CHAPTER 4

GLOBAL
ECONOMY

RUBY ROSE P. VINLUAN

CASS, Lecturer
 Economic Systems

International Trade

OUTLINE
Transnational Corporations

International Economic Institutions and

Market Integration
  The global economy of most countries is classified into
there categories: market, command, and mixed
economies.

Economic  In countries where democracy prevails, its economic

system is usually under freedom, choice, and decisions of
Systems its citizens.
 While countries that are under the control of a single
political party and authority, its system could be under the
practice of command economy.
MARKET ECONOMY  Decision making of private individuals Hongkong

 Economy under the will and interest of the individuals.

New Zealand
 Economic freedom to purchase and sell products, services, and properties.
Australia
 This condition is not planned by a single person or group that has the ability to manipulate or direct the
economy solely.
Switzerland
 It promotes competition among business and firms.

COMMAND ECONOMY  A central economic planning body handles the entire decision making. North Korea

 The quality and quantity of goods and services produced is based on the decision of the government.
Cuba
 Production quantity is dictated, consumer behavior is directed, and market operation is controlled by a single
authority. Russia

 Its objective is to mobilize resources for the common good of the public and for the interest of the nation.
China
 Private individuals have no say in the economic operation.

MIXED ECONOMY  Market-driven economies Philippines

 Combination of market and command economies.

United States
 Some sectors are under the directions of the private individuals while other aspects of the economy are left within
the guidance of the government. United Kingdom

 State can take over the ownership and operation of a private company for the purpose of maintaining the interest of
the nation. France
 The process and the system when goods,
commodities, services cross national economy, and
boundaries in exchange for money or goods of
another country (Balaam and Veseth, 2008).

International Global trade has grown dramatically since the post-

cold war era because of increasing demand of goods
Trade and services and countries.

This global norm reflects growing practice of

internationalizing and globalizing local products and
services.
 1. Descriptive Theory – it deals with the natural order
and the movement of trade. It describes the pattern of
trade under the idea of laissez faire, a French term which
means “leave alone”.

Trade It refers to the notion that individuals are best economic

agents to solve the problems through invisible hand rather
Theories than government policies.
It also addresses the questions which product to trade,
how much product to offer and produce, and which
country to trade in the absence of government
restrictions.
 2. Prescriptive Theory - it prescribes whether
government, an important economic institution, should
Trade interfere and restrict with the movement of goods and
services.

Theories This theory views government to have participation in

deciding which countries to alter the amount,
composition, and direction of goods.
1. Economic Liberals
 For David Ricardo, his influential work, Law of Comparative Advantage explains that free trade
efficiency is attainable if two countries can produce more goods and trade products separately. The
advantage of this theory in international trade is deriving principle of specialization and division of
labor of Adam Smith (Nau, 2009). Countries have different resources and talents; they are better in
performing in that economic activity than other economic activities.
 Economic liberals explain the importance of free trade and the role of individual’s preference in
choosing economic activity. It includes making decision, and choices on comparing the costs of
products to be produced and traded, the availability of the product, and the efficiency of producing
and buying products.

Three Perspectives on International

Trade
2. Mercantilists
 Mercantilism is an economic theory emerged from about 1500-1800. This period was the
emerging eras of nation-states and the formation of more central governments. This system
flourished due to the following reasons:
a. Higher export than import. Governments imposed restrictions and policies requiring economy
ant its market to produce higher export that products and services purchased outside the country or
import. Countries used this mechanism to support their trade objectives and strengthen their
colonial rule and possessions.

Three Perspectives on International

Trade
b. Export less high valued product and import less high valued product. It
prevented and monopolized the production and manufacturing operation of the
colonies.
c. The benefits of colonial powers. Mercantilism is adopted to increase and
sustain the colonial power and its authority to direct and control the economic
activity of the colony.
3. Structuralists
 The Modern World System (MWS) theory developed by Immanuel Wallerstein, explain the
contact of economies between core, semi-peripheral, and peripheral countries in the world.
 The core states have the absolute advantage over the other through unequal exchange and
extraction of raw materials from the periphery and semi-periphery.
 This system as part on the structure of the global capitalism, involves exploitation, and
transformation in some ways.

Three Perspectives on International

Trade
 The role of Multinational Corporation (MNCs) in the 21st
is distinct and interesting to investigate. The movement of
ideas, capital, investment, technology, and people are
affected by the operations of MNCs.

 As the global economy is becoming complex and

competitive, MNCs continue to offer innovations and new
product and services. For several years, the term MNCs
was used to refer to a firm operating in different countries
Transnational
around the world. Because of the magnitude of global
production and networks, the term transnational Corporations
corporation (TNC) became the more acceptable name.

 This refers to business organizations and firms that

compete in regional or global markets. It operates in
countries and makes investments in research,
technology, facilities, distribution, and production.
 TNC can control and monopolize the global
market especially if it has huge pool of
resources making it one of the most powerful
economic actors in the world.
 The number of TNCs from north and west has Transnational
business operations in the south where cheap
labor and raw material are available. Corporations
 TNCs are very powerful economic institutions
because of their global influence in investment
and network distribution.
 International Economic Institutions and Market
Integration

 The formation of economic integration is designed to address and enhance

the level of competitiveness of member economies in trade.
 Free trade is the primary consideration of regional economic integrations.
 Free Trade Area (FTA) is a trading bloc which involves the reduction of
internal tariffs to zero of member economies while retaining different
external tariffs. This policy aims to promote free flow of goods and
services as well as to increase the volume of trade within the region.
 International Economic Institutions and Market
Integration

 Unfair Trade is the conduct of trade by a business firm or government that violates and
breaks the international trade agreements that are unjustifiable and discriminatory.
 Examples of common trade practices are issues relating to price, labor, wages, health, and
environmental concerns that failed to meet the regulatory standards of the body.
 World Trade Organization (WTO)

 In 1995, General Agreement on Tariffs and Trade

(GATT) of the American government was replaced
and succeeded by WTO with 151 members as of
2008 and accounts for 90% of the world’s trade.
 It is based in Geneva, Switzerland and leads by a
director general selected by consensus among its
members.
  Primarily, WTO has the following main
functions:
a. Implementation of the latest GATT
agreements

World Trade b. A venue for trade negotiations

c. A dispute settlement body responsible for
Organization resolving trade problems
d. Review and assess national and
(WTO) international trade laws and policies
e. Assist members and developing economies
by providing technical assistance and training
programs
 World Bank

 Officially called the International Bank for

Reconstruction and Development (IBRD), or World
Bank is an international agency with 189 member-
countries operating in 130 countries worldwide.
 Formed by Bretton Woods agreement in 1944 to
finance the reconstruction of war-torn countries
brought by the devastation of World War II.
  World Bank is composed of four associated
agencies:
a. International Development Association
(IDA). This agency focuses on poor and third
world economies in the world by providing
financial assistance and load program.

World Bank b. International Finance Corporation (IFC).

c. Multilateral Investment Guarantee Agency
(MIGA).
d. International Settlement Centre of
Investment Disputes (ISCID).
International Monetary Fund (IMF)

 IMF was created as the flagship institution of Bretton Woods

agreement with 189-member countries.
 IMF is responsible in supervising exchange rate system,
providing loan programs to economies experiencing
balancing payments adjustments, and review domestic
economic policies.
 Its mandated to ensure the stability of the international
monetary system including exchange rates and international
payments.
 It reflects on the amount owed by the country from another
country as well as indicates the economic operation like what
it produces, consumes, and buys with its money
 European Union
 European Union (EU) is a political economic regional
organization of 28 member-economies in Europe.
 Founded in 1985, European Economic Country (EEC) was
formed by six countries: Belgium, Germany, France, Italy,
Luxembourg, and Netherlands.
 Since then, other European countries joined the regional bloc
making it as Europe’s most influential and powerful body.
 EU is guided by its core values, considered as integral part in
the way of life of its citizens.
 It believes on the following value orientation: (1) Human
dignity, (2) freedom, (3) democracy, (4) equality, (5) rule of
law, and (6) human rights.
 Association of Southeast Asian
Nations (ASEAN)

 The Association of Southeast Asian Nation

(ASEAN) was founded on August 1967 in Bangkok
Thailand with Indonesia, Malaysia, Philippines,
Singapore, and Thailand as its founding fathers.
 Brunei Darussalam, Vietnam, Myanmar, and
Cambodia joined the organization making up today
the 10 member-countries.
 The ASEAN Political-Security Community,
ASEAN Economic Community, and ASEAN
Socio-Cultural Community are the three main
pillars of ASEAN.
  As stated in the Treaty of Amity and Cooperation in
Southeast Asia (TAC) of 2976. The ASEAN
Community functions under its six fundamental
principles (ASEAN.org).
a. Mutual respect for the independence, sovereignty,

Association of
equality, territorial integrity, and national identity of all
nations;
b. The right of every State to lead its national

Southeast Asian existence free from external interference, subversion or

coercion;
c. Non-interference in the internal affairs of one
Nations (ASEAN) another;
d. Settlement of differences or disputes by peaceful
manner;
e. Renunciation of the threat or use of force; and
f. Effective cooperation among themselves