GEC 103 REVIEWER

(Global Economy, Market Integration, International-System)

GLOBAL ECONOMY
THE INTERNATIONAL ECONOMY - Because of this, national economic policies
cannot be formulated without evaluating their probable impacts on the economies of
other countries.
Historical Evolution
End of WWII (1945) - US was economically and politically the most powerful
nation in the world.
1950's - Formation of European Community (now European Union).
1960's - Importance of multinational corporations rose. Creation of euro
(launched 1 January 1999).
1970's - Market power in world oil markets enjoyed by the Organization of
Petroleum Exporting Countries.
Turn of 21st century
INTERNATIONAL COOPERATION - Conferences devoted to global issues have
explored the avenues through which cooperation could be fostered between industrial
and developing nations.
Economic interdependence has direct and indirect consequences
 students
 consumers
 investors
 members of labor force
INTERNATIONAL TRADE
GLOBALIZATION - has led to a phenomenal increase in world trade.
World Bank stats show how world exports as a % of GDP have increased from 13%
in 1970 to 30% just before the financial crisis of 2008.
Trade (% of GDP) in World was reported at 56.54 % in 2021, according to the World
Bank collection of development indicators, compiled from officially recognized
sources.
TRADE - The sum of exports and imports of goods and services measured as a share
of gross domestic product.
DAVID RICARDO - States that, even if one country has an ABSOLUTE ADVANTAGE
in the production of all goods, it can still benefit from specialization and trade.
Nations can gain an international trade advantage when they focus on producing
goods that produce the lowest opportunity costs as compared to other nations.
What it costs someone to produce something is the OPPORTUNITY COST – the value
of what is given up. If opportunity costs were the same, then there would be no
benefit from specialization and trade.
CRITICS
FREE TRADE IS NOT FAIR TRADE - Rich countries might exert their
monopsony power to force producers in developing countries to accept low prices.
UNREALISTIC ASSUMPTIONS - such as constant costs of production, zero
transport costs, and no barriers to trade.
LIMITS OF FREE TRADE
PROTECTIONISM - refers to measures designed to limit free trade.
PROTECT INFANT INDUSTRIES - they are too small to benefit from the
economies of scale.
PROTECT GERIATRIC INDUSTRIES - to restructure and rationalize
production.
ENSURE EMPLOYMENT PROTECTION – cheap imports might threaten jobs
in the domestic economies.
PREVENT DUMPING - goods exported to another country at a price below the
average cost of production.
RESTRICT IMPORTS - from countries whose health and safety, and
environmental regulations are less stringent.
STRATEGIC REASONS - food, defense equipment, and energy are saved to
be safe in times of war.
RAISE TAX REVENUE - Tariff may be an important source of tax revenue for
developing countries.
IN RETALIATION - protectionism may be imposed by a country because
another country has restricted the imports of its goods.
TYPES OF PROTECTIONISM
TARIFF - a tax or duty to be paid on a particular class of imports or exports.
QOUTAS - restriction on the amount of goods that can be imported.
SUBSUDIES - grants given to domestic producers artificially lower production cost.
REGULATIONS - labelling, health and safety, environmental standards, and
documentation.
DISADVANTAGES OF TRADE BARRIERS/PROTECTIONISM
 Distort comparative advantage and specialization.
 Lower world output; reduce living standards.
 Higher prices and less choice for consumers.
 Less incentive for domestic producers to become more efficient.
 Difficulty of removing trade barriers once such barriers were introduced
because of adverse effects.
GLOBAL ACTORS - Refers to any social structure which is able to act and influence
and engage in the global or international system.
INTERNATIONAL ECONOMIC AND FINANCIAL ORGANIZATIONS
 World Bank
 International Monetary Fund (IMF)
 World Trade Organization (WTO)
Provide structure and funding for many unilateral and multilateral development
projects; deal with major economic and political issues; promote sustainable private
and public sector development.
INTERNATIONAL GOVERNMENTAL ORGANIZATIONS (IGO)
 United Nations (UN)
 European Union (EU)
 Association of Southeast Asian Nations (ASEAN)
 North Atlantic Treaty Organization (NATO)
Have international membership, scope, and presence primary members consist of
sovereign states bring nation states together to cooperate on a particular theme or
issue that have global impacts.
MEDIA - communication outlets or tools used to store and deliver information or data
print media, publishing, news media, photography, cinema, broadcasting, and
advertising.
MULTILATERAL DEVELOPMENT BANKS -international financial institutions owned
by countries provide loans, grants, guarantee, private equity and technical assistance.
 World Bank Group
 Inter-American Development Bank (IDB)
 African Development Bank (AfDB)
 Asian Development Bank (ADB)
 European Bank for Reconstruction and Development
STATE - is a political and geopolitical entity
NATION - is a cultural and/or ethnic entity
NATION-STATE - would be a sovereign territory with one group of individuals who
share a common history.
NATION-STATES
 Japan
 France
 Egypt
 Germany
 South Korea
 Portugal
 Iceland
NONG-GOVERNMENTAL ORGANIZATIONS (NGO) - legally constituted
organization created with no representation of any government.Task-oriented and
perform a variety of service and humanitarian functions. May be organized around
specific issues such as human rights, environment, education, or health.
TRANS-NATIONAL CORPORATIONS (TNC) - exert a great deal of power in the
globalized world economy.
UNITED NATIONS SYSTEM
 Consists of the United Nations and the 6 principal organs of UN.
 Meet twice a year to coordinate the work of the organization.
 General Assembly
 Security Council
 Economic and Social
 Council
 Trusteeship Council
 International Court of
 Justice
 UN Secretariat
 Specialized agencies and affiliated organizations
 Executive heads and WTO.
 Comprises the United Nations System Chief Executives' Board for
Coordination (CEB).

MARKET INTEGRATION
1. Defining Market Integration
“The integrated economy is one in which various economic processes are so
functionally related to every other process that the totality of separate operation forms
a single unit of production with characteristics of its own”
- McDonald, 1953
MARKET INTEGRATION
 Markets are said to be integrated if they are connected by a process of arbitrage.
 A well-integrated market system is central to a well-functioning market economy.
 The economic proposition of integration is that an element of efficiency is attainable
in the unified operation than in independent actions.

 MARKET INTEGRATION is the phenomenon by which price interdependence

takes place.
 FAMINOW AND BENSON (1990) integrated markets are those where prices are
determined interdependently
 Price change in one market affects the prices in other markets
Goodwin and Schroeder, 1991 - described that markets that are not integrated may
convey inaccurate price information which might distort producer marketing
decisions and contribute to inefficient product movements.
Information on market integration presents specific pieces of evidence as to the
competitiveness of the market, the effectiveness of arbitrage (Carter and
Hamilton, 1989) and the efficiency of pricing (Buccola, 1983).
“Two trading localities are integrated if price changes in one locality cause price
changes in the other.”
- Slade, 1986
2. Types of Market Integration
SUPPLY CHAIN - the network of all the individuals, organizations, resources, activities
and technology involved in the creation and sale of a product.
1. BACKWARD VERTICAL INTEGRATION - This involves acquiring a business
operating earlier in the supply chain.
Ex. a retailer buys a wholesaler, a brewer buys a hop farm.
2. FORWARD VERTICAL INTEGRATION - this involves acquiring a business further
up in the supply chain
Ex. a vehicle manufacturer buys a car parts distributor.
3. HORIZONTAL INTEGRATION - Businesses in the same industry and which
operate at the same stage of the production process are combined
4. CONGLOMERATE INTEGRATION - This involves the combination of firms that are
involved in unrelated business activities.

3. Pros and Cons of Each Type of Integration