Globalization- the process of increased interconnectedness and interdependence among countries,

economies, cultures, and people across the world.

International trade- refers to the exchange of goods, services, and capital between countries. It
allows nations to obtain products and resources they may not have domestically and fosters
economic interdependence.

History of Globalization:

-Silk Roads (1st Century BC – 5th Century AD)

- Spice routes (7th - 15th century)
- Age of discovery (15th - 18th century)
- First wave of globalization (19th century)
- Globalization during world war
- Globalization in modern world

REASON OF GLOBALIZATION AND INTERNATIONAL TRADE:

1. Technological Advances
2. Trade Liberalization
3. Market Access
4. Labor Mobility
5. Capital flows
6. Multinational Corporations
7. Global challenges
8. Cultural exchange
9. Government Policies
10. Consumer Demand
International Trade Theory- a branch of economics that studies the trends, causes, and welfare
implications of international trade.
 CLASSICAL Trade Theory- country-based theories
 NEW Trade Theory- country-based theories

International Trade:
1. Economic transactions
2. Global economic growth
3. Import & Export
4. Resource availability
5. Employment opportunities
6. Improved living standards
7. Social and international relations among countries
Classifications of international trade activities:
1. INTERNATIONAL TRADE OPERATIONS: operations constituting international business via import
and export, import-export combined operations, and transit.
2. STRATEGIC ALLIANCES: includes activities like franchising, sub-contracting, joint ventures (private
or government)
3. FOREIGN DIRECT INVESTMENT: Cross-border investment or investment made by a someone in
one country into business interests located in another.
Theories of International Trade:
 explain the mechanism of international trade which is how countries exchange goods and
services with each other...
 help countries in deciding what should be imported and what should be exported

Classical Trade Theory:

 priority should be increasing the wealth of one’s own nation
 focus should be on economic growth on a priority basis
Classical Trade Theory:
 Mercantilism
 Absolute advantage
 Comparative advantage
 Heckscher-Ohlin theory (Factor Proportions theory)
New Trade Theory:
 came up after the rising popularity of multinational companies.
 mainly focused on the country, however, the modern or firmbased theories address the
needs of companies
New Trade Theory:
 Country similarity theory
 Product life cycle theory
 Global strategic rivalry theory
 Porter’s national competitive advantage theory
Mercantilism- A form of economic nationalism that prioritizes the accumulation of wealth and power
for the state. It involves policies aimed at restraining imports, encouraging exports, and accumulating
precious metals like gold and silver.
-An economic system that prevailed in Western Europe from the 16th to the late 18th centuries.
MERCANTILISM:
Historical Dominance Colonialism and Imperialism Protectionism State Intervention
Military Conflict Modern Mercantilism Post-World War II Period

Neomercantilism -A modern economic and political theory and practice that shares some similarities
with historical mercantilism but is adapted to contemporary global economic conditions.
-Involves government intervention in the economy to promote the interests of a nation-state,
particularly in terms of trade and industrial policy.

Key Points to Know:

Protectionism Trade Surpluses Industrial Policy Currency Manipulation
Geopolitical Competition Criticism and Trade Tensions

ABSOLUTE ADVANTAGE:
Definition: Occurs when a country can produce a specific good or service more efficiently (using
fewer inputs or resources) than another country. In other words, a country is simply better at
producing a particular item.
Example: Suppose Country A can produce 100 cars with fewer resources than Country B, which can
only produce 80 cars with the same number of resources. In this case, Country A has an absolute
advantage in car production.
-Saudi Arabia’s Oil Production
-Switzerland’s Watch Manufacturing
Advantage: Trade Implications: According to the theory of absolute advantage, it makes sense for
Country A to specialize in car production and trade some of its surplus cars with Country B. Both
countries can benefit from trade because they can obtain more of the other's product by trading.

COMPARATIVE ADVANTAGE:
Definition: Refers to a country's ability to produce a specific good or service at a lower opportunity
cost compared to another country.
Example: Country X can produce both wheat and corn, but it has a lower opportunity cost for
producing wheat compared to Country Y. Conversely, Country Y has a lower opportunity cost for
producing corn compared to wheat. In this scenario, Country X has a comparative advantage in
wheat production, and Country Y has a comparative advantage in corn production.
-U.S. and China’s Manufacturing
-Portugal and England’s Wine and Cloth Trade (Ricardo’s Example)
Advantage: Trade Implications: According to the theory of comparative advantage, it is beneficial for
both countries to specialize in the production of the good in which they have a comparative
advantage and then trade with each other. By doing so, they can maximize their overall output and
consumption.
THEORY OF RELATIVE FACTOR ENDOWMENTS
-This theory seeks to explain international trade patterns by focusing on differences in the
relative factor endowments of countries.

Key Principles:
FACTORS OF PRODUCTION-The theory consider two primary factors of production – labor and
capital.
FACTOR ENDOWMENTS- Factor endowments refer to the relative abundance of labor and capital in a
given country.
PRODUCTION TECHNOLOGIES- The theory assumes that countries have different production
technologies, which means they can use their abundant factors more efficiently in certain industries
or for producing certain goods.
COMPARATIVE ADVANTAGE- Heckscher-Ohlin theory argues that countries will specialize in and
export goods that require the intensive use of factors they have in relative abundance.
FACTOR PRICE EQUALIZATION- The theory predicts that international trade will lead to the
equalization of factor prices (wages and returns on capital) between countries over time.
FACTOR MOBILITY- Heckscher-Ohlin theory assumes that factors of production are not perfectly
mobile across borders in the short run but can move more freely in the long run.
ASSUMPTIONS AND SIMPLIFICATIONS- The theory makes several simplifying assumptions, including
constant returns to scale in production and the absence of transportation costs, tariffs, and other
trade barriers, to provide a clear framework for analysis.

INTERNATIONAL PRODUCT LIFE-CYCLE

-This theory describes how a product's life cycle can affect a country's trade patterns and
investment decisions. The International Product Life Cycle theory is often used to analyze the
globalization of industries and the movement of production from developed countries to developing
ones.
KEY CONCEPTS:
INTRODUCTION STAGE- At this stage, a new product is introduced in the market, and it is typically
produced and marketed by the country where it was developed (usually a developed country).
GROWTH STAGE- As the product gains acceptance and popularity, it enters the growth stage. During
this phase, demand for the product increases, and production and sales expand.
MATURITY STAGE- In the maturity stage, the product becomes widely accepted, and competition
intensifies. As the product matures, production processes become more efficient, and production
costs decrease.
STANDARDIZATION AND DECLINE STAGE- In the final stages of the product life cycle, the product
becomes standardized, and demand may begin to decline in the home market. At this point,
companies may decide to move production to countries with lower production costs to maintain
profitability.

NATIONAL COMPETITIVE ADVANTAGE THEORY

-This theory seeks to explain why certain countries or regions excel in particular industries
and gain a competitive advantage in global markets.
PORTER’S DIAMOND:
FACTOR CONDITIONS- These refer to the inputs required for production, including labor, capital,
natural resources, infrastructure, and technology.
DEMAND CONDITIONS- Strong and sophisticated domestic demand can drive innovation, product
development, and improvement in quality, which can make a country's firms more competitive in
global markets.
RELATED AND SUPPORTING INDUSTRIES- The presence of competitive suppliers, service providers,
and related industries can enhance a country's competitive advantage.
FIRM STRATEGY, STRUCTURE, AND RIVALRY- The way companies in a country are organized, their
competitive strategies, and the level of rivalry among them can impact their international
competitiveness.

OTHER EXTERNAL FACTORS:

CHANCE- Chance events are unforeseen and uncontrollable occurrences that can have a significant
impact on a nation's competitive advantage. Chance events can either boost or undermine a
country's competitive position.
GOVERNMENT- Government can either support or hinder the development of industries through
regulations, subsidies, trade policies, taxation, intellectual property protection, and other measures.
Government interventions can shape the competitive landscape and influence the behavior of firms
within a country.

CLASSICAL TRADE THEORY

- Classical trade theory, also known as the classical theory of international trade, refers to a
set of economic ideas and principles that were developed primarily in the 18th and 19th centuries by
classical economists such as Adam Smith, David Ricardo, and John Stuart Mill. These economists laid
the groundwork for understanding the basis of international trade and the benefits of free trade.
Globalized economy-Refers to the growing interdependence of world economies as a result of the
movement of international capital, the wide and quick dissemination of technology, and the
increasing volume of cross-border trade in goods and services.
Example: Multinational corporations which includes Coca-Cola, McDonalds, Amazon and Google

Causes: Improved Trade • Increased Labor • Capital Mobility • Improved Technology

Effects: Greater Economic Development • Improved Productivity • Job Creation

Free Trade- Is a trade policy that does not restrict imports and exports.

Advantages of free trade:

• Greater access to low-priced but high-quality goods
• Greater efficiency and innovation in production
• Increased economic development and living standards
• Overall economic growth
Disadvantages of free trade:
• Job and labor migration
• Endanger the security of the country
• Allow the economy to become dependent on few products
• Reducing environmental standards
Protectionism-an economic policy that aims to protect a country's domestic industries and economy
from foreign competition by imposing barriers to trade and restricting the flow of goods, services,
and sometimes capital across international borders.

HISTORY:
1.Mercantilism (16th-18th Centuries) This early form of protectionism focused on accumulating
precious metals, promoting exports, and limiting imports to achieve a favorable trade balance.
Tariffs, subsidies, and colonization were commonly used
2. 19th Century During periods of industrialization, many countries-imposed tariffs and trade
restrictions to protect their fledgling industries from foreign competition. Notable examples include
the U.S. Tariff Act of 1789 and Germany's Zollverein customs union.
3. Great Depression In response to economic crises like the Great Depression in the 1930s,
protectionist measures, including the Smoot-Hawley Tariff Act, were enacted. However, these actions
contributed to a decline in global trade.

Pros of Protectionism:
1.Domestic Industry Protection Protecting domestic industries can safeguard jobs and ensure the
stability of key sectors like agriculture and manufacturing.
2. National Security Protectionism can be used to protect industries vital to national security, such as
defense or critical infrastructure.
3. Strategic Trade Policy Governments can employ protectionist measures strategically to support
industries with long-term economic potential.

Cons of Protectionism:
1. Trade Disruption Protectionism can lead to reduced international trade, harming global
economic growth and triggering trade conflicts.
2. Higher Consumer Prices Tariffs and trade barriers can result in higher prices for imported goods,
burdening consumers.
3. Inefficiency Protecting less efficient domestic industries can hinder innovation and productivity
growth, reducing overall economic efficiency.
4. Retaliation Other countries may respond with their own protectionist measures, escalating trade
tensions and potentially leading to a trade war.

Instruments of Protectionism:
1.Tariffs
2.Quotas
3.Subsidies
4.Non-Tariff Barriers
5. Currency Manipulation
6.Trade Agreements
International trade organization- A multilateral organization established for the purpose of
regulating and promoting global trade. ITO is comprised of various countries that seek to develop
international trade policies, dispute settlement mechanisms, and contractual relationships that
provide a level playing field for all participants.

THE PRIMARY GOALS OF INTERNATIONAL TRADE ORGANIZATION IS TO REDUCE TRADE BARRIERS

AND PROMOTE OPEN MARKETS INCLUDES:
• Eliminating tariffs
• Removing non tariffs barriers
• improving trade related infrastructure
• provide platform for member states
• resolve disputes over trade issues
• promote fair and sustainable trade practices

EXAMPLES OF INTERNATIONAL TRADE ORGANIZATION:

 World Trade Organization (WTO)

 International Chamber Commerce (ICC)
 International Monetary Fund (IMF)
 World Economic Forum (WEF)
 International Trade Centre (ITC)
 Organization for Economic Cooperation and Development (OECD)
 United Nations Conference on Trade and Development (UNCTAD)

International trade blocs- A regional organizations formed by a group of countries to promote

economic integration and cooperation. The main aim of these blocs is to develop a common trade
policy, reduce trade barriers within the region, and facilitate the free movement of people, goods,
and services amongst member states.

History of international trade blocs

International trade blocs are groups of countries that have come together to promote economic
integration and reduce trade barriers among member nations. The history of international trade
blocs can be traced back to the early 20th century, with the formation of the Central European
Customs Union (Zollverein) in 1834.

The first truly modern trade bloc was the European Economic Community (EEC), which was formed in
1957 by six Western European countries - France, Germany, Italy, Belgium, the Netherlands, and
Luxembourg.
INTERNATIONAL TRADE BLOCS EXAMPLES:

 European Union (EU)

 North American Free Trade Agreement (NAFTA)
 European Economic Community (EEC)
 Southern Common Market (Mercosur)
 Association of Southeast Asian Nations (ASEAN)
 African Union (AU)
 Gulf Cooperation Council (GCC)
 Commonwealth of Independent States (CIS)
 Economic Community of West African States (ECOWAS)
 Central American Common Market (CACM)
 East African Community (EAC)
VIEWS ON GLOBALISATION
- The word " globalization " is used to describe how commerce and technology have
increased connectivity and interdependence around the world. The resulting economic and societal
developments are also included in the scope of globalization. It may be visualized as the strands of a
massive spider web that has grown in size and reach over thousands of years. In the modern era,
more people and more things have traveled these silky strands than ever before, and they have done
so more quickly and in greater quantities.

Hyperglobalist- Hyper-globalization refers to an extreme level of interconnectedness and integration

among countries and economies on a global scale. It involves the deepening and acceleration of
cross-border flows of goods, services, capital, information, and people. Hyper-globalization goes
beyond regular globalization, where there is still some degree of national or regional autonomy in
decision-making and economic activities.

Sceptical- It is about the idea of global economic integration being anything particularly new. They
believe that globalization is exaggerated and as they look back to the nineteenth century, they’re
able to draw higher statistical evidence of developed flows of trade and investment which they
compared to today’s modern society. Insist that their analysis of the nineteenth century demonstrate
that instead of witnessing globalization, the world is going through ‘regionalization’; to organize a
country on a regional basis.

Transformationalist- Transformationalists argue that globalization should be understood as a

complex set of interconnecting relationships through which power is mostly exercised indirectly.
They argue that the flow of culture is not one way, from the west to the developing world; it is a two-
way exchange in which Western culture is also influenced, changed and enriched by cultures in the
developing world.

Pros of globalization:

 Increased Capital Flows

 Increased Labor Mobility
 Makes production more affordable
 Improved International Relations
 Higher Quality Products
 Economies of Scale

Anti of globalization:

 Unequal Economic Growth

 Lack of Local Businesses
 Exploits cheaper labor markets
 Potential Global Recessions
 Job Displacement
 Loss of Sovereignty