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.
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 sufficiently of resources to compete with other most power economies in
the world. They somehow control and dictate the movement of global demand, investment
and flow of technologies worldwide.
ECONOMIC SYSTEM
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 – decision making lies on the private individuals is a determinant
of a pure market economy. Economic freedom to purchase and sell products, services,
and properties is a key characteristic of an economy under the will and interest of the
individuals. Economic activities like production and 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.
Trade Theories
There are two (2) types of trade theories explaining international trade.
 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 and semi-periphery. This system as
part on the structure of global capitalism, involves exploitation, and transformation in
some ways.