)

• United Nations (UN) System. The United Nations System consists of the United Nations, and
the six principal organs of the United Nations: the General Assembly, Security Council,
Economic and Social Council ,(ECOSOC), Trusteeship Council, International Court of Justice
(ICJ), and the UN Secretariat, specialized agencies, and affiliated organizations. The executive
heads of some of the United Nations System organizations and the World Trade Organization,
which is not formally part of the United Nations System, have seats on the United Nations
System Chief Executives' Board for Coordination (CEB). This body, chaired by the Secretary-
General of the United Nations, meets twice a year to co-ordinate the work of the organizations
of the United Nations System. (Wikipedia “United Nations System,” 2019)

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SUMMARY

In studying globalization, there are theories see globalization as a process that increases either
homogeneity or heterogeneity. Homogeneity refers to the increasing sameness in the world as cultural
inputs, economic factors, and political orientations of societies expand to create common practices,
same economies, and similar forms of government. On the other hand, heterogeneity pertains to the
creation of various cultural practices, new economies, and political groups because of the interaction
of elements from different societies in the world. Heterogeneity refers to the differences because of
either lasting differences or of the hybrids or combinations of cultures that can be produced through
the different trans-planetary processes.

Regionalization is the tendency to form decentralized regions. ... In politics, it is the process of
dividing a political entity or country into smaller jurisdictions (administrative divisions or subnational
units) and transferring power from the central government to the regions; the opposite of unitarization.
Regions helps to protect public relations of globalization from negative impact and act as an
independent subject of international relations. ... They can be as : Multipolar world theory, the theory
of large spaces, the theory of convergence and regional joint doctrine.

Activity 1

Global Products Market Survey

Go to SM or any shopping center and then take a global product survey of imported items or goods
sold in the shopping mall. Use and fill in the chart provided below. After filling in the chart, take a
picture of your visit to the mall using your smartphone and then paste it on the space provided on the
next page.

Item Price Country Company

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Paste your Pictures here.

Activity 2

Instructions: Answer the following questions below. Answers must be brief, clear and concise.
Avoid circular arguments. Write your answer in a coupon bond/yellow paper. Answers must be
brief, clear and concise. Avoid circular arguments.

1. Do you agree or dis-agree that economic globalization divide/unite the world? Why or Why
not?
___________________________________________________________________________
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___________________________________________________________________________
___________________________________________________________________________
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___________________________________________________________________________
___________________________________________________________________________

2. Do you believe in “buying Filipino” even if you have to pay a higher price?
___________________________________________________________________________
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___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

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RUBRIC

REFERENCES

Aldama, Prince Kennex R. The Contemporary World First Edition.Rex Bookstore, Inc. 2018.

Steger, Manfred B., Paul Battersby, and Joseph M. Siracusa, eds. 2014.The SAGE Handbook of
Globalization. Two volumes. Thousand Oaks: SAGE Publications.

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