THE GLOBAL ECONOMY

Topic 2
ECONOMIC GLOBALIZATION

- Is the economic mixing and interdependence of economies

across the world through an escalation of cross-cultural
movement of goods, services, technologies, and wealth
(Joshi, 2009).Global reputation.
- It is the world's money being spread around as goods,
products, and technology are sent from one country to
another country.
THE PROS OF GOING GLOBAL

1. Global reputation.
2. Cheaper labor costs
3. Hiring local employees
4. Fresh ideas
5. Cheaper operating costs
6. Cheaper supply costs
7. Global partnerships
8. Back-up income source
IMPACT ON JOBS AND PRICING

1. Creates jobs
2. Lowers prices
POLITICAL IMPACT

Economic globalization will encourage the GROWTH OF

DEMOCRACY as impoverished nations, especially those under
dictatorships, begin to interact with the freer West.
THE CONS OF GOING GLOBAL

1. Dealing with local politics

2. crime rate and war
3. Cultural differences
4. financial instability
CAPITAL FLIGHT

 Capital flight, the large-scale departure of companies,

assets, and wealth from a country due to economic
instability or the opportunity for cheaper production
(Hermes, et. Al, 2003).
 Small businesses could not compete with the cheap prices
offered by imported goods, forcing them to shut their
doors. It has come at the loss of local businesses and the
demise of what many have called main-street local
businesses.
Economic globalization has allowed social injustices, such as:
1. poor working conditions
2. wages that are scandalously low,
3. the exploitation of children in the form of forced labor.
MAJOR DRIVERS OF
GLOBALIZATION
1. Technological Innovation
- Companies are able to manage, reproduce, and standardize
their production across the world with local sourcing of
materials coordinated by technology, such as video
conferencing and emailing with suppliers. It is also easy to
communicate with employees worldwide to ensure
coordinated global efforts for topics such as training.
MAJOR DRIVERS OF
GLOBALIZATION
2. Transportation Systems
- This allows quick, affordable migration of products across
the globe. Companies utilize freight trains, ships, and even
planes to transfer products. Social and political reforms
MAJOR DRIVERS OF
GLOBALIZATION
3. Social and Political Reforms
- The enormous growth in population and consumerism of
countries, such as China, Japan, and India, has created
opportunities for new customers globally. And the collapse of
communism in Central and Eastern Europe has created even
more new markets and business partnerships.
MODERN WORLD
SYSTEMS
Two broad categories that describe the impact of globalization:
(Levitt, 2001).

1. Market globalization
 is the decline in barriers to selling in countries other than the
home country. This change will make it easier for a company
to begin selling products internationally, since lower tariffs
keep consumer prices lower and fewer restrictions when
crossing borders makes it easier for a company to enter a
foreign market.
MODERN WORLD
SYSTEMS
Two broad categories that describe the impact of globalization:
(Levitt, 2001).

1. Production globalization
 is the sourcing of materials and services from other countries
to gain advantage from price differences in different nations.
For example, purchasing materials and components for a
particular product from multiple countries and then assemble
the product in yet another international location to reduce
costs of production.
MODERN WORLD
SYSTEMS
Globalization of Business

The primary effects of globalization include the following:

2) Changes in location wherein companies may locate their firms

in new places, both to reduce labor and production costs and

to take advantage of free trade zones.
3) Increasing complexity — although multiple locations and
distributed operations may lead to reductions in cost, it also
causes increasing complexity in management of the
interactions between the facilities
MODERN WORLD
SYSTEMS
Globalization of Business
The primary effects of globalization include the following:
1) Distributed Operations wherein companies may locate
facilities in multiple countries. There are many reasons to
spread out operations, including:
(a) reduced labor or production costs in the country where
a plant is located,
(b) reduced distribution costs due to locating a plant
nearer to the customers.
MODERN WORLD
SYSTEMS
Globalization of Business
2. Changes in location
- companies may locate their firms in new places, both to reduce
labor and production costs and to take advantage of free trade
zones. In a free trade zone, goods can travel freely between
countries and no tariffs are charged when crossing borders. This
helps keep prices lower than if the goods were shipped in from
another area
MODERN WORLD
SYSTEMS
Globalization of Business
3. Increasing complexity
- multiple locations and distributed operations may lead to
reductions in cost, it also causes increasing complexity in
management of the interactions between the facilities.
ECONOMIC
INTEGRATION
 involves agreements between countries to permit, to varying
degrees, the flow of capital, labor, goods, and services across
their respective international borders (Tovias, 1994).
 It is an arrangement between different regions that often
includes the reduction or elimination of trade barriers, and the
coordination of monetary and fiscal policies.
ECONOMIC
INTEGRATION
 The aim of economic integration is to reduce costs for both
consumers and producers and to increase trade between the
countries involved in the agreement
THEORY OF ECONOMIC
INTEGRATION
 Every country is better suited to engage in certain activities than
other activities. Some countries are rich in natural resources,
some in labor, and some in capital, just to name a few. If labor
and capital are free to move across international borders, each
country can capitalize on its advantages.
THEORY OF ECONOMIC
INTEGRATION
 The theory hypothesizes that eventually the ratio between
wages and profits should equalize among the participating
countries, resulting in fair and balanced trade. In other words,
according to the theory, there will eventually cease to be a
disparity between labor costs, capital investment, and wealth
among nations.
TYPES OF
INTEGRATION
1. FREE TRADE AGREEMENTS
 Most efforts at economic integration occur today through the
use of free trade agreements, which are agreements entered into
between countries regarding specific trade issues, such as
reduction of tariffs (a type of tax on imported or exported goods
and services) and quotas (non- tariff barriers between countries)
that limit imports.
TYPES OF
INTEGRATION
1. FREE TRADE AGREEMENTS
 Trade agreements can be bilateral (between two countries) or
multilateral (between several countries). Countries that are not a
party to the agreement will be subject to higher tariffs and other
trade barriers
TYPES OF
INTEGRATION
2. FREE TRADE AREAS
 A free trade area eliminates barriers to trade among the
members such as tariffs and quotas. Members of a free trade
area make their own policies concerning trade with other
countries outside of the free trade area.
 may be limited to specific types of goods and services. The best
example of a free trade area is NAFTA, the North American Free
Trade Agreement
TYPES OF
INTEGRATION
3. CUSTOMS UNION
 is formed by countries that not only eliminate trade barriers
between the members but also have a unified trade policy with
countries outside of the union.
 Example: a customs union will establish a common tariff that is
applied to all imports coming into each member country. The
tariff revenues may be split among the members, according to a
formula agreed to by the members.
 An example of a customs union is the Andean Community
consisting of Bolivia, Colombia, Ecuador, and Peru.
TYPES OF
INTEGRATION
4. COMMON MARKET
 A common market has all of the characteristics of a customs
union but also eliminates barriers to the movement of capital,
labor, and technology. Restrictions on immigration, emigration,
and foreign investment between members are lifted.
 Mercosur (short for Mercado Común del Sur (or Common
Market of the South) is a South American group of nations that
is an example of a common market.
TYPES OF
INTEGRATION
5. ECONOMIC UNION
 The highest level of economic integration occurs in economic
unions. In addition to all of the economic integration features
found in common markets, members of an economic union
must be able to maintain consistency with monetary policy,
fiscal policy, and tax policy.
 An economic union also uses a common currency. It should be
noted that an economic union requires that member states give
up a significant amount of their independent sovereignty. The
European Union is an example of an economic union.
TYPES OF
INTEGRATION
 In other words, the more integrated economies become, the
fewer the trade barriers are, and the more economic and
political coordination there is between countries.
THE ADVANTAGES AND
DISADVANTAGES OF ECONOMIC
INTEGRATION
1) Trade Benefits
With economic integration, member countries
(a) have a wider selection of goods and services not previously
available;
(b) can acquire goods and services at a lower cost after trade
barriers due to lowered tariffs or removal of tariffs;
(c) have increased efficiency gains which leads to an increased
purchasing power since more trade is encouraged between
member countries,
THE ADVANTAGES AND
DISADVANTAGES OF ECONOMIC
INTEGRATION
2. Employment Opportunities,
 tend to improve because as economic integration encourage trade
liberation and lead to market expansion, more investment into the
country and greater diffusion of technology, it creates more
employment opportunities for people to move from one country
to another to find jobs or to earn higher pay.
 For example, industries requiring mostly unskilled labor tend to
shift production to low wage countries within a regional
cooperation.
THE ADVANTAGES AND
DISADVANTAGES OF ECONOMIC
INTEGRATION
3. Political cooperation among countries
 improve because of stronger economic ties, which can help
resolve conflicts peacefully and lead to greater stability. A group of
nations can have significantly greater political influence than each
nation would have individually. This integration is an essential
strategy to address the effects of conflicts and political instability
that may affect the region.
THE ADVANTAGES AND
DISADVANTAGES OF ECONOMIC
INTEGRATION
 Economic integration is a useful tool to handle the social and
economic challenges associated with globalization.
THE DISADVANTAGES AND
DISADVANTAGES OF ECONOMIC
INTEGRATION
Economic integration has disadvantages
1. Creation of trading blocs since economic integration can also
increase trade barriers against non-member countries.
2. Trade Diversion
3. Erosion of national sovereignty - because of trade barriers, trade
is diverted from a non-member country to a member country
despite the inefficiency in cost.
THE DISADVANTAGES AND
DISADVANTAGES OF ECONOMIC
INTEGRATION
Economic integration has disadvantages
3. Erosion of national sovereignty –
Example, a country has to stop trading with a low cost manufacture in
a non-member country and trade with a manufacturer in a member
country which has a higher cost. In short, trade unions can turn away
trade from non-members even if it is economically detrimental for
them to do so.
POINTS OF DEBATE
First point is:
 Globalization measures cost per unit, not per hour - this is
crucial, and helps explain why factory workers in Germany
and Japan are not victims of globalization like those in the
United States. This is because those countries have access to
better technology, which means that they can produce at a
lower cost per unit. In those countries, technology is so
advanced that even while providing higher wages and better
benefits, technological efficiency allows those companies to
still make more money by leaving their operations in their
home countries.
POINTS OF DEBATE
Second point is:
 Knowledge is power - being able to adapt is an asset. A job is
not a safety net; however, a skill set is. People who work jobs
that are replaceable overseas may find themselves without a
pay check, but those people who have a skill set that is
needed locally will almost always have a job.
POINTS OF DEBATE
Third point is:
 Companies have to face consequences - many companies may
be tempted to use globalization to lower their costs far
beyond what would be possible in the past, but they should
be careful in doing so. Creating an economy in which
consumers do not have the money to buy goods once the jobs
have been moved overseas is not an economy that will
generate many sales. Consumers who lost their jobs because
the company moved the factory overseas won't have money
to buy the now cheaper goods.