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Unit 2 - Session 2.1 - The Global Economy
Unit 2 - Session 2.1 - The Global Economy
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movement of goods, services, and capital across borders. It also refers to the movement
of people (labor) and knowledge (technology) across international borders.
In economic terms, globalization is nothing but a process making the world
economy an organic system by extending transnational economic processes and
economic relations to more and more countries and by deepening the economic
interdependencies among them (19).
the last 100 years or roughly two-thirds of world export (23). Transnational corporation
otherwise known as multi -national corporation is a corporation that has a home base, but
is registered, operates and has assets or other facilities in at least one other country at
one time (24). Examples are the US-based General Electric (GE), the Coca-Cola Company
of Atlanta, Georgia, US Nike and others.
In the 19th century the advent of globalization approaching its modern form is
witnessed. A short period before World War I is referred to as golden age of globalization
characterized by relative peace, free trade, financial and economic stability (29). Growth
in international exchange of goods accelerated in the second quarter of the 19 th century.
Global economy in the 19th and 20th centuries grew by an average of nearly 4 percent per
annum, which is roughly twice as high as growth in the national incomes of the developed
economies since the late 19th century (30).
International monetary system (IMS) refers to a system that forms rules and
standards for facilitating international trade among the nations. It helps in reallocating the
capital and investment from one nation to another. It is the global network of the
government and financial institutions that determine the exchange rate of different
currencies for international trade. It is a governing body that sets rules and regulations by
which different nations exchange currencies with each other (31).
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especially trade and investment (32). It also reflects economic power and interests, as
In 1870 to 1914, with the help of gold and silver, trade was carried without any
institutional support. Monetary system during that time was decentralized while market
based and money played a minor role in international trade in contrast to gold.
Gold Standard is a system of backing a country’s currency with its gold reserves.
Such currencies are freely convertible into gold at a fixed price, and the country settles all
its international trade transactions in gold (35)
After World War I, the use of gold declined due to increased expenditure and
inflation which were caused by war. Major economic powers were on gold standards but
could not maintain it and failed because of the Great depression in 1931.
Since the United States held most of the world’s gold, all the nations would
determine the values of their currencies in terms of dollar. The central banks of nations
were given the task of maintaining fixed exchange rates with respect to dollar for each
currency. The Bretton Woods system ended in 1971 as the trade deficit and growing
inflation undermined the value of dollar in the whole world. In 1973, the floating exchange
rate system, also known as flexible exchange rate system was developed that was market
based (36).
To assess whether the gold standard was successful, the following roles of a
properly designed IMS must be considered: to lend order and stability to foreign exchange
markets, to encourage the elimination of balance-of-payments problems, and to provide
access to international credits in the event of disruptive shocks (37). The gold standard
has never worked satisfactorily in controlling inflation or maintaining equilibrium in
international transactions.
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However, over the past decade, the build-up of macroeconomic imbalances, and
the imprudent fiscal policies of some Member States, resulted in the continuing double
crisis in banking and sovereign. As a result of this crisis, many individual Member States
face difficult re-adjustment processes, and Members States collectively must reappraise
the governance architecture of Monetary Union and adopt new mechanisms to detect,
prevent, and correct problematic economic trends (38).
The European Monetary System (EMS) on the other hand is a 1979 arrangement
between several European countries which links their currencies in an attempt to stabilize
the exchange rate. This system was succeeded by the European Economic and Monetary
Union (EMU), an institution of the European Union (EU), which established a common
currency called the euro.
The EU in 2010 in response to the crisis enacted the three- pillar financial rescue
program which includes: the European Financial Stability Mechanism, the European
Financial Stability Facility, the financial assistance of International Monetary Fund (IMF).
Since the three -pillar system is temporary EU in 2013 activated its own permanent
European Stability Mechanism. The future of EMU depends on the willingness of member
states to agree on more fundamental changes in the governance of Eurozone.
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budget of the European Union as collateral. The European Financial Stability Facility
(EFSF) on the other hand, is an organization created by the European Union to provide
assistance to member states with unstable economies. The EFSF is a special purpose
vehicle (SPV) managed by the European Investment Bank, a lending institution. The fund
raises money by issuing debt, and distributes the funds to eurozone countries whose
lending institutions need to be recapitalized who need help managing their sovereign debt
or who need financial stabilization (40).
International trade is the exchange of goods, services and capital across national
borders. It is a multi-million dollar activity, central to the Gross Domestic Product (GDP)
of many countries, and it is the only way for many people in many countries to acquire
resources (41). In acquiring products where demand is inelastic and domestic supply is
inadequate absent traders, consumers and suppliers are forced to either develop
substitute goods or devote a large percentage of their income.
Trade policies on the other hand refer to the regulations and agreement of foreign
countries (45). It defines standards, goals, rules, and regulations that pertain to
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trade relation between countries (46). Each country has specific policies formulated by its
officials. Boosting the nation’s international trade is the aim of each country. Taxes
imposes on import and export, inspection, regulations, tariffs and quotas are all part of
country’s trade policy.
Tariffs
These are taxes or duties paid for a particular class of imports or exports.
Imposing taxes on imported and exported goods is a right of every country. Heavy
tariffs on imported goods are levied by some nations for the protection of their local
industries. The prices of imported goods in local markets are inflated due to high
imported taxes to ensure demand of local products.
Trade barriers
Safety
This ensures that imported products in the country are of high quality.
Inspection regulations laid down by public officials ensure the safety and quality
standards of imported products.
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To regulate the trade and business relations between two nations, this policy
is formed. Under the trade agreement the national trade policies of both the nations
and their negotiations are considered while bilateral trade policy is being
formulated.
International Trade Policy
This defines the international trade policy under their charter like the
International economic organizations, such as Organization for Economic Co-
operation and Development (OECD), World Trade Organization (WTO) and
International Monetary Fund (IMF).The best interests of both developed and
developing nations are upheld by the policies.
The World Trade Organization (WTO) deals with the global rules of trade between
nations with the main function of ensuring that trade flows smoothly, predictably and freely.
It is the only global international organization dealing with the rules of trade between
nations with WTO agreements, negotiated and signed by the bulk of the world’s trading
nations and ratified in their parliaments at its heart (48). WTO is viewed as the means by
which industrialized countries can gain access to the markets of developing countries (49).
especially prevalent in areas where complex projects are the norm like construction and
information technology (52).
Outsourcing is a means of finding a partner with which a firm can establish a
bilateral relationship and having the partner undertake relationship-specific investments
so that it becomes able to produce goods and services that fit the firm’s particular needs.
Often, the bilateral relationship is governed by a contract, but even in those cases the legal
document does not ensure that the partners will conduct the promised activities with the
same care that the firm would use itself if it were to perform the tasks (53).
One of the most rapidly growing components of international trade is the
outsourcing of intermediate goods and business services. There are three essential
features of a modern outsourcing strategy.
1. Firms must search for partners with the expertise that allows them to perform
the particular activities that are required.
2. They must convince the potential suppliers to customize products for their
own specific needs.
3. They must induce the necessary relationship-specific investments in an
environment with incomplete contracting.
2. The technology for search affects the cost and likelihood of finding a suitable
partner.
3. The technology for specializing components determines the willingness of a
partner to undertake the needed investment in a prototype.
4. The contracting environments can impinge on a firm’s ability to induce a
partner to invest in the relationship.
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References:
The Global Economy
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http://www.un.org/en/development/desa/policy/cdp/index.shtml
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53. Marsh, P. (2001). “A Sharp Sense of the Limits of Outsourcing”. The Financial Times, 31 July, 10
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