COURSE CODE: GE 103

COURSE NAME: The

Contemporary World
COURSE MODULE: 2
AUTHOR

Dr.Leoncio P. Olobia
Olobia, L. Contemporary World. Leyte Normal University.

Module 2
Global Economy

Overview

Module 2 highlights globalization and its related concepts such as international trade, income
inequality, protectionism, among others. Globalization as a process of integrating economies
emphasizes mutual independence and interdependence of its member countries. International
trade emphasizes free flow of goods and services, mutual exchange giving rise to global
economy. However, protectionist policy like import tariff is implemented in order to regulate
infusion of imported products, thus, protecting local industries from foreign goods thus
restricting international trade.

The rest of the module discusses economic inequality, Global North and Global South
classifications signifying differences in economic performance, political power, among other
factors.

Objectives

At the end of this module, you are expected to

 Explain the meaning of globalization, income inequality, poverty

 Discuss the gains and losses of international trade
 Identify problems resulting from income inequality and poverty
 Compare and contrast Global North and Global South
 Reflect on issues surrounding globalization, income inequality, poverty and sustainable
development

DIRECTION: ANSWER ALL QUESTIONS IN THIS MODULE AND SUBMIT IN ONE EMAIL ONLY AS
MODULE 2.

Economic Globalization

Economic globalization refers to the increasing interdependence of world economics as a result

of the growing scale of cross-border trade of commodities and services, flow of international
capital, and wide and rapid spread of technologies (United Nations, 2000).
Let us dissect the definition. First, interdependence of world economies means that countries
are open economies that depend on other countries instead of an “autarky” (closed economy)
arising from independence and self-sufficiency.

Economic interdependence suggests free flow of goods and services in free trade agreements.
This is explained in the cross-border trade of commodities and services, meaning, trade is
already international, no longer domestic-based. Next, flow of international capital means that
capital in the form of money and other assets as investment forms move freely within nations
without restrictions. Investors in one country can bring their capital to other countries (capital
outflow) while foreign investors can bring capital domestically (capital inflow).

From the discussions, you will understand that globalization, indeed, opens up economies.
Technology plays a great role in the interdependence among nations. The rapid use of the
internet helps financial banks speed up transactions on a global scale. Proliferation of digital
economy such as e-commerce links sellers and customers globally boosting income levels.
Likewise, the rise of knowledge economy becomes inevitable in an age of information following
the digitization process sweeping the globe.

While international free trade means free movement of goods services between nations, some
restrictions are placed to protect local industries. These are called protectionist policies such as
import tariffs (taxes on imports) and import quotas (physical limit on importation of goods).
They help local producers fight against competition from foreign goods. Such encouragement
involves giving preferential treatment to domestic producers and discriminating against foreign
competitors (McAleese, 2007 as cited in Ritzer, 2015, p. 1169). In the next section, graphical
illustration of tariff will be discussed for better understanding of its intricacies.

For your deeper understanding on the technical aspect of tariff, you will study the following
graphical illustration and answer the following activities that follow.

Questions:
1. How does economic globalization take place?
2. What are some characteristics of international free trade?

A. Tariff
Figure 1 (Tariff)

Figure 1 is a graphical illustration of an import tariff (tax on imported good). P on the vertical
axis represents price while Q on the horizontal axis represents quantity of goods; DD is demand
curve while DS is supply curve.

Pw indicates world price which is located below the equilibrium price (where DD and DS
interacts in the middle). At Pw, the country is producing Q1 and demanding at Q2. From the
picture, it can be concluded that the country wants to consume more than it produces so the
difference (Q2-Q1) is the level of importation. When tariff is imposed as a protectionist policy,
Pw is raised to the level of Pw + Tariff and the country’s imports are reduced (Q4-Q3). In the
graph, tariff has protected the local industry as seen in the greater production surplus (orange).
Notice also the increase in local production from Q1 to Q3 as a result from the tariff. On the
consumer side, consumer plus (violet) is reduced, why? From the picture, consumer surplus
before the tariff was triangle PPwQ2 but with tariff, it is reduced to the violet area, hence, there
is a deadweight loss in the yellow triangles (2) indicating loss of consumer surplus from tariff
imposition. So, consumer surplus is reduced because of the tariff while producer surplus is
increased.

Finally, tax revenue collected by the government from tariff collection (remember that tariff is a
tax) is represented by the green rectangle. There is an offsetting effect of tariff revenue due to
the deadweight loss on both yellow triangles.

There are downside effects of tariff. It increases price of goods for consumers. Furthermore,
increased price due to the tax can result to retaliation of foreign country’s export with an
export tariff. When the outcome affects the domestic economy in a bad situation, tariff can be
removed. This process is called trade liberalization which involves removing barriers to trade
that has a lowering effect on domestic price and increased specialization. On the other hand,
fair trade practices protect the welfare of developing countries which are usually in the losing
end of international trade. Protection of the environment is another fair
trade practice being implemented by Starbucks Company, for instance, in protecting
agricultural farmers producing coffee and the company’s effort in environmental sustainability
as articulated in its corporate social responsibility.
In the final analysis, tariff reduction or elimination is the hallmark of free trade which
encourages movement of goods, services and people around many parts of the world. Also,
technology, as previously discussed, is critical in the globalization process like mobile phones
which, according to economist Jeffrey Sachs, is a transformative technology that helps
developing countries do banking, improve educational opportunities and many other
transformative economic solutions. The multiplicative effect of technological uptake through
mobile phones can be instrumental in leapfrogging economies from agricultural to industrial
and post-industrial stage.

For your detailed understanding on the graphical illustration of a tariff, study the video
underneath and do the following activity.

Source: Trade and Tariffs. Retrieved from https://youtu.be/otwJc-L5CBc .

Gains from International Trade

Following the discussion on free trade as an element of globalization, it is necessary to ask who
gains from international trade? Given two countries engaging in trade without government
restrictions such as tariff, regulation among others, free trade will not necessarily equalize gains
or losses. There will always be discrepancies and opportunity costs along the way.

To further understand the theory behind gains of international trade, study the link below and
answer questions in the Activity.

Resource: Gains of International Trade. Retrieved from https://youtu.be/fefeNhqbj-xw.

Globalization and Sustainable Development

As defined by the United Nations in the Brundtland Report of 1987, sustainable development is
the idea that human societies must live and meet their needs without compromising the ability
of future generations to meet their own needs. This entails balance between economic growth,
nature (environment) and human nature. It is not to be discarded that humans play a great role
in the realization of economic goals and environmental preservation. However, too much focus
on economic growth does not bring long-term gains for future users of resources. As the
economist Jeffrey Sachs puts it, Gross National Product (GNP) as output measurement should
be renamed Gross National Happiness (GNH) which considers welfare of human beings and that
includes good health and clean environment, both ingredients of sustainability

Thus, excessive indulgences to short-term gains can overlook environmental protection leading
to degradation that is exacerbated by climate change. Next, negative externalities as costs
thrown to the society are not calculated by firms that pollute air and water because there is no
price for environmental protection per se unless a company is serious with its corporate social
responsibility that addresses sustainability between short-run incentives. This thinking allows
firms to disregard social responsibility putting us all in great malady.

In relation to international trade discussed previously, it shares some responsibility towards the
environment as in the case of manufacturing goods that continually damage the environment.
Hence, ecological modern theory sees globalization as a process that can both protect and
enhance the environment (Yearly, 2007).

However, so many responses are being rallied today in trying to combat climate change. For
one, lesser carbon emissions, ‘carbon tax’ and ‘carbon neutrality’ (Ritzer, 2015) are but some of
the measures in place to help heal the already damaged environment which has caused severe
storms, biochemical warfare, among many other disturbing incidences.

In the past, efforts to mitigate the effects of climate change have been considered as in the case
of the implementation of Human Development Index (HDI) that measures economic and social
achievements through periodic monitoring of developmental activities. Another measure used
before and continues until this day is the concept of ecological footprint that represents the
maximum limit of consumption per person according to earth’s ecological capacity. If we could
manage to keep above the minimum HDI and below the maximum ecological footprint per
capita (a number that is decreasing as the human population increases) we’d on track for a
sustainable future (youmatter.world).

Finally, you will reckon that at the top of everything is good leadership that should guide every
institution and nation in implementing sound policies that balance economy and the
environment, not growth at the expense of the environment, which should be communicated
responsibly to various constituencies. Concerted efforts from government and private sectors
to create proactive solutions that are sustainable should be prioritized. Lessons from natural
calamities disrupting food production distribution, for instance, endangering people that are
already immersed in poverty should be a wake-up call for everyone that we need to preserve
the environment for its future users. Really, we do these steps for ourselves because the
environment can survive without human beings, we need the environment in order to survive.

Questions:
3. What happens when tariff is imposed to an imported product?
4. What are the gains and losses of tariff?
5. What is the relationship between globalization and sustainable development?

Economic Globalization, Poverty and Inequality

All the wonders of globalization remain rhetorical when in practice, poverty looms in rural areas
not experiencing any form of economic amelioration. Indeed, you will realize that while
industries soar in big cities, a backward agriculture remains detached. This glim scenario is
exacerbated by unclear policies, corruption and mismanagement that altogether plunge
societies.
Globalization is an audacious process that should integrate communities in various forms of
interconnectedness but the reality disconnects the “have-nots” trying to compete with scarce
resources that are working against them. In another scenario, while developed countries
outsource labor to low-wage countries in disguise of promoting domestic employment, the
threat of inequality further displaces the disadvantaged. It is not only economic encroachment
but political subjugation that put locals at the mercy of colonialism due to oppressive structures
being implemented.

While it is true that investors from developed countries help local workers achieve a little bit of
emancipation among those who possess much needed skills at low cost, it cannot be denied
that amassing profit by unscrupulous giants will always be the guiding dictum in their various
activities. With this, a form of local entrepreneurship was developed in Bangladesh before in
the form of microcredit that allowed small businessmen to obtain loan for various productive
ventures. Yunus (2012) reasoned, “In my experience, poor people are the world’s greatest
entrepreneurs. Every day they must innovate in order to survive.” Such idea is anchored on
people’s participation of economic activities no matter how small they are but they earn
income for whatever expenditures come their way.

If you notice, today’s micro small medium enterprise (MSME) is seen another poverty-
alleviating solution that actively involves individuals in income-generating activities that
empower themselves. The flourishing small businesses in the countryside areas of developing
countries are good examples of MSMEs that have potentials of attaining global competitiveness
in the products they produce.

Finally, it is only fitting to note that small businessmen in suburban areas have comparative
advantage in labor-intensive production due to lower wages, yet, developed countries take
advantage of the quagmire of poverty these local people experience, hence, they are
vulnerable to exploitation. Indeed, you will reason that globalization is audacious as stipulated
in the beginning of this discussion because it is an ambitious desire to obtain macrocosmic
power, to be integrated into the global economic flow where local identity and ingenuity may
not be heard anymore. Thus, only local people will rally their voices to be heard in order to step
out of the poverty trap and emerge as growing economies even if they have to start small.

A. Global Income Inequality

You will understand that the link between globalization and inequality is well-defined. Countries
all over the globe are divided as developed and developing, North and South, East and West,
core and periphery. Two types of global economic inequality are worth mentioning: wealth
inequality and income inequality. In brief, wealth inequality refers to unequal distribution of
assets although there is no widely recognized monetary measurement of such assets
(Economist, 2012). In the measurement of global economic inequality, the use of Gross
National Product (GNP) is important to determine how income is distributed across different
income groups.
Lorenz Curve

After observing the above picture, you will notice that Lorenz Curve illustrates the degree of
income inequality of a nation. On the X-axis is cumulative percent of population while on the Y-
axis is cumulative percent of income. The diagonal line in the middle is called perfect equality or
egalitarian line. For instance, if a point is in the middle of the line, it should read: 50% of the
population owns 50% of the income, hence, there is no inequality since all income is enjoyed by
50% of the population. All points along the diagonal line represent perfect equality as
mentioned before.
Points below the diagonal line represented by A, for instance, represent income inequality. The
drawn curve is the Lorenz curve for that particular nation. An example of income inequality
within the Lorenz cure illustrates: the bottom 20% of the population (X-axis) owns, say 5% of
the income (on the Y-axis). Another one would be 60% of the population enjoys 55% of
cumulative income.

Income inequality is measured using Gini-coefficient ratio with the following formula:

g = A/A+B
where g = gini-coefficient ratio
A = area under the perfect equality as indicated in the drawing
B = area below A as indicated in the drawing

Note: a perfect equality will have a Gini-coefficient ratio of zero while a perfect inequality will
have a Gini-coefficient ration equal to 1.

For further understanding of Lorenz curve, study the link below:

Source: The Lorenz curve. Retrieved at https://youtu.be/yN1alTAMo3w

Questions:
6. How does globalization affect poverty and income inequality?
7. Why is the Lorenz curve important?

Global North and Global South

Odeh (2010) explains that there are broadly two economic worlds that cut across the globe,
these are the Global North and the Global South. Global North includes economically developed
countries like the United States, Canada, Western Europe and developed parts of Asia while
Global South includes Caribbean countries, Latina America, South America, Africa, and parts of
Asia (Aldama, 2018).

You can discern that distinction between the two indicates a widening gap in factor
endowments and their utilization, in opportunities skewed against developing countries of the
Global South that are continually immersed in poverty, in political power Global South
members tend to dwell on oppressive structures being in constant struggle. On the other hand,
political domination of Western nations has far-reaching colonial power extended across
territories, thanks to world colonialism.

Historically speaking, Global North/South differences stemmed from First World-Second-World-

Third World classifications during the Cold War era as political and economic blocs (Tomlinson,
2003). In this classification, Western countries were labeled as “First World” while Soviet
countries and their allies were called “Second World’, while all the others were called “Third
World”. After the Cold War, “Second World” classification somehow vanished but “First World”
and “Third World” classification continued with the latter being less advanced, more
impoverished against an advanced “First World” category.

Lastly, in a highly digitized world where technology is ubiquitous, you will surmise that the gap
between Global North and South can be narrowed. However, information-poor countries in the
South coupled with digital divide among haves and have-nots continue to hound
categorizations placing Global South countries as merely “catching up” to global trends set up
by Global North nations rather than creating their own technological and knowledge
breakthroughs.

Questions:
8. What is the relationship between Global North and Global South?
9. What happens to the gains of international trade when there is protectionism?
10. What can the government do in order to solve income inequality?

ASSESSMENT:
Post a 5-minute vlog on how you as a student in a Global South country will help in solving
the problem of poverty while adhering to environmental sustainability. Post your vlog in the
FB page as Module 2 vlog: Sustainability and Poverty.
References:

Aldama, P. (2018). The Contemporary World. REX Book Store. 5th Edition.

……….. The Lorenz Curve. Retrieved from https://youtu.be/yN1alTAMo3w

……….. Sustainable Development – What is It? Definition, History, Evolution, Importance and
Examples. Retrieved from www.youmatter.world.

………. Gains of International Trade. Retrieved from https://youtu.be/fefeNhqbj-xw.

………. Trade and Tariffs. Retrieved from https://youtu.be/otwJc-L5CBc .