CONTEMPORARY WORLD
GLOBAL ECONOMY
Learning Objectives:
After studying this chapter, the student will be able to:
1. Define international trade and identify the reasons why countries
engage in international trade.
2. Examine the various theories and perspectives explaining the
practice of international trade.
3. Evaluate the roles and functions of different international economic
organizations.
4. Discuss the factors leading the formation of economic integration
and cooperation.
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The interconnected of world economy is the forefront marker of
globalization. The meeting point of developed and developing
economics as well as the emergence of economics institutions and
organizations make everything easier and faster to hold transaction
globally.
Global productions are everywhere in the world especially in
countries where labor is cheap and materials are available.
The global economy is highly interdependent through exchanges of
commodities that create as opportunity to more sustainable and
equipped economy like the rich countries while pose risk to the
emerging and less performing country.
Developed economics are all top gainers because they have
sufficient resources to compete with other most power economies in
the world and They somehow control and dictate the movement of
global demand, investment and flow of technologies worldwide.
ECONOMIC SYSTEM
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The Global Economy of most countries is classified into three (3)
categories: market, command and mixed economies.
In countries where democracy prevails, its economic system is
usually under the freedom, choice at decisions of its citizens.
While countries that are under the freedom, choice and decisions of
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.
1. Market Economy – (democratic countries)
 decision making lies on the private individuals which is a
determinant of a pure market economy.
 Economic freedom to purchase and sell products, services is a
key characteristic of an economy under the will and interest of
the individuals. Economic activities like production and
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distribution of goods and commodities are based on the
interaction of supply and demand.
This condition is not planned by a single person or group that
has the ability to manipulate or direct the economy solely.
There is a very close economic engagement between
producers and consumers.
Supply in the market is based on the consumer behavior,
price, and the resource availability in the economy.
They usually compete for the quality and price of their
products. This allows consumers to enjoy their economic
freedom to choose products.
Innovation is also an advantage of this system which
encourages competing producers to make and develop items
that will provide comfort and satisfaction to the market.
2. Command Economy – a central economic planning body handles
the entire decision-making in the operation of the economy. The
quality and quantity of goods and services produced in the market is
based on the decision of the government. Production quantity is
dictated consumer behavior is directed, and market operation is
controlled by a single authority.
The objective of command system is to:
a. To mobilize resources for the common good of the public and for
the interest of the nation.
b. Private individuals have no say in the economic operation as this
includes the abolition of private ownership
c. Opposition to this system states that there is the total absence of
economic competition and innovation.
3. Mixed Economy – Market driven economies like United States,
Great Britain, and France had experienced mixed economic system.
This practice is a combination of market and command systems of
economic planning and decision-making. Some sectors are under
the direction of the private individuals while other aspects of the
economy are left within the interest and guidance of the
government. There are times that are state has to take over the
ownership and operation of a particular troubled private firm for the
purpose of maintaining the interest of the nation. When the
American market was hit by the 2008-2009 financial markets, its
government resorted to take over some collapsing financial
corporations
INTERNATIONAL TRADE
International Trade (IT) is the process and system when goods,
commodities, services cross national economy, boundaries in exchange
for money or goods of another country (Balaam and Veseth, 2008). Global
trade has grown dramatically since the post-cold war was era as a result
of increasing demand of goods and services of countries. This global norm
is a reflection of growing practice of internationalizing and globalizing local
products and services.
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Trade Theories
There are two (2) types of trade theories explaining international trade.
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Descriptive Theory – descriptive theory addresses the questions
of which product to trade how much product to offer and produce,
and which country to trade in the absence of government
restrictions.
Prescriptive Theory – this theory views government to have
participation in deciding which countries to alter the amount
composition and direction of goods. The pressing question
describing descriptive theory is “Should the government control
trade?”
Three Perspectives on the International Trade
1. Economic Liberals
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 the products.
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 from the principle of specialization
and division of labor (Nau, 2009). Countries have different resources
and talents; they are better in performing in that economic activity
that other economic activities.
2. Mercantilists
Mercantilism is an economic theory emerged from about
1500 -1800. This period was the emerging eras of nations-states
and the formation of more central governments. This system
flourished due to the following reasons:
 Higher export that import
 Export less high valued product and import less high valued
product
 The benefits of colonial powers Mercantilism was adopted to
increase and sustain the colonial power and its authority to
direct and control the economic activity of the colony.
3. Structuralists
The core states have the absolute advantage over the other through
unequal exchange and extraction of raw materials from periphery
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and semi-periphery. This system as part on the structure of global
capitalism, involves exploitation, and transformation in some ways.
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