MARKET

INTEGRATION
Lesson 2 – Topic 1
Lesson Objectives

a. Recognize and critically analyze the role of international financial

institutions in the creation of global economy.
b. Explain the history of the Global Market in the 20th Century.
c. Identify and describe the attributes of Global Corporations.
d. Rationalize the Crises of Global Capitalism
 You should know..
This lesson presents an overview of what money is, the benefits that
come with using it, including its functions in the economy. Said
discussion will then lead us to the discussion on the role of financial
institutions in the creation of the global economy.
Table of Contents.

01 02 03
The Benefits of Money Types of Money Functions of Money

04 05
Financial Institutions Financial Institutions and
Trade Agreements
The Benefits of
Money
 Benefits of Money
 Money was invented as an
alternative to bartering. The When people can use money
major benefit of money is that it instead of bartering, this leads to
increases the efficiency of an more specialization and better
economy by reducing division of labor within the
transactions costs. economy (Mishkin, 2007)
 Three Types of Money
COMMODITY
MONEY For example, gold has been used as
Money that is in the form of a commodity money for thousands
commodity with intrinsic value is of years.
considered commodity money.
'Intrinsic value' means it has value
outside of its use as money.
Types of Money
 Three Types of Money
REPRESENTATIVE
MONEY During colonial days in America,
Representative money is not tobacco was a valuable commodity.
money itself, but something that Somebody could pay for the goods
represents money. It is and services that they needed using
exchangeable for a commodity. tobacco, and it would be accepted
just like money was (Mankiw,
2007)
 Three Types of Money

REPRESENTATIVE
MONEY
In today's economy, a check from a
check book is an example of
representative money because it
represents money but it is not the
money itself.
 Three Types of Money
FIAT MONEY
 Fiat money is money with Most of the paper currency -
absolutely no intrinsic value that is including the Bank Notes issued by
just used as money. the Central Bank of the Philippines
● Fiat money only has value because is not worth the paper it is printed
the government says it's valuable.
on, in spite of the fact that it is used
● A fiat is simply an order or decree
and accepted virtually everywhere
given by a government.
in the world.
Functions of Money
Functions of Money

Money is a Unit of Account

Money is a unit of account because everything in the economy is quoted in

terms of it (Bernstein, 2008). It is the foundation of every transaction
taking place around us.
Functions of Money

Money is a medium of exchange

Money is a medium of exchange because it can be used to satisfy unlimited needs

and wants (Greco, 2001). Money serves as an important medium of exchange in
the economy, empowering people to purchase goods and services in an attempt to
satisfy their unlimited needs and wants.
Functions of Money
Money is a Store of Value

Money is a store of value because it can be exchanged for services and used
to purchase goods. (Mises, 1981). Unfortunately, inflation prevents most of
the money in existence today from serving as a pure store of value, because
the money loses a significant portion of its purchasing power over time.
However, if there were no inflation, then money would serve as a near-
perfect store of value.
Functions of Money

Money is a Standard of Deferred Payment

Money is a standard of deferred payment because it is used to buy

something today and pay for it over time (Mises, 1981).
For something to be considered money, it
must be a unit of account, a medium of
exchange and a store of value.
Indeed, money is essential in economic
transactions especially when there is
exchange of goods and services (Mankiw,
2007).
Financial Institutions
 Depository
Institutions
 Depository institutions allow customers to deposit money in an
account.
Commercial banks
 are for profit entities that provide a number of services to their
account holders.
 These types of financial institutions usually operate at the local,
regional or national level, have large advertising budgets, and
charge higher fees than a credit union.
 Depository
Institutions

Credit Unions
 are non-profit entities owned by accountholders, also called
members.
 Fees are usually lower at credit unions.
 They are typically found at the local level
 Financial intermediation works at depository
institutions because customers deposit money in
accounts, and the institutions loan that money to
borrowers.
 Non - Depository
Institutions

Non-depository institutions do not allow customers to deposit

money. However, they are considered financial institutions because
they transfer funds from savers to borrowers by investing the funds
they receive.
 Non - Depository
Institutions
Insurance companies provide customers with policies that protect
them from risk, for which they charge them monthly premiums. They
invest the rest of the premiums in securities, like stocks, bonds, and
other commodities, such as cattle, gold, and silver.
 Investment Institutions
Investment banks are also
financial institutions that play a
role in the financial intermediation
process by channeling funds from
savers to borrowers. Unlike
commercial banks, they usually
do not provide services to the
public.
Investment banks may also
function as brokers, provide
financial advice to corporations,
or serve as the middlemen
between investors and securities
issuers.
 Investment Institutions
Examples of investment banks in the
Philippines
Regulatory bodies, like the Securities
1. BPI Capital Corporation and Exchange Commission (SEC) and
the Bureau of Treasury, oversee the
2. Insular Investment and Trust activities of investment bank
Corporation

3. PNB Capital and Investment

Corporation

4. Unioil Resources & Holdings,

Inc
Financial Institutions and

Trade Agreements
 World Bank
 World Bank is a specialized  It is the world's largest source
agency of the United Nations. of development assistance
Composed of the International and has over 180 member
Bank for Reconstruction and countries around the world
Development (or IBRD) and the that determine where its
International Development money comes from and how
Association (or IDA),
it spends its money.
 World Bank Goals
World Bank is deeply committed to human welfare in a much larger sense than
just finances.

1. to eradicate extreme poverty and hunger;

2. achieve universal primary education;
3. promote gender equality and empower women;
4. reduce child mortality;
5. improve maternal health;
6. combat HIV/ AIDS, malaria, and other deadly diseases;
7. ensure environmental stability;
8. develop a global partnership for development.
 International Monetary Fund
 Referred to as the 'sister'  This institution has helped
organization to the World Bank. developing nations grow so that
 Its purpose is to encourage companies will be interested in
currency exchange with member establishing businesses due to
countries in order for them to customer potential.
orchestrate global trade.
 It also provides loans to
governments and debt relief
 International Monetary Fund
 The International Monetary  The IMF's overall goal is to help
Fund was legally established in encourage economic growth and
1945 with 29 members for stability on a global basis.
starters.  It does this through three
 It consists of nearly all sovereign primary activities namely:
states in the world today and is surveillance, technical assistance
headquartered in Washington, and lending.
D.C.
 General Agreement of Tariffs and Trade
International trade is the exchange of goods between national borders.

General Agreement on Tariffs and Trade, (GATT)

 It was drafted in 1947 as a provisional agreement to regulate
international trade.
 GATT was enforced from January 1, 1948 until December 31, 1994,
when it was finally replaced by the World Trade Organization
(WTO) on January 1, 1995
 General Agreement of Tariffs and Trade

General Agreement on Tariffs and Trade, (GATT)

 Members of the GATT included 23 nations that originally signed in

1947 in Geneva before it went into effect.
 The signatories, or contracting parties, comprised the following:
Australia, Belgium, Brazil, Burma, Canada Ceylon, Chile, China,
Cuba, Czechoslovakia, France, India, Lebanon, Luxembourg, The
Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia,
Syria, South Africa, The United Kingdom, and The United States.
 Background & History of GATT
 World War II ended in 1945, a couple years prior to GATT. Many
European countries were economically devastated in the aftermath
of World War II. Creating an international trade agreement was
one way to help stimulate the world economy.
 The United States promoted the idea of creating a trade agreement
that lowered trade barriers and tariffs (taxes imposed on imports)
to bolster the world economy.
 Purpose of GATT

 to lower trade barriers among the signatories.

 increase incomes and standards of living,
 develop national resources, and expand trade
 allows for the creation of the MFN (Most Favored Nation)
designation, which permits the designated country to export goods
with very low tariffs and other beneficial terms.
 aims to make sure that every member enjoyed the same trade
terms.
 World Trade Organization (WTO)
 A global organization that helps countries and producers of goods deal
fairly and smoothly with conducting their business across international
border
 The WTO was officially created in January of 1995 and essentially
replaced the General Agreement on Tariffs and Trade (GATT)
 Its main purpose is to help trade flow smoothly for all member nations
so that they may increase the well-being of their countries and
standards of living for their citizens.
 World Trade Organization (WTO)
 As of 2017, there are 164 member countries that are part of the WTO.
 Focus of WTO
 Cut living costs and raise living standards through more
economic trade and competition among countries - As more
trade happens, consumers will have more choices for low cost
and higher quality products.
 Settle disputes and reduce trade tensions - This is by acting as
a governing body and discouraging unfair practices, such as
export subsidies and dumping products at below cost to gain
market share.
 Focus of WTO
 Stimulate economic growth and create jobs - This is by lowering
trade barriers such as customs duties, tariffs, import bans, and
quotas that countries may have. This allows companies to enter
new markets and grow their business, often resulting in higher
revenues and more jobs.
 Give smaller countries a voice - Over three-quarters of WTO
members are developing countries and countries in transition to
market economies. The WTO works to ensure that these
countries are heard from and it is not just the top seven to ten
economies of the world driving agreements and policy.
 Focus of WTO
 Contribute to peace and stability - Many political and
government tensions can arise from economic disputes
between countries. By helping develop agreements that ensure
free and smooth trade, countries should experience more peace
and stability among each other.
Two Basic Models of the Economy.
 The Classical Model
 The Classical Model was popular before the Great Depression.
 The economy is very free-flowing, and prices and wages freely
adjust to the ups and downs of demand over time. (Mankiw,
2007). In other words, when times are good, wages and prices
quickly go up, and when times are bad, wages and prices
freely adjust downward.
 The major assumption of this model is that the economy is
always at full employment, meaning that everyone who wants
to work is working and all resources are being fully used to
their capacity.
 The Classical Model
 According to this model: “if competition is allowed to work, the
economy will automatically gravitate toward full employment, or
what economists call potential output”
 Classical economists believe that the economy is self-
correcting, which means that when a recession occurs, it
needs no help from anyone.
 The Keynesian Model
 This model came about as a result of the Great Depression.
 Economist John Maynard Keynes observed that the economy is not
always at full employment. In other words, the economy can be
below or above its potential.
 During the Great Depression, unemployment was widespread, many
businesses failed and the economy was operating at much less than its
potential (Mankiw, 2007).
 The Keynesian Model
 Keynes observing the Great Depression, realized that the economy
could be well below its potential for a long time, and that something
was causing it to get stuck.
 Keynes believed that the government and monetary leaders should do
something to help the economy along in the short run, or the long run
may never come.
 The Keynesian Model
 Keynes' model recognizes that the economy may start out in a state of
balance in which everyone is fully employed, but strong demand for
products and services temporarily pulls the economy above the full
employment level.
 expansion - strong demand for products and services temporarily
pulls the economy above the full employment level.
 recession - when weaker demand temporarily pulls the economy
below the full employment level.
Classical or Keynesian Model: Which
is Correct?
 Both models are correct, because they are describing the
economy at two different points in time.
 The Classical Model describing the economy in the long run
- where resources are fully employed and everyone is
working.
 The Keynesian Model describing what happens when there
is a recession and people are out of work or when the
economy is temporarily overheating and a shortage of
workers takes place.
Classical or Keynesian Model: Which
is Correct?
 In the mid-1940s to the early 1970s, governments poured
money in their economies, allowing people to purchase more
goods and, in the process, increase demand for these
products. As a result, prices also surged. Countries in the
West and some in Asia (like Japan) accepted this price build-
up because it was complemented with an economic growth
and reduced unemployment. The theory is simple: as prices
increased, companies would earn more and would have more
capability to hire more workers.
Classical or Keynesian Model: Which
is Correct?
 For the macroeconomists who help to manage the economy
of an entire country, it is a constant balancing act between
too much unemployment or too much inflation (Mankiw,
2007). Neither are good for the economy, but in healthy
economic environments, they can act to counterbalance the
other.
Thank you!