Economics And Globalization For Business Management

History of Economics and Globalization

Describe about the Economics and Globalization for Business Management.

The importance of globalization in the present world cannot be overemphasized. According to Professor AmartyaSen, the act of globalization has led to the economic, scientific and cultural enrichment of a nation. However, the question is, when did the global integration of markets actually started, and how. It is worth mentioning that though Adam Smith never mentioned the term “Globalization” even for once in his book, The Wealth of Nations, there is an underlying concept of the same. It is said that even during the primitive time, as the “division of labor” was introduced, the need for specialized experts emerged, and consequently it became imperative to bring people from various parts of the world that ultimately led to the expansion of trading networks (Ruzana 2015). In the words of Van Der Wee, the process of economic globalization started in Europe during the 11^th and 14^th centuries (Fujita and Thisse 2013). While during the 17^th century, globalization aided countries in the expansion of trade through the establishment of the British East India Company or the Dutch East India Company, the process continued through the colonization of America by Europe. During the 19^th century, however, owing to the growth of industrialization, as well as the rise of imperialism, new trade relations started getting established between nations. Finally from the 20^th century onwards, with the invention of technology, the process of homogenization of cultures and nations led to the growth of globalization (Antuneset al. 2016).

Again, as far as the history of Economics is concerned, the subject has been evolving itself for more than hundred years. During the time span of 850 to 1000 AD, with the rise of feudalism, the idea of trade exchange emerged, as land was held in lieu of the service offered. Further during the 18^th century, Adam smith spoke about the marketing operations in a self-regulatory way, through the intervention of “invisible hand”. Followed by Smith, J.S Mill, and David Ricardo also started discussing about the capitalist markets, and the utility of goods and so on. Further, a group of neoclassical economists also emerged, such as John Maynard Keynes, who started introducing and establishing the scientific as well as the mathematical concept of economics (Negishi 2014).

The Balance of Payments, also referred to as the BOP, is the statement used in one country in order to record each of its economic transactions with the rest of the world. The Balance of Payments, also popularly known as the Balance of International payments, records the detail of each transaction taking place between a particular country’s residents and the non-residents, in terms of goods or services, liabilities or transfers (Xingyun 2015). The Balance of Payments classifies and categorizes the transactions into two groups, and records accordingly into two separate accounts. While the details of the transactions between countries, in terms of goods and services, or investment income, are recorded in the Current Account, the transactions in terms of financial instruments are recorded in the Capital Account. However, one thing should be remembered, that the data recorded in the Balance of payments is not at all concerned with the actual amount of payment incurred or received by a country. Despite its name, the Balance of Payments helps actually deals with the details of the transactions. It should be noted here, that there are multiple transactions in an economy that do not in any way involve the exchange of money, and yet these are recorded here (Barbosa-Filho 2012). Hence, the figure of the amount entered in the Balance of payments, and the figure of the net amount paid by a country to a foreign nation, will differ. The Balance of Payments of a nation is highly important, as it helps in formulating the national as well as the international economic policy. One of the important advantages of the Balance of Payments is that it highlights, and thereby helps to understand the competitive strength as well as weakness of a nation In case there the total payment of a country as recorded in the Balance of Payments, exceeds its total receipt, there will be deficit, while in case of receipt exceeding the payment, there will be surplus. It should be remembered that the Balance of Payments helps a nation understand the extent to which a country will be able to meet its obligation of exchanging its own currency as against the currency of other nations (Kyle 2015).

Introduction to Balance of Payments

David Ricardo is a popular name known for the introduction of his classical theory of comparative advantage in economics, in the year of 1817. The Ricardian model helps in providing a mathematical concept of global trade. Ricardo talks of the importance of Comparative Advantage, as opposed to the concept of Absolute Advantage as taught by Adam Smith (Ishise 2015). According to Ricardo, the importance of Comparative Advantage lies in the fact, that it helps a country produce goods that it specializes in, while buy goods from a foreign country that its own labor power is able to produce less efficiently. This helps the country enjoy economic advantage, and the whole concept was explained by David Ricardo through an example that follows:

Figure 1 : Comparative Study of Labor Efficiency of England and Portugal as Demonstrated by Ricardo

Source : (Naito 2012)

As it can be seen from the above chart, England requires as much as 120 hours producing a single unit of wine, while the country 100 hours to produce a unit of cloth. Again, on the other hand, Portugal requires 90 hours to produce a single unit of cloth, while relatively speaking it requires only 80 hours producing a unit of wine. Hence, from here, it is evident that England enjoys greater efficiency in producing cloth, as compared to Portugal, while the latter enjoys greater efficiency in the production of wine. Keeping this in consideration, Ricardo states that it would be effective as well as efficient if England produces the good it specializes in, such as cloth in the present case, and Portugal produces what it specializes in, such as coffee in the present case (Jaimovichand Merella2012). This is what is being referred to as the Comparative Advantage by Ricardo. From producing the products, in which one nation enjoys productivity, and then exchanging the good with a country that does not enjoy the productivity in that good, and vice versa help of the countries enjoy advantage over the other. This also goes to underline the importance of international trade, as pointed out by Ricardo. Ricardo very notably argues, that even if a particular country excels in the production of various goods, it still should engage in international trade. Ricardo through the theory of Productivity and Comparative advantage, upheld that given the situation where labor difference exists, free trade between nations should be encouraged. Accordingly the Ricardian model is one of the most fundamental models being used in international trade (Kurokawaet al. 2016).

Productivity and Comparative Advantage: Ricardian Model

The Heckscher –Ohlin Model is another important mathematical model that is being widely used for understanding the real concept of international trade. The model in named after the names of the two most important Swedish economists- Eli Heckscher and Bertil Ohlin.It is needless to state that this model in itself in an extension of the theory propounded by David Ricardo. According to the Heckscher –Ohlin Model, the goods that are being exported by a particular country, are those which use abundant and local factors of production. On the other hand, the good which are imported by a nation are those which are produced using scarcely available factors of production in the country. In this way, the Heckscher –Ohlin Model seeks to claim that the factors of production, such as land or capital will largely determine the concept of Comparative Advantage as enjoyed by a specific nation (Kawagishiand Mino2016).

A country’s trade thus is highly determined by the factors of production possessed by the country. For instance, it is assumed that there is a country where capital and land required for the production of a good are abundant, then it is evident that the total cost required for the production of the good is low. Again, on the other hand, if the country suffers from scarcity of labor, it will definitely indicate a rise in the price of the labor supply. In case of the first situation, it is advantageous for the organization to consume as well as export its products as the cost is low, while in case of the latter, instead of producing the product at a higher price, it is advisable to import the same from another country, where the labor is abundant, and hence available at a cheaper price (Bond et al. 2012). Hence, the Heckscher –Ohlin Model upholds that a country should export a product that it can effectively produce, while it should import any product that cannot be plentifully or at least effectively produced in the country. This model places a very strong emphasis on the importance as well as benefits of international trade. The model has considerable relevance in the presently competitive market, where as new markets emerge, labor supply becomes scarce, and consequently the price of labor goes high. However, this model explains that in such crucial situations, a country instead of focusing on local market, must trade internationally as the cost of labor supply caries from one country to another. The same holds truth for any kind of factor of production (Iwasaand Nishimura2014).

Resources and trade: Heckscher –Ohlin Model

The Standard Trade model is an important concept in Economics. There is a lot of debate going on as to what exactly should be the standard model of trade, and while no economist seems to agree on one point, Krugman and Obstfeld in the year of 1991 claims that a model with curved PPF, perfect competition, and consumer preference, that can also at the same time be represented with the help of the community indifference curve, can be regarded as the standard trade model. Hence, the above mentioned model also includes the H-O Model as well as the Specific Factors Model (Dal Bóand Dal Bó2012). It is important to note here that the standard trade model actually incorporates different economic theories. According to this model, the net value of an economy’s total amount of consumption will always be equal to the  total amount of production. According to the Standard Trade model, the differences in the availability of the factors of production in two countries, such as land, capital or physical labor, as well as other factors such as technology will undoubtedly create differences in the productivity available between the two countries. Besides, such differences in productivity will be regarded as the differences in the production possibility frontiers that in turn will again represent the different productive capacities of the two countries concerned. Again, according to the theory, any nation’s PPF (Production Possibility Frontier) will always be determining the relative supply curve of the particular country. Last but not the least, this model also seeks to highlight the fact that the national relative supply curves will always be determining the world relative supply, which again along with world relative demand will also determine equilibrium under the international trade (Baldwinand Robert-Nicoud2014).

Reference List:

Antunes, C. and Fatah-Black, K. eds., 2016. Explorations in History and Globalization.Routledge.

Baldwin, R. and Robert-Nicoud, F., 2014. Trade-in-goods and trade-in-tasks: An integrating framework. Journal of International Economics, 92(1), pp.51-62.

Barbosa-Filho, N.H., 2012. The balance-of-payments constraint: from balanced trade to sustainable debt. PSL Quarterly Review, 54(219).

Bond, E.W., Iwasa, K. and Nishimura, K., 2012. The dynamic Heckscher–Ohlin model: A diagrammatic analysis. International Journal of Economic Theory, 8(2), pp.197-211.

Dal Bó, E. and Dal Bó, P., 2012. Conflict and Policy in General Equilibrium: Insights from a Standard Trade Model. The Oxford Handbook of the Economics of Peace and Conflict.

Fujita, M. and Thisse, J.F., 2013. Economics of agglomeration: cities, industrial location, and globalization. Cambridge university press.

Ishise, H., 2016. Capital heterogeneity as a source of comparative advantage: Putty-clay technology in a ricardian model. Journal of International Economics, 99, pp.223-236.

Iwasa, K. and Nishimura, K., 2014. Dynamic twoâ€Âcountry Heckscher–Ohlin model with externality. International Journal of Economic Theory, 10(1), pp.53-74.

Jaimovich, E. and Merella, V., 2012. Quality ladders in a Ricardian model of trade with nonhomothetic preferences. Journal of the European Economic Association, 10(4), pp.908-937.

Kawagishi, T. and Mino, K., 2016.Time Preference and Income Convergence in a Dynamic Heckscher–Ohlin Model. Review of International Economics.

Kurokawa, Y., Pang, J. and Tang, Y., 2016. Exchange Rate Regimes and Wage Comovements in a Ricardian Model with Money (No. 2013-005).Economics, Graduate School of Humanities and Social Sciences, University of Tsukuba.

Kyle, J.F., 2015. The balance of payments in a monetary economy.Princeton University Press.

Naito, T., 2012.A Ricardian model of trade and growth with endogenous trade status. Journal of International Economics, 87(1), pp.80-88.

Negishi, T., 2014. History of economic theory (Vol. 26).Elsevier.

Ruzana, M., 2015.Historyof Globalization. AnaleleUniversitatii” Constantin Brancusi” din TarguJiu. SerieLiteresiStiinteSociale, (1), p.75.

Xingyun, P.E.N.G., 2015. Balance of Payments. World Scientific Book Chapters, pp.453-477.