Chapter 2: The Global Economy done by firms and companies that have the

sources and capital to operate in a

ECONOMIC GLOBALIZATION
transnational market.
According to the United Nations, economic
2. Cost reduction and increase of profit.
globalization refers to the increasing
interdependence of world economies as a » A market leader for a particular good or
result of growing scale of cross-border trade of service may garner a lower production cost by
commodities and services, flow of international increasing its market in global rather than
capital, and wide and rapid spread of domestic. This enables a firm to increase its profit
technologies. while reducing its operating costs.

Economic globalization primarily comprises the 3. Cheaper supplies.

globalization of production, finance, markets,
» A country imports goods from other countries
technology, organizational regimes,
because of inexpensive raw materials and
corporations, and people. Nation-states,
supplies used for production. The availability of
international governmental and non-
buying cheaper materials from other materials
governmental organizations, global
from other countries lowers the costs in
corporations, and international financial
production which might result to an increase in
institutions are global actors that facilitate the
the profit of businesses.
economic activities of the world economy.
4. Addition to product line
Two types of economic policies
» Economies usually aim for a variety of products
Protectionism = “a policy of systematic
and services available in the market. It offers
government intervention in foreign trade with
consumer to choose and buy products that are
the objective of encouraging domestic
of competitive prices, having a high degree of
production.
importance and will offer higher satisfaction.
Trade liberalization = the removal or reduction
5. Reduction of risk
of restrictions or barriers on the free exchange
of goods between nations. » Importing products is seen as an alternative to
countries that are vulnerable to supply
International Trade
shortage. These countries that have high
= is the process and system when goods, volume of imported goods are economies that
commodities, services cross national economy confront the demand and supply condition of
and boundaries in exchange for money or the local market.
goods of another country (Balaam and Veseth,
6. Foreign policy tool
2008). Global trade has grown dramatically
since the post-cold war era as a result of » The membership of a country to regional
increasing demand of goods and services of market integration and economic relationships
countries. This global norm is a reflection of is part of its foreign policy. Enhancing the
growing practice of internationalizing and economic and political affiliation of a country is
globalizing local products and services. a very important move in sustaining its
international status in a global environment.
Why do countries engage in international
trade? Modern World System
1. Use of excess capacity in demand The Modern World System (MWS) theory
developed by Immanuel Wallerstein, is an
» The inadequate domestic demand pushes
approach to world history and social change
business organizations to expand their market
that suggests there is a world economic system
base outside the national territory. This is usually
in which some countries benefit while others are
exploited.
The world systems theory is established on a
three-level hierarchy consisting of core,
periphery, and semi-periphery areas. This theory
emphasizes the social structure of global
inequality.
a. Core Countries - are dominant capitalist
countries that exploit peripheral countries for
labor and raw materials. They are strong in
military power and not dependent on any state
or country. They are focused on higher skill and
capital-intensive production.
b. Semi-periphery - plays a significant role when
it comes to stabilizing world systems since it
facilitates interactions and connections
between high-income states and low-income
states. Also referred to as the middle-class, they
exist to divide the economic power between
periphery and core areas.
c. Periphery Countries - lack a strong central
government and possesses a disproportionately
small share of the world’s wealth. These areas
are less developed than the core and semi-
periphery. These countries export raw materials
to the core countries; are often dependent on
more developed nations for capital; and have
underdeveloped industry. These countries also
have low-skill, labor-intensive production, or in
other words, cheap labor.
Market Integration
Economic internet integrations
= 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 internatintegrations to zero
of member economies but retaining its different
external affairs. This policy aims to promote free
flow of goods and services as well as increase
the volume of trade within the region.
The world’s major free trade areas are North
American Free Trade Agreement (NAFTA),
European Union (EU), Association of Southeast
Asian Nations (ASEAN), Common Market of
Eastern and Southern Africa (COMESA), and
Southern Common Market/Mercado Comun
del Sur (MERCOSUR).
Market Integration
= Market Integration occurs when prices among
different locations or related goods follow
similar patterns over a long period of time.
Types of Market Integration:
1. Horizontal Integration - This occurs when firms
or agency gains control of other firms or
agencies performing similar marketing functions
at the same level in the marketing sequence. In
this type of integration, some marketing
agencies combine to form a union with a view
to reducing their effective number and the
extent of actual competition in the market.
(Examples: Walt Disney’s acquisition of 21st
Century Fox and Pixar Animation Studios,
Facebook’s acquisition of Instagram)
2. Vertical Integration - This occurs when firms
perform more than one activity in the sequence
of the marketing process. It is a linking together
of two or more functions in the marketing
process within a single firm or under a single
ownership. This type of integration makes it
possible to exercise control over both quality
and quantity of the product from the beginning
of the production process until the product is
ready for the consumer.
a. Forward Integration - It occurs when a
company decides to take control of the post-
production process.
b. Backward Integration -It occurs when a
company decides to buy another company
that makes an input product for the acquiring
company’s product.
3. Conglomeration - The process whereby a firm
expands by supplying a range of different
products and, as such, operates in several
markets rather than a single market.
The World Bank
 To lend money to war-ravaged countries
The International Monetary Fund (IMF)
3 Areas of responsibility
1. Surveillance - Observing global trends and
advising on macroeconomics issues
2. Technical Assistance - Assisting low and
middle income countries in managing their
economies

(Example: In addition to phones and other 3. Lending - Providing support to help countries
electronics, Samsung builds ships, undertakes avoid balance of payment deficit and
major construction projects, and is involved in potential bankruptcy
businesses that include food processing, textile The World Bank
manufacturing, insurance, financial products,
and consumer retail).  Largest public development institution in
the world (2010 - 72 billion)
Bretton Woods System
Area focus
Influenced by the ideas of British economist
John Maynard Keynes who believed that 1. Africa
economic crisis occurs not when a country does 2. Post-conflict countries
not have enough money, but when money is
not being spent and thereby, not moving. When 3. Fragile States
economies slow down, according to Keynes,
Project Focus
governments must reinvigorate markets with
infusions of capital. 1. Public Institutions (e.g. Schools/Hospitals)

The Bretton Woods System 2. Infrastructure (e.g. Electricity,Ports)

 World Bank 3. Cross border issues (e.g.Trade,Disease)

 International Monetary Bank

July 1994

 44 Allied Countries meet in the USA

Purpose was to create a system which avoided:

 World War III

 Great Depression II

The International Monetary Fund (IMF)

 To monitor exchanges rates

 To lend reserve currencies to nations with
trade deficits
 To encourage and further international
trade