The Globalization of Economic Relations

Economic Globalization is a historical process, the result of human innovation and technological
progress. It refers to the increasing integration of economies around the world, particularly
through the movements of goods, services, and capital across borders. The term sometimes
also refers to the movement of people (labor) and knowledge (technology) across international
borders. (IME, 2008).

INTERCONNECTED DIMENSIONS OF ECONOMIC GLOBALIZATION

The Globalization of Trade of Goods and Services

When a country exports more than it imports, it runs a trade surplus. When a country imports
more than it exports, it runs a trade deficit. The large trade deficits in the middle and the late
1980s sparked political controversy that still persist today.

Foreign competition hit U.S. markets hard. Less expensive foreign goods among them are steel,
textiles, and automobiles- began driving U.S. manufacturers out of business, and thousands of
jobs were lost in important industries. In more recent times, the outsourcing of software
development to India has caused complaints from white-collar workers.
For hundreds of years, industries in the U.S. have petitioned governments for protection and
societies have debated the pros and cons of free and open trade. For the last century and a
half, the principal argument against protection has been the theory of comparative advantage,
the advantage in the production of goods enjoyed by one country over another when that good
can be produced at lower opportunity cost in terms of other goods than it could be in the other
country. A country enjoys an absolute advantage over another country in the production of a
good if it uses a fewer resources to produce that good than the other country does.
Trade barriers-also called obstacles to trade - take many forms. The three most common are
tariffs, export subsidies, and quotas. All are forms of protection shielding some sector of the
economy from foreign competition.
A tariff is a tax on imports. The average tariff on imports into the United States is less
than 5 percent. Certain protected items have much higher tariffs. For example, in 2009, former
President Obama of the United States imposed a tariff of 35 % on tire imports from China.
Export subsidies is a government payment made to domestic firms to encourage exports
- can also act as a barrier to trade. Farm subsidies remain a part of the international trade
landscape today. Many countries continue to appease their farmers by heavily subsidizing
exports of agricultural products. The prevalence of farm subsidies in the developed world has
become a major rallying point for less developed countries as they strive to compete in the
global marketplace.
A quota is a limit on the quantity of imports. Quotas can be mandatory or voluntary, and
they may be legislated negotiated with foreign governments. The best-known voluntary quota or
"voluntary restraint, was negotiated with the Japanese government in 1981. Japan agreed to
reduce its automobile exports to the United States by 7.7 %, from the 1980 level of 1.82 million
units to 1.68 million units. Many quotas limit trade around the world today. Perhaps the best
known recent case is the textile quota imposed by the European Union on import textiles from

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REFERENCES: Abelos, Tajolosa, De Dios. (2018) The Contemporary World. Mutya Publishing House
Sachs (2015) The Age of Sustainable Development. Columbia University Press
Rodrigue (2024). The Geography of Transport Systems. New York: Routledge
China in 2005. The EU blocked the entry of Chinese produced textiles into Europe; as a result,
more than 100 million garments piled up in European ports.
International trade increases the number of goods that domestic consumers can choose
from, decreases the cost of those goods through increased competition, and allows domestic
industries to ship their products abroad. Trade barriers are tools used by governments to collect
revenues but they are also treated as ways to protect domestic industry and production.
Economic Integration
Economic Integration helps countries overcome divisions that impede the flow of goods,
services, capital, people and ideas. It is sometimes called regional integration because it often
occurs on neighboring nations where nations agree to reduce or eliminate trade barriers and
agree on fiscal policies.

Free Trade Areas

A free trade area (FTA) is formed when two or more countries agree to abolish all internal
barriers to trade among themselves. Countries that belong to a free trade area can do and
maintain independent trade policies with respect to on-FTA countries. A system of certificate of
origin is used to avoid trade diversion in favor of low-tariff members. The system discourages
importing goods into the member country with the lower tariff for transshipment to countries
within the area with higher external tariffs; customs inspectors police the borders between
members. The European Economic Area is an example of a free trade area that includes the 27-
nation European Union, Norway, Liechtenstein, and Iceland.

Customs Union

A customs union represents the logical evolution of a free trade area. In addition to
eliminating internal barriers to trade, members of a customs union establish common external

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REFERENCES: Abelos, Tajolosa, De Dios. (2018) The Contemporary World. Mutya Publishing House
Sachs (2015) The Age of Sustainable Development. Columbia University Press
Rodrigue (2024). The Geography of Transport Systems. New York: Routledge
barriers. On January 1, 1996, the European Union and Turkey initiated a customs union in an
effort to boost two-way trade above the current annual level of $20 billion. The arrangement
called for elimination of tariffs averaging 14 % that added $1.5 billion each year to the cost of
European goods imported by Turkey.

Common Market

A common market is the next step in the spectrum of economic integration. In addition to
the removal of internal barriers to trade and the establishments of common external barriers, the
common market allows for free movements of factors of production, including labor, capital, and
information. Examples include the Central American Integration System, The Common Market of
the South, the Andean Community and the Association of South East Asian Nations (ASEAN).

Monetary Union

All tariffs are removed for trade between member countries, creating a uniform market.
There are also free movements of labor, enabling workers in a member country to move and
work in another member country. Monetary and fiscal policies between member countries are
harmonized, which implies a level of political integration. A further step concerns a monetary
union where a common currency is used, such as the European Union (Euro).

Economic Union

Members establish full economic integration through a single market with coordinated
fiscal, budgetary and monetary policies. This allows for policies to be harmonized across the
whole region.

Economic Integration reduces cost for both consumers and producers and increase trade
between the involved countries which can improve the availability of goods and services

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REFERENCES: Abelos, Tajolosa, De Dios. (2018) The Contemporary World. Mutya Publishing House
Sachs (2015) The Age of Sustainable Development. Columbia University Press
Rodrigue (2024). The Geography of Transport Systems. New York: Routledge
because of a wider selection. Additionally, because of market expansion, technology sharing,
and cross-border investment, employment opportunities grow.

The Globalization of Technology and Communication

Capital is not the only factor of production required to produce output, labor is equally important.
To be productive, the workforce must be healthy. Health is not the only issue but basic literacy
as well as specialized training in farm management, for example, can yield high returns to both
the individual worker and the economy. Education has grown to become the largest category of
government expenditure in many developing nations. In part technology transfer and
communication have become part of manpower training in most agricultural countries. This is so
because of the belief that human resources are the ultimate determinant of economic advance.

The Globalization of Production

Production is the process which inputs are combined and transformed into output. Production
technology relates inputs to outputs. Specific quantities of inputs are needed to produce any
given service or good. Most outputs can be produced by a number of different techniques. In
choosing the most appropriate technology, firms choose the one that maximize the cost of
production. For a firm, an economy with a plentiful supply of inexpensive labor but not much
capital, the optimal method of production will involve labor-intensive techniques.

WORLD BANK FOUR-CATEGORY SYSTEM

Below are the tools used to measure and track a nation's wealth from year to year and
how does each tool is computed:

Where C+I+G+X stands for:

C - Consumption (or Personal consumption) refers to household expenditure on various goods

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REFERENCES: Abelos, Tajolosa, De Dios. (2018) The Contemporary World. Mutya Publishing House
Sachs (2015) The Age of Sustainable Development. Columbia University Press
Rodrigue (2024). The Geography of Transport Systems. New York: Routledge
and services.

I - Investment refers to capital goods, which are purchased for producing mainly consumer
goods in the economy.

G - Government purchases are the various goods and services purchased by the central, state
and local governments.

X - Net exports (Exports less Imports) are the difference between exports and imports. It is the
difference between the value of goods and services exported to the rest of the world and the
value of goods and services imported from the rest of the world.

Additionally, personal consumption can be traced back to the consumption expenditure of

Households as presented in the circular flow model of production below:

The lower loop of the figure shows the market for consumer goods and services. The consumers
are the buyers while the business firms are the sellers. The consumers pay the business firms
for the purchase of goods and services. The purchase prices of the goods and services forms
the connecting link between the consumers and the business firms. The value of goods and
services is equal to the money that flows back to the business firms.
The upper loop of the figure is the market resources. The consumers provide the business firms
with resources (i.e. land, labor, capital and entrepreneurship). The business firms, on the other
hand, pay for these resources in the form of wages/salaries, rent interest, and profit.

The World Bank has developed a four category system of classification that uses per capita
(GNI) as a base which is updated every July 1. Although the income definition for each of the
stages is arbitrary, countries within a given category generally have a number of characteristics
in common. Thus, the stages provide a useful basis for global market segmentation and target
marketing.

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REFERENCES: Abelos, Tajolosa, De Dios. (2018) The Contemporary World. Mutya Publishing House
Sachs (2015) The Age of Sustainable Development. Columbia University Press
Rodrigue (2024). The Geography of Transport Systems. New York: Routledge
Low-Income Countries

Low-income countries have a GNI per capita of less than $1,145. The characteristics shared by
countries at this income level are:

1. Limited industrialization and a high percentage of the population engaged in agriculture

and subsistence farming

2. High birth rates

3. Low literacy rates

4. Heavy reliance on foreign aid

5. Political instability and unrest

6. Concentration in Africa south of the Sahara

Many low-income countries have such serious economic, social, and political problems that they
represent very limited opportunities for investment and operations. Some are low-income, no
growth countries such as Burundi and Rwanda that are beset by one disaster after another.
Others were once growing, relatively stable countries that have become divided by political
struggles. The result is declining income and often considerable danger to residents. As the 20th
century draws to a close, Yugoslavia is a case in point, countries embroiled in civil wars are
dangerous areas; most companies find it risky hence they avoid them.

Low-Middle-Income Countries

Sometimes, countries that can be assigned to the lower income and lower middle income
categories are known collectively as less-developed countries (LDCs). This is to indicate a
contrast with developing (upper-middle-income) countries and developed (high-income)
countries. Low-Middle income countries are those with GNI per capita between $1,146 and
$4,515. These countries are typically at relatively early stages of industrialization. Factories
supply a growing domestic market with such items as clothing, batteries, automobile tires,
building materials, and packaged foods. Consumer markets in these countries are expanding.
Countries such as Belarus, Indonesia, and Turkey represent an increasing competitive threat as
they mobilize their relatively cheap and often highly motivated-labor forces to serve target
markets in the rest of the world. The LDCs in the lower-middle income category have a major
competitive advantage in mature, standardized, labor-intensive industries such as toy making
and textiles. Indonesia, the largest noncommunist country in Southeast Asia, is a good example
of an LDC on the move. Several factories produce athletic shoes under contract for Nike.

Upper-Middle-Income Countries

These countries are also known as industrializing or developing countries with a GNI per capita
ranging from $4,516 to $14,005. In these countries, the percentage of population engaged in
agriculture drops sharply as people move to the industrial sector and the degree of urbanization
increases. Malaysia, Brazil, Chile, Hungary, and many other countries in this stage are rapidly
industrializing. They have rising wages and high rates of literacy and advanced education but
significantly lower wage costs than the advanced countries. Innovative local companies can

DO NOT REPRODUCE WITHOUT PERMISSION

REFERENCES: Abelos, Tajolosa, De Dios. (2018) The Contemporary World. Mutya Publishing House
Sachs (2015) The Age of Sustainable Development. Columbia University Press
Rodrigue (2024). The Geography of Transport Systems. New York: Routledge
become formidable competitors and help contribute to their nations' rapid, export-driven
economic growth.

Upper middle-income countries that achieve highest rates of economic growth are sometimes
referred to collectively as newly industrializing economies (NIE). In Hungary and other upper-
middle-income countries, scores of manufacturing companies have received ISO-9000
certification for documenting compliance with recognized quality standards. The influx of
technology, particularly the computer revolution, creates startling balanced positions of the old
and the new in these countries, In Brazil, for example, grocery distribution companies use
sophisticated logistics software to route their trucks; meanwhile, horse-drawn carts are still a
common sight on many roads.

High-Income Countries

High-income countries are also known as advanced, developed, industrialized, or post- industrial
countries. They have GNI per capita above $14,005. With exception of a few oil-rich nations, the
countries in this category reached their present income levels through a process of sustained
economic growth.

The United States, Sweden, Japan, United Kingdom, and other advanced, high income countries
are characterized with an orientation toward the future and the importance of interpersonal
relationship in the functioning of society. Product and market opportunities in a post-industrial
society are more heavily dependent on a new products and innovations than in industrial
societies. Ownership levels for basic products are extremely high.

DO NOT REPRODUCE WITHOUT PERMISSION

REFERENCES: Abelos, Tajolosa, De Dios. (2018) The Contemporary World. Mutya Publishing House
Sachs (2015) The Age of Sustainable Development. Columbia University Press
Rodrigue (2024). The Geography of Transport Systems. New York: Routledge