CHAPTER 4

GLOBAL ECONOMY
OUTLINE

• Economic Systems
• International Trade
a)Trade Theories
b)Three Perspectives on International Trade
• Transnational Corporations
• International Economic Institutions and Market
Integration
Economic Systems

• The global economy of most countries is classified into

there categories: market, command, and mixed
economies.
• In countries where democracy prevails, its economic
system is usually under freedom, choice, and decisions of
its citizens.
• While countries that are under the control of a single
political party and authority, its system could be under the
practice of command economy.
MARKET ECONOMY • Decision making of private individuals Hongkong

• Economy under the will and interest of the individuals.

New Zealand
• Economic freedom to purchase and sell products, services, and properties.
Australia
• This condition is not planned by a single person or group that has the ability to manipulate or direct
the economy solely.
Switzerland
• It promotes competition among business and firms.

COMMAND ECONOMY • A central economic planning body handles the entire decision making. North Korea

• The quality and quantity of goods and services produced is based on the decision of the government.
Cuba
• Production quantity is dictated, consumer behavior is directed, and market operation is controlled by a
single authority. Russia

• Its objective is to mobilize resources for the common good of the public and for the interest of the
nation. China

• Private individuals have no say in the economic operation.

MIXED ECONOMY • Market-driven economies Philippines

• Combination of market and command economies.

United States
• Some sectors are under the directions of the private individuals while other aspects of the economy are
left within the guidance of the government. United Kingdom

• State can take over the ownership and operation of a private company for the purpose of maintaining
the interest of the nation. France
International Trade

• The process and the system when goods, commodities, services

cross national economy, and boundaries in exchange for money
or goods of another country (Balaam and Veseth, 2008).
• Global trade has grown dramatically since the post-cold war era
because of increasing demand of goods and services and
countries.
• This global norm reflects growing practice of internationalizing
and globalizing local products and services.
 1. Descriptive Theory – it deals
with the natural order and the
movement of trade. It describes the
pattern of trade under the idea of
laissez faire, a French term which
means “leave alone”.
Trade It refers to the notion that individuals
are best economic agents to solve the
Theories problems through invisible hand
rather than government policies.
It also addresses the questions which
product to trade, how much product
to offer and produce, and which
country to trade in the absence of
government restrictions.
 2. Prescriptive Theory - it
prescribes whether government,
an important economic
institution, should interfere and
restrict with the movement of
Trade goods and services.
Theories This theory views government to
have participation in deciding
which countries to alter the
amount, composition, and
direction of goods.
Three Perspectives on International Trade

1. Economic Liberals
• For David Ricardo, his influential work, Law of Comparative Advantage
explains that free trade efficiency is attainable if two countries can
produce more goods and trade products separately. The advantage of this
theory in international trade is deriving principle of specialization and
division of labor of Adam Smith (Nau, 2009). Countries have different
resources and talents; they are better in performing in that economic
activity than other economic activities.
• Economic liberals explain the importance of free trade and the role of
individual’s preference in choosing economic activity. It includes making
decision, and choices on comparing the costs of products to be produced
and traded, the availability of the product, and the efficiency of producing
and buying products.
Three Perspectives on
International Trade

2. Mercantilists
• Mercantilism is an economic theory emerged from
about 1500-1800. This period was the emerging eras of
nation-states and the formation of more central
governments. This system flourished due to the
following reasons:
a. Higher export than import. Governments imposed
restrictions and policies requiring economy ant its market
to produce higher export that products and services
purchased outside the country or import. Countries used
this mechanism to support their trade objectives and
strengthen their colonial rule and possessions.
b. Export less high valued product and
import less high valued product. It prevented
and monopolized the production and
manufacturing operation of the colonies.
c. The benefits of colonial powers.
Mercantilism is adopted to increase and sustain
the colonial power and its authority to direct
and control the economic activity of the colony.
Three Perspectives on International Trade

3. Structuralists
• The Modern World System (MWS) theory developed by Immanuel
Wallerstein, explain the contact of economies between core, semi-
peripheral, and peripheral countries in the world.
• The core states have the absolute advantage over the other through
unequal exchange and extraction of raw materials from the periphery
and semi-periphery.
• This system as part on the structure of the global capitalism, involves
exploitation, and transformation in some ways.
Transnational Corporations

• The role of Multinational Corporation (MNCs) in the 21st is distinct and

interesting to investigate. The movement of ideas, capital, investment,
technology, and people are affected by the operations of MCNs.
• As the global economy is becoming complex and competitive, MCNs
continue to offer innovations and new product and services. For several
years, the term MCNs was used to refer to a firm operating in different
countries around the world. Because of the magnitude of global production
and networks, the term transnational corporation (TNC) became the more
acceptable name.
• This refers to business organizations and firms that compete in regional or
global markets. It operates in countries and makes investments in
research, technology, facilities, distribution, and production.
• TNC can control and monopolize
the global market especially if it
has huge pool of resources
making it one of the most
powerful economic actors in the
world.
• The number of TNCs from north
and west has business operations
in the south where cheap labor
and raw material are available.
• TNCs are very powerful economic Transnational
institutions because of their global
influence in investment and
Corporations
network distribution.
• The formation of economic integration is designed to address and
enhance the level of competitiveness of member economies in
trade.
• Free trade is the primary consideration of regional economic
integrations.
• Free Trade Area (FTA) is a trading bloc which involves the
reduction of internal tariffs to zero of member economies while
retaining different external tariffs. This policy aims to promote free
flow of goods and services as well as to increase the volume of
trade within the region.

International Economic Institutions

and Market Integration
• Unfair Trade is the conduct of trade International
by a business fir or government that Economic
violates and breaks the international Institutions and
trade agreements that are
unjustifiable and discriminatory. Market
Integration
• Examples of common trade practices
are issues relating to price, labor,
wages, health, and environmental
concerns that failed to meet the
regulatory standards of the body.
 • In 1995, General Agreement on
Tariffs and Trade (GATT) of the
American government was
replaced and succeeded by
World Trade WTO with 151 members as of
Organization 2008 and accounts for 90% of
(WTO) the world’s trade. It is based in
Geneva, Switzerland and leads
by a director general selected
by consensus among its
members.
World Trade Organization (WTO)

• Primarily, WTO has the following main functions:

a. Implementation of the latest GATT agreements
b. A venue for trade negotiations
c. A dispute settlement body responsible for resolving trade
problems
d. Review and assess national and international trade laws and
policies
e. Assist members and developing economies by providing
technical assistance and training programs
 • Officially called the
International Bank for
Reconstruction and
Development (IBRD), or World
Bank is an international agency
with 189 member-countries
World Bank operating in 130 countries
worldwide.
• Formed by Bretton Woods
agreement in 1944 to finance
the reconstruction of war-torn
countries brought by the
devastation of World War II.
World Bank

• World Bank is composed of four associated agencies:

a. International Development Association (IDA). This agency
focuses on poor and third world economies in the world by providing
financial assistance and load program.
b. International Finance Corporation (IFC).
c. Multilateral Investment Guarantee Agency (MIGA).
d. International Settlement Centre of Investment Disputes (ISCID).
 • IMF was created as the flagship
institution of Bretton Woods
agreement with 189-member
countries.
• IMF is responsible in supervising
exchange rate system, providing loan
programs to economies experiencing
International balancing payments adjustments, and
review domestic economic policies.
Monetary • Its mandated to ensure the stability of
Fund (IMF) the international monetary system
including exchange rates and
international payments.
• It reflects on the amount owed by the
country from another country as well
as indicates the economic operation
like what it produces, consumes, and
buys with its money
 • European Union (EU) is a political economic
regional organization of 28 member-
economies in Europe.
• Founded in 1985, European Economic Country
(EEC) was formed by six countries: Belgium,
Germany, France, Italy, Luxembourg, and
Netherlands.
European • Since then, other European countries joined
Union the regional bloc making it as Europe’s most
influential and powerful body.
• EU is guided by its core values, considered as
integral part in the way of life of its citizens.
• It believes on the following value orientation:
(1) Human dignity, (2) freedom, (3)
democracy, (4) equality, (5) rule of law, and
(6) human rights.
 • The Association of Southeast Asian
Nation (ASEAN) was founded on
August 1967 in Bangkok Thailand
with Indonesia, Malaysia,
Philippines, Singapore, and Thailand
Association of as its founding fathers.
Southeast • Brunei Darussalam, Vietnam,
Myanmar, and Cambodia joined the
Asian Nations organization making up today the 10
member-countries.
(ASEAN) • The ASEAN Political-Security
Community, ASEAN Economic
Community, and ASEAN Socio-
Cultural Community are the three
main pillars of ASEAN.
Association of Southeast Asian Nations
(ASEAN)
• As stated in the Treaty of Amity and Cooperation in South East Asia (TAC) of
2976. The ASEAN Community functions under its six fundamental principles
(ASEAN.org).
a. Mutual respect for the independence, sovereignty, equality, territorial
integrity, and national identity of all nations;
b. The right of every State to lead its national existence free from external
interference, subversion or coercion;
c. Non-interference in the internal affairs of one another;
d. Settlement of differences or disputes by peaceful manner;
e. Renunciation of the threat or use of force; and
f. Effective cooperation among themselves