Economic

Globalization
 Globalization:
Globalization is a process of interaction and integration among
the people, companies, and governments of different nations, a
process driven by international trade and investment and
aided by information technology.
The term “Global Village” by McLuhan.
( Globalization is the product of Society being increasingly
‘Mediate’).
Bauman sees ‘Winners and Losers’ in the process, reminding
us of the crucial fact that more people are excluded from the
Global Village than are included. (Less than 20% people have
access to Internet) “Global Digital Divide”.
Globalizatio
n:
Globalization is dynamic process by which nations and
economies around the world become more
interdependent. Globalization is not strictly an economic
phenomenon: Social, cultural, and political convergence,
such as the formation of international institutions (i.e.,
the World Bank or United Nations), has played an
important role in fostering global interdependence.
Economic globalization is not an entirely new
phenomenon; but with the developments in information
and communication technology (ICT) have increased
the speed of globalization in the latter part of the 20th
 Role of ICTs in Globalization:
Electronic Colonialism Theory : by Tom McPhail.
“Explains how Mass Media are leading to new concept of Empire
(Empire of the Mind). It focuses on the global media influence on
how people think and act.”
World System Theory: Immanuel Wallerstein.
A macro-sociological theory that seeks to explain the dynamics
of the “Capitalist world economy” as a “total social system”.
This theory states that global economic expansion takes place from
a relatively small group of core-zone nation-states out to two
other zones of nation-states, these being in the semi-peripheral
and peripheral zones.
 Economic Globalization:

Economic Globalization, the term, first proposed by Levy

1985.
The trans-national Increase in trade and capital transfer
across national boundaries.
The word “trans-national” and the phrase “across
national boundaries” also need explanation. The world
has always known international trade, but what makes
economic globalization different is that nations are
coming to play a smaller and weaker role in it.
Modern trans-national corporations have offices and
Economic Globalization:
Modern Multinational corporations are increasingly
“stateless,” as they answer to no one, and have
economies larger and more powerful than many of the
countries that host them. They make their own
international trade policy, intervene in national policy,
and use campaign contributions to sway the votes of
politicians. These corporations are undemocratic, secret
societies, and apparently prefer to do business in
undemocratic countries.
 Forms of Economy
Protectionism VS Trade Liberation.
Protectionism: Protecting one’s economy from foreign
competition by creating trade barrier;
 High custom duty,
 Limit import products,

 Ban import product.

Trade Liberation (Free Trade); reducing trade barriers for
easy global trade.
Institutions of Economic Globalization:
Bretten Woods Conference/Agreement:
During WWII, 44 allied countries met to talk about the aftermath of
the economy after the war.
Established a set rules, including new ideas for the global economy.
Some institutions have been originated after this conference:
IMF, World bank, World Trade Organization.
NIEO (New International Economic Order)
NWICO (New World Information and Communication Order).
Institutions of Economic Globalization:
OECD (Organization for Economic Cooperation and
Development); attempts to forecast macroeconomic
developments on behalf of the 30 member countries,
which produce two-thirds of the world’s goods and
services. In a way, OECD is a think-tank for core and some
semi peripheral nations. It provides them with expert
advice on how to further frame and expand international
trade rules so that the cooperation among member nations
as well as others increases and creates a stable and
expanding global economy.
Advantage and Disadvantages of Economic
Globalization.
Advantages
• Free trade
• Cheap Production.
• Economic Growth
• Increased the standard of
life.
• Access to new and
efficient market.
• Increased Competition
Disadvantages
• Harmful effects on small
Industries and Small
Business.
• Global Warming.
• Underpayment of
Workers in Developing
Countries.
• Encourages dependence on
other
countries.
Historical Background:
Economics
Hesiod (8BC)
Poem: Works and Days:
fundamental economic problem
of scarce resources for the
pursuit of numerous and
abundant human end and
desires.
Because of scarcity, labor,
materials and time have to be
allocated efficiently;
Competition helps to overcome
scarcity
Advocates a rule of law and a
respect for justice to establish
order and harmony within a
society, and to allow
competition to develop within a
matrix of harmony and justice
Plato (468-399 BC); Republic
Specialization is the reason for
and justification of society;
Through specialization, the
individual learns and perfects
his knowledge in skills in an art
or practice, as well as
increasing the production of
material things.
2 effects of specialization:
1. Increases output and
improves the welfare of the
individual by producing more
goods and services; and
2. Component of justice
Individuals are not self-
sufficient
Xenophone (430-355BC)
Student of Socrates who
viewed division of labor and
the allocation of resources
within the Latifunda, pieces of
landed property covering
tremendous areas, as a way
to self-sufficiency.
He called the fficient
management of Latifunda as
oeconomicus.
Aristotle (384-322)
Divided the concerns of economics
into 2 separate fields:
1. Oikonomiks – dealt with the
production and consumption of
goods; analysis of how decisions
were made regarding the
management of resources.
2. Chrematistics – encompassed
the activities of money-making
as well as aspects of
production.studied human
activities involved with wealth-
getting which could be natural or
unnatural.
Made a clear distinction between
activities that involved real things
and those that were pecuniary;
while they are related, they are
fundamentally different.
Rise of Mercantilism
Economic theory that holds the prosperity
of a nation depends upon its supply of
capital and that the global volume of trade
is unchangeable.
Established from 16th to 18th century;
economic assets or capital are respected
by bullion (gold, silver and trade value) held
by the state, which is best increased
through a positive balance of trade with
other nations;
Ruling government should have a
protectionist role in the economy.
Physiocrats
Group of economists who believed that the
wealth of nations was derived solely from
the value of land agriculture or land
development.
Laissez faire– the only legitimate form of
government revenue is derived from the
value of land.
Physiocracy – first well-developed
economic theory;
Emphasis on productive work as the
source of national wealth.
Proponents: Turgot (1727-1781) and
Quesnay (1694-1774)
Laissez Faire Theory
"Let do"; first used by the 18th century
physiocrats as an injunction against
government interference with trade;
synonym for strict free market economics
during the mid 19th century;
Means that the state has no responsibility
to engage in intervention to maintain a
desired wealth distribution or to create a
welfare state to protect people from
poverty; government should not create
legal monopolies; state should not use
protectionist measures (tariffs and
subsidies)
David Ricardo (1772 – 1823)
Theory of comparative
advantage – even if a
country could produce
everything more efficiently
than another, it would reap
gains from specializing in
what it was best at
producing and trading with
other nations.
Wages should be left to
free competition, so there
should be no restrictions
on the importation of
agricultural products from
abroad.
Thomas Robert Malthus
(1766 – 1834)
Principle of Population –
population, if unchecked
increases at a geometric
rate whereas food supply
grows at an arithmetic
scale.
Favored moral restraint
(late marriage and sexual
abstinence) as a check on
population growth for the
working and poor classes.
Lower social classes are
responsible for societal ills
so lowering their population
reduces poverty and
hunger.
Marginalist School (1870`s) – Classical economics
Explored the process of rational decision making
on both sides of the market – demand side and
supply side.
Economic decisions are made at the margin (refers
to the next unit or additional unit);
Demand side – concept of utility and how changes
in utility effect the price the people are willing to
pay for goods or services;
Utility – usefulness or satisfaction a consumer derives from
the consumption of an item.
Law of diminishing marginal utility – as a
consumer purchases additional units of the same
item in a given period of time, the marginal utility
falls.
Karl Marx (1818 – 1883)
The Marxist Economics
Comes from the work of
German economist Karl
Marx (The Capital);
Labor theory of value and
exploitation of labor by
capital; capitalism was
doomed and would soon
be followed by business
depressions,
revolutionary upheavals
and socialism;
Neo-Classical Economics
Also called orthodox economics;
Alfred Marshall – Father of New-
classical Economics (1842-1924)
Price and output of a good were
determined by both supply and
demand: the 2 curves are like
scissor blades that intersect at
equilibrium;
Concept of consumer surplus –
price was typically the same for
each unit of a commodity that a
consumer bought, but the value
to the consumer of each
additional unit declines.
Concept of producer surplus –
the amount the producer is
actually paid minus the amount
that he would willingly accept.
John Maynard Keynes
(1883 – 1946); Father of Modern
Macroeconomics;
Published The General Theory
of Employment, Interest and
Money during the Great
Depression;
If investment exceeds
savings, there will be inflation
(plenty of money going after
small number of goods). If
savings exceeds investment,
there will be recession.
In the midst of economic
depression, the correct
course of action should be to
encourage spending and
discourage savings.
Economics:
Introduction
Economics
Branch of social science that aims to
describes the factors which determine
production, distribution and consumption of
goods;
Coined from the Ancient Greek term oikos
(house) and nomes (custom or law), hence
"rules of the house"
Originally known as "political economy" but
was shortened to "economics" (economic
science)
Nature of Economics
As a SCIENCE: body of systematic knowledge built upon
by conscious efforts; its laws and principles are arrived at
only after a long series of observations and
experimentations.
Theory – explanation of a certain event; it becomes
successful if its predictions are confirmed by actual
observation and must gain universal acceptance.
Economics as a SOCIAL SCIENCE
Deals with the study of man`s life and how he lives
with other men; concerned with human beings and
their behavior.
Interdependent with other sciences
1. Psychology – science of the mind;
2. History – science that records and explains past
events;
3. Sociology – development of society;
4. Political science – science of STATE;
5. Geography – determines main resources of a
region;
6. Religion – traditions and beliefs can affect
economic development.
Branches of Economics
1. Macroeconomics – behavior of the whole or
entire economy; level of production, rate of
unemployment, GNP, etc.
Economic behavior of the whole economy or
its aggregates: government, business and
households;
Known as EMPLOYMENT AND INCOME
ANALYSIS
2. Microeconomics – behavior of a specific
segment such as consumers, business firms,
prices of products in the market, etc.;
individualized.
Known as PRICE THEORY
Household – basic consuming unit;
Firm – basic producing unit
Good – anything which yields satisfaction to someone.
Tangible goods – material goods or commodities.
Intangible goods – in the form of services; examples:
services of a doctor, teacher or painter.
According to use:
Consumer goods – those which yield satisfaction directly;
Capital goods – used in the production of other goods and
services. Examples: buildings, machineries, equipment.
According to need:
Essential goods – if used to satisfy basic needs of man;
food, shelter, medicine
Luxury good – those which man may do without, but are
used to contribute to his comfort and well being; perfume,
chocolates, expensive cars
Manufacturing or industry - Goods are created by
means of production. It may involve the physical
transformation of a commodity. Example: conversion
of leather into shoes.
Agriculture production – production that takes place in
the farm; planting, harvesting of rice, corn, coconut,
sugar
Exploration – oil, mineral and precious metal is
production
Economic resources – things needed to carry on the
production of goods and services; also called factors
of production.
Market – means of interaction between buyers and
sellers for trading or exchange.
Goods market, wet market, dry market, labor market
Divisions of Economics
1. Production – manufacturing process of
goods to provide and satisfy consumer
needs, utilization of products, goods and
services in a given time;
2. Distribution – manner in which goods,
products and services are delivered to
consumers; how they are allocated to
consumers through economic outlets.
3. Exchange – how products, goods & services
are transferred from one person to another.
4. Public finance – how the Government
implement financial activities (taxation,
expenditures, etc)
Tools of Economics
1. Logic – sound thinking and reasoning
2. Mathematics – deals with numbers and their operations.
Economics is the most quantifiable discipline among all
social sciences (population, income, national product,
aggregate number of firms, etc)
3. Statistics – analysis and interpretation of numerical data
Factors of Production (INPUTS)
1. Land – natural resource used in production
of goods or products.
2. Labor – workforce, manpower;
3. Capital – physical productive capacity
(machines, tools, factories)
4. Entrepreneur – brings all these factors to
produce goods;
5. Foreign exchange – the foreign money or
currencies that are reserved in order to
import material or raw materials that are
needed in the production process.
Foreign exchange is defined as the conversion of an amount of
money or currency of one country into an equivalent amount of
money or currency of another.
Economic Systems
Organization of economic society with
reference to production, exchange, distribution
and consumption of wealth.
These are the means by which countries and
governments distribute resources and trade
goods and services.
They are used to control the factors of
production
The basic economic problem of every economic system is
SCARCITY
Scarcity is the tension between our limited resources and
our unlimited wants and needs.
For an individual, resources are: time, money and skill
For a country, resources are: natural resources, capital,
labor force and technology
Because of SCARCITY OF RESOURCES, every
economic system is faced with the following
problems:
1. What to produce – desires of the people; based
on needs of consumers; affected by availability
of resources, physical environment and
customs/traditions of people.
2. How much to produce – consumers` tastes and
preferences play an import role in determining
production;
3. How to produce – manipulating factors of
production to come up with desired output;
quality vs. quantity
4. For whom shall goods/services be produced –
problem of distribution
 Types of Economic
Systems
1.Traditional
2.Command
3.Market
4.Mixed
Traditional Economic System
Each new generation retains the economic
position of its parents and grandparents.
South America, Asia and Africa support some
traditional economies of thriving agricultural
villages.
Traditional economies produce products and
services that are direct results of their beliefs,
customs, traditions and religions.
Areas of traditional economies tend to be rural,
second or third world and closely tied to the
land (agricultural)
Also known as SUBSISTENCE ECONOMY
 Command Economic System
Government controls all economic activities,
e.g. Communism
Market plays little to no role in production
decisions.
Less flexible than market economies and react
slower to change in consumer purchasing
patterns and fluctuations in supply and
demand.
Capable of creating a healthy supply of its own
resources and generally rewards its own
people with affordable prices.
 Market Economic System
Based on consumers and their buying
decisions rather than under government
control; similar to free market economy;
Market trends and product popularity generate
what businesses produce.
Does not utilize price controls or subsidies and
prefer less regulation of industry and
production.
Also called FREE ENTERPRISE – any
individual can engage in any enterprise, which
he thinks will yield him profit in competition
with other business.
 Mixed Economic System
Combines qualities of market and command
systems into one;
Certain resources are allocated through the
market and others through the state;
Also called DUAL ECONOMY;
Government sets laws and rules that regulate
economic life, produces educational and police
services and regulates pollution and business.
 Basic Concepts: Supply and Demand
Supply refers to the amount of goods a market
can produce;
Demand refers to the amount of goods
consumers are willing to buy;
1. Potential demand – mere need or desire not
backed up by ability to pay; no purchasing power;
2. Effective demand – need that is backed up by
ability to pay
These two powerful market forces form the
main principle that underlies all economic
theory.
The law of supply and demand explains how
prices are set for the sale of goods.
• Inflation vs Deflation
• Fiat Money vs Commodity Money
• GDP vs GNP
• Recession vs Depression
• Savings vs Investment
Inflation is a situation when the prices of goods and services get a
boost, thus decreasing the buying power of money.
Deflation is the opposite of inflation; prices of goods and services fall
and people can purchase more goods with limited money