THE CONTEMPORARY WORLD: LESSON 2

THE GLOBAL ECONOMY

ECONOMIC GLOBALIZATION AND GLOBAL TRADE.

Economic Globalization refers to the increasing interdependence of world economies 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. It reflects the continuing
expansion and mutual integration of market frontiers, and is an irreversible trend for the
economic development in the whole world and the turn of the millennium.

What is ‘The Global Economy or Global Economics?’

“Worldwide economic activity between various countries that are considered intertwined and
thus can affect other countries negatively or positively.”
It is all the economies of the world which we consider together as one economic system. Put
simply; it is one giant entity. It is also the system of trade and industry across the world that has
emerged due to globalization. In other words, the way in which countries’ economies have
been developing to operate collectively as one system.

MAJOR INFLUENCES WITHIN THE GLOBAL ECONOMY:

THE WORLD TRADE ORGANISATION - The WTO attempts to promote free and fair trade –
an increasingly difficult task, which it undertakes with varying success. The WTO was
established in 1995 when it replaced the General Agreement on Tariffs and Trade (GATT). It has
its headquarters in Geneva, Switzerland and, by 2016, had 164 member countries, including
China, which was the last major nation to join.
The purpose of the WTO is to promote free and fair trade through multilateral talks and
negotiations, and to arbitrate between countries that are in dispute. The WTO itself claims that,
unlike GATT that preceded it, its rules of trade have been worked out by the direct involvement
of all countries, and not just a few powerful ones.

TRADE – Why do countries trade?

Countries trade with each other when, on their own, they do not have the resources, or
capacity to satisfy their own needs and wants. By developing and exploiting their domestic
scarce resources, countries can produce a surplus, and trade this for the resources they need.
Clear evidence of trading over long distances dates back at least 9,000 years, though long
distance trade probably goes back much further to the domestication of pack animals and the
invention of ships. Today, international trade is at the heart of the global economy and is
responsible for much of the development and prosperity of the modern industrialized world.
Goods and services are likely to be imported from abroad for several reasons. Imports may be
cheaper, or of better quality. They may also be more easily available or simply more appealing
than locally produced goods. In many instances, no local alternatives exist, and importing is

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essential. This is highlighted today in the case of Japan, which has no oil reserves of its own, yet
it is the world’s fourth largest consumer of oil, and must import all it requires.
The production of goods and services in countries that need to trade is based on two
fundamental principles, first analyzed by Adam Smith in the late 18th Century (in The Wealth of
Nations, 1776), these being the division of labor and specialization.
DIVISION OF LABOR - In its strictest sense, a division of labour means breaking down
production into small, interconnected tasks, and then allocating these tasks to different
workers based on their suitability to undertake the task efficiently. When applied
internationally, a division of labour means that countries produce just a small range of goods or
services, and may contribute only a small part to finished products sold in global markets. For
example, a bar of chocolate is likely to contain many ingredients from numerous countries, with
each country contributing, perhaps, just one ingredient to the final product.
SPECIALISATION - Specialisation is the second fundamental principle associated with trade, and
results from the division of labour. Given that each worker, or each producer, is given a
specialist role, they are likely to become efficient contributors to the overall process of
production, and to the finished product. Hence, specialisation can generate further benefits in
terms of efficiency and productivity.
Specialisation can be applied to individuals, firms, machinery and technology, and to whole
countries. International specialisation is increased when countries use their scarce resources to
produce just a small range of products in high volume. Mass production allows a surplus of
goods to be produced, which can then be exported. This means that goods and resources must
be imported from other countries that have also specialised, and produced surpluses of their
own.
When countries specialise they are likely to become more efficient over time. This is partly
because a country's producers will become larger and exploit economies of scale. Faced by
large global markets, firms may be encouraged to adopt mass production, and apply new
technology. This can provide a country with a price and non-price advantage over less
specialised countries, making it increasingly competitive and improving its chances of exporting
in the future.
WHAT ARE THE ADVANTAGES AND DISADVANATGES OF TRADE?
ADVANTAGES DISADVANTAGES
Trade can lead to over-specialisation, with workers
The exploitation of a country's at risk of losing their jobs should world demand fall
comparative advantage, which means that or when goods for domestic consumption can be
trade encourages a country to specialise in produced more cheaply abroad. Jobs lost through
producing only those goods and services such changes cause severe structural
which it can produce more effectively and unemployment. The recent credit crunch has
efficiently, and at the lowest opportunity exposed the inherent dangers in over-specialisation
cost. for the UK, with its reliance on its financial services
sector.
Trade increases competition and lowers Certain industries do not get a chance to grow
world prices, which provides benefits to because they face competition from more
consumers by raising the purchasing established foreign firms, such as new infant
power of their own income, and leads a industries which may find it difficult to establish
rise in consumer surplus. themselves.
Trade also breaks down domestic
monopolies, which face competition from
more efficient foreign firms.
The quality of goods and services is likely

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 to increases as competition encourages
innovation, design and the application of
new technologies. Trade will also
encourage the transfer of technology
between countries.
Trade is also likely to increase
employment, given that employment is
closely related to production. Trade
means that more will be employed in the
export sector and, through the multiplier
process, more jobs will be created across
the whole economy.

LIBERALIZATION – TRADE LIBERALIZATON.

Two opposing forces have shaped the changing pattern of world trade over the last 200 years;
the promotion of free trade (Trade Liberalization) and the protection against free trade
(Protectionism).
WHAT IS FREE TRADE?
A free trade agreement is a pact between two or more nations to reduce barriers to imports
and exports among them. Under a free trade policy, goods and services can be bought and sold
across international borders with little or no government tariffs, quotas, subsidies, or
prohibitions to inhibit their exchange.

WHAT IS THE PURPOSE OF FREE TRADES?

Essentially, FTAs are designed to reduce the barriers to trade between two or more countries,
which are in place to help protect local markets and industries. Trade barriers typically come in
the form of tariffs and trade quotas. ... FTAs are also ultimately designed to benefit consumers.

WHAT ARE THE ADVANTAGES OF FREE TRADE?

1. The theory of comparative advantage - This explains that by specialising in goods where
countries have a lower opportunity cost, there can be an increase in economic welfare
for all countries. Free trade enables countries to specialise in those goods where they
have a comparative advantage.
2. Reducing tariff barriers leads to trade creation.
3. Increased exports.
4. Increased competition. - With more trade, domestic firms will face more competition
from abroad. Therefore, there will be more incentives to cut costs and increase
efficiency. It may prevent domestic monopolies from charging too high prices.
5. Trade is an engine of growth. - World trade has increased by an average of 7% since
1945, causing this to be one of the significant contributors to economic growth.
6. Make use of surplus raw materials. - Middle Eastern countries such as Qatar are very
rich in reserves of oil, but without trade, there would be not much benefit in having so
much oil.
Japan, on the other hand, has very few raw materials; without trade, it would have low
GDP.
7. Tariffs may encourage inefficiency. - If an economy protects its domestic industry by
increasing tariffs industries may not have any incentives to cut costs.

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