CHAPTER 3: MARKET INTEGRATION

Economy is the social institution that has one of the biggest impacts on the society. And it is the social
institution that organizes all production, consumption and trade of goods in the society. There are many
ways in which products can be made, exchanged and used.

Economic systems- are the means by which countries and governments distribute resources and trade
goods and services. They are used to control the five factors of production including: labor, capital,
entrepreneurs, physical resources and information resources.

4 Types of Economies:
1. Traditional Economic System- is the most traditional and ancient types of economies in the
world. Areas under traditional economic system tend to be rural, second-third world that closely
tied to land, usually through farming.
2. Command Economic System- the large part of economic system is controlled by a centralized
power. The government is often involved in everything from planning to redistributing
resources. A command economy is capable of creating a healthy supply of its resources, and it
rewards its people with affordable prices. This capability also means that the government
usually owns the critical industries like utilities, aviation and railroad. (China & North Korea are
examples of Command economy)
Advantages:
 If executed correctly the government can mobilize resources on massive scale. This mobility can
provide jobs for almost all of the citizens.
 The government can focus on the good of society rather than an individual, which could lead to
more efficient use of resources.
Disadvantages:
 It is hard for central planners to provide for everyone’s needs. This challenge forces the
government to ration because it cannot calculate demand since it sets prices.
 There is lack of innovation since there is no need to take any risk. Workers are also forced to
pursue jobs the government deemed fit.
3. Market Economic System- In a free market economy, firms and households actin self –interest
to determine how resources get allocated, what goods get produced and who buys the goods.
This is opposite to how a command economy works, where the central government gets to keep
the profits.
Laissez Faire- it means no government intervention in the pure market economy.
In this type of economy there is separation between government and the market. This
separation prevents the government from becoming too powerful and keeps their interests
aligned with that of a markets. (Historically, Hong Kong is considered an example of a free
market society.
Advantages:
 Consumers pay the highest price they want to, and businesses only produce profitable goods &
services. There is a lot of incentive for entrepreneurship.
 This competition for resources leads to the most efficient use of the factors of production since
businesses are very competitive.
 Businesses invest heavily in research & development. There is an incentive for constant
innovation as companies compete to provide better products for consumers.
Disadvantage
 Due to the fiercely competitive nature of a free market, businesses will not care for the
disadvantaged like the elderly or disabled. This lack of focus on societal benefit leads to higher
income inequality.
 Since the market is driven solely by self-interest, economic needs have a priority over social and
human needs like providing healthcare for the poor. Consumers can also be exploited by
monopolies.
4. Mixed Economic System- is a cross between a market economy and command economy. In the
most common types of mixed economies, the market is more or less free of government
ownership except for a few key areas like transportation or sensitive industries Iike defense and
railroad. However the gov’t is also usually involved in the regulation of private businesses. The
idea behind a mixed economy was to use the best of both worlds-incorporate policies that are
socialist & capitalist. (ex. India & France)
Advantages:
 There is less gov’t intervention than a command economy. This results in private businesses that
can run more efficiently & cut costs down than a gov’t entity might.
 The government can intervene to correct market failures. For example, most gov’t will come in
and break up large companies if they abuse monopoly power. And taxation of harmful products
like cigarettes to reduce a negative externality of consumption.
 Governments can create safety net programs like healthcare or social security.
 Governments can use taxation programs to redistribute income and reduce inequality.
Disadvantages:
 Too much government intervention and sometimes there isn’t enough
 A common problem is that the state run industries are often subsidized by the government and
run into large debts because they are uncompetitive.

3 Sectors of Production in a Given Economy:

1. Primary Sector- extracts raw materials from natural environments. Ex Miners and farmers fit
well into primary sector.
2. Secondary Sector- gains the raw materials and transforms them into manufactured goods. This
means for example that someone from primary sector extracts oil from the earth then someone
from secondary sector refines the petroleum to gasoline.
3. Tertiary Sector- involves services rather than goods. It offer services by doing things rather than
making things.
International Financial Institution
The strength of a more powerful economy brings greater effect on other countries. In the same manner,
crisis on weaker economies have less effect on other countries.

Although countries are heavily affected by the gains and crises in the world economy, organizations that
they consist also contribute to these events.

The following are financial institutions and economic organizations that made countries even closer
together when it comes to trade.

The Bretton Woods System

Was established because of the fear of the recurrence of lack of cooperation among nation-
states, political instability, and economic turmoil (especially the Second World War) reduction of barriers
to trade and free flow of money among nations became the focus to restructure the world economy and
ensure global financial stability .

5 Key Elements of Bretton Woods System:

1. Expression of currency in terms of gold or gold value to establish a par value
2. The official monetary authority in each country would agree to exchange its own currency for
those of other countries at the established exchanged rates, plus or minus one percent margin.
3. The establishment of an overseer for these exchange rates thus the (IMF) international
Monetary Fund was founded.
4. Eliminating restrictions on the currencies of member states in the international trade.
5. The U.S. dollar became the global currency.

The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO)

General Agreement on Tariffs and Trade (GATT)- was established in 1947

 Was a forum of the meeting of representatives from 23 member countries. It focused on trade
goods through multinational trade agreements conducted in many rounds of negotiation.
World Trade Organization (WTO) - was created under an agreement out of the Uruguay Round (1986-
1993)
 Its headquarter is located in Geneva, Switzerland with 152 member countries as of 2008
 An independent multilateral organization that became responsible for trade in service, non-tariff
related barriers to trade and other broader areas of trade liberalization.
The International Monetary Fund (IMF) and The World Bank

IMF and World Bank- were founded after World War ll. The establishment was mainly because of peace
advocacy after the war.
 Aimed to help the economic stability of the world.
 Both are basically banks but instead of being started by individuals like regular banks, they were
started by countries. Most of the world’s countries are members of the two institutions.
IMF’s – it’s goal is to help countries which were in trouble at that time and who could not obtain money
by any means. (Ex. Country’s economy collapse or threatened. It is the last resort for countries which
needed financial assistance.)
The World Bank- had more long-term approach. Its main goals revolved around the eradication of
poverty and it funded specific projects that helped them reach their goals, especially in poor countries.

Unfortunately, the reputation of these institutions has been dwindling, mainly due to practices such as
lending the corrupt governments or dictators and imposing ineffective austerity measures to get their
money back.

The Organization for Economic Cooperation and Development (OECD) the Organization of Petroleum
Exporting Countries (OPEC), and the European Union (EU)

Organization for Economic Cooperation and Development- the most encompassing club of the richest
countries in the world with 35 member states as of 2016 with Latvia as the latest member. It is highly
influential despite the group having little formal power. This emanates from the member country’s
resources and economic power.

Organization of Petroleum Exporting Countries (OPEC)- was formed because member countries wanted
to increase the price of oil, which in the past had a relatively low price and had failed in keeping up with
inflation. ( Members: Saudi Arabia, Iraq, Kuwait, Iran & Venezuela. And today UAE, Algeria, Libya, Qatar,
Nigeria, & Indonesia are also included as members.)

European Union (EU)- is made up 28 states. Most members in Eurozone adopted the Euro as the basic
currency but some Western European nations like Great Britain and Sweden, and Denmark did not.
Critics argue that the euro increased prices in Eurozones and result in depressed economic growth rates
like Greece, Portugal & Spain. Caused by the policies contributed by European Central Bank.

North American Free Trade Agreement (NAFTA)- is a trade pact between U.S.
Mexico, and Canada created on January 1, 1994 when Mexico joined the two other nations.
 It helps in developing and expanding world trade by broadening international cooperation for
improving working conditions in North America by reducing barriers to trade as it expands the
markets of the three countries.
Generally NAFTA has its positive and negative consequences.
Positive: It lowered prices by removing tariffs, opened-up new opportunities for small-medium – sized
business to establish a name for itself, quadrupled trade between the three countries.
Negative: excessive pollution, loss of more than 682,000 manufacturing jobs, exploitation of workers in
Mexico, & moving of Mexican farmers out of business.

History of Global Market Integration

Before the rise of today’s modern economy, people only produced for their families. Nowadays,
economy demands the different sectors to work together in order to produce, distribute and exchange
products and services.
The Agricultural Revolution and Industrial Revolution

Agricultural Revolution- considered as the first big economic change.

- Happened when people learned to domesticate plants and animals they realized that it was more
productive than hunter-gatherer societies. Farming helped societies, build surpluses, meaning, not
everyone had to spend their time producing food. This in turn, led to major developments like
permanent settlements, trade networks and population growth.

Industrial Revolution (1800’s)- the second major economic revolution. With the rise of industry came
New economic tools, like steam engines, manufacturing and mass production. Factories
popped up and instead of working at home where people worked for their family by making
things from start to finish, they began working as wage laborers and then becoming more
specialized in their skills. Overall, productivity went up , standards of living rose and people
have access to a wider variety of goods due to mass production.

Negative effect: every economic revolution comes with economic casualties.

- Workers especially women and children work in dangerous conditions for low wages.
- With more productivity came greater wealth, but also greater economic inequality.
Labor Unions- gave way for minimum wage laws, reasonable working hours, and regulations to protect
the safety of workers.

Capitalism & Socialism

Two competing economic models that sprung up around the time of industrial Revolution, as economic
capital became more important to the production of goods.

Capitalism – is a system in which all natural resources and means of production are privately owned.
- It emphasizes profit maximization and completion as the main drivers of efficiency. This means that
when one owns a business, he needs to outperform his competitors if he is going to succeed. He is
incentivized to be more efficient by improving the quality of one’s product and reducing its prices.
Adam Smith’s “invisible hand” idea is that if one leaves a capitalist economy alone, consumers will
regulate things themselves by selecting goods & services that provide the best value.
- However, there are many sectors where a hands-off approach can lead to what economist call
market failures. Where an unregulated market ends up allocating goods & services inefficiently. A
monopoly is an example of market failure.

Socialism- government plays an even large role, the means of production are under collective
ownership. It rejects capitalism’s private property and hands-off approaches.
- Property is owned by the government and allocated to all citizens, not only to those with money
who can afford it.
- It emphasizes collective goals , expecting everyone to work for a common good and placing a higher
value on meeting everyone’s basic needs than on individual profit.
- Karl Marx viewed it as a stepping stone towards communism- a political and economic system in
which all members of the society are socially equal.
Negative: But this has not played out in countries that have modelled their economies on socialism, like
Cuba, North Korea, China and USSR. Rather than freeing workers from inequality, the massive power of
the government in these states gave enormous wealth, power and privilege to political elites.

Information Revolution
- Is a period of change that might prove as significant to the lives of people. Computer technology is
the root of this change, and continuing advancements in that technology seem to ensure that this
revolution would touch the lives of people.
- Began in the 20th century has been driven in most part by a geometric growth in the production of
high-tech electronics , including components of computers, computer peripherals, semiconductors ,
integrated circuits, printed circuit boards, video display equipments, audio equipments and
household electronics which accelerated the growth in production, distribution and sales of
information and communication technologies.
- The main feature of Information Revolution is the growing economic, social & technological role of
information.
- May relate to Industrial Revolution or Agricultural Revolution as a product of Informational Inputs,
produced by individual innovators, scientific & technical institution.
- Led us to the age of the internet where optical communications networks play key role in delivering
massive amounts of data.
- Computers and technologies are beginning to replace many jobs because of automation or
outsourcing jobs offshore. We also see decline in Union membership.

Primary labor market jobs- includes jobs that provide many benefits to workers like high incomes, job
security, health insurance and retirement packages. These are White-collar professions like Doctors,
Accountant and Engineers.
Secondary labor market jobs- provide fewer benefits and include lower-skilled jobs & lower service-
sector jobs. They tend to pay less, have more unpredictable schedules, and typically do not offer health
benefits and tend to have less job security.
Tertiary Sector or Service Industry- includes every jobs such as administrative assistants, nurses,
teachers and lawyers. It is defined mainly by what it produces rather than what kinds of jobs it includes.

Global Corporations
- also known as Multinational / Transnational companies
- These companies that extend beyond the borders of one country.
- They intentionally surpass national borders and take advantage of the opportunities in different
countries to manufacture, distribute, market and sell their products.
- The Trade Regulatory groups (WTO) and agreements (NAFTA) regulate the flow of goods and
services between countries. They reduce tariffs which are taxes on imports , and makes custom
procedure easier which makes trading across the national boarders much more feasible.