The Main Features of an International Economy - Case Study Example

International Economy Student’s Name Institutional Affiliation International Economy Introduction International economy refers to the integrated world economy that takes place among regions and nations of the world (Gilpin & Gilpin, 2001). One of the common characteristics of international economy is the mutual understanding and trade agreements that control the movements of goods and services among nations. In recent years, international economy has been highly boosted by the ongoing globalization of the world economy, among other factors. These necessitated free movement of goods and services, labor transnational, as well as less restriction in terms laws (Lowenfeld, 2008). This depicts a bigger picture of increasing interconnectedness of nations with free movement of capital across regions, meaning that it is not possible to understand international economy in isolation. The following paper seeks to discuss international economy, by looking at its features as well as the factors that lead to the growth of international economy in the 19th century. Other considerations will be the factors that are affecting the current global economy. Overview of International Economy There have been dramatic changes over the years as far as the growth of international economy is concerned. The industrial revolution in Europe, migration of people from one continent to another, formed the foundation of the current state of the world economy (Kenen, 2006). However, there have been other forces, which have shaped the current economic status, such as globalization. As noted above, globalization, which refers to the integration of the consumption as well as the production in all world markets, has contributed a lot in the growth of international economy. It is evidently true that globalization has necessitated the growth of economies of all countries in the world thus integrating them in the global economy (Carbaugh, 2013). Political, economic and social decisions of individual countries are taken in consideration of the impact at a global front. As a result, narrow provisional ideals have been disregarded in total awareness of the mutual coexistence among nations. It is for this reason that nations have come to realize the advantages that globalization has come to play in the international economy. International economy is the entire economy of the world having a unified market for all services and goods being produced in the world. The push and pull factors of international economy help domestic producers to expand their market and thus raising their capacity based on the demand and supply factors in the world (Rolf et al, 2011). At the same time, it provides an opportunity for the domestic consumers to choose products and services from an array of imported good in their respective countries. There have been efforts to rationalize all prices of goods and services available in the world across all markets. However, this calls for concerted efforts among nations. Some of the latest developments in the international economy include the reduction of tariffs as well as quotas driven by world trade organization (WTO). This has seen the flow of goods and services from developed to less developed nations become easier (Kumar, 2008). Further, there is an emergence of Trans National Companies or the Multi-National Companies, which is due to globalization. The introduction of these multinational firms in the international trade has seen more connection to the world markets. The net result is that the consumer benefits by having a wide variety of goods and services to select. At the same time technological advancement, which has been happening in the world has played a great role in the growth of international economy (Bayne & Woolcock, 2007). This technological development has permeated into developing countries from developed ones such as USA and Japan. This has led to people in these countries be able acquire technical skills as well as knowledge in developing their economies through operating sophisticated equipment. The result of such realities is the increase in income levels of these countries. Factors that Led to the Development of International Economy in the 19th Century The genesis of the current world economic system can be traced back from the industrial revolution. The increase in the prices of timber by the end of the 18th century meant that there was need for the search of new source of energy (Goloboy, 2008). This search led to the increase in the invention efforts, which were to be implemented for forty years. In this period, economic growth would suffer dramatically, which led to the shift to steam power. This later resulted into the first growth of economy in history. As a result, the technology on the long distance transport system was revolutionized, which changed both economic and social structures (Bayne & Woolcock, 2007). This initiative was instrumental in the transformation of the global and domestic economy as societal institutions. The Industrial Revolution It was between 1820 and 1890 that Britain became the core engine of the world economy after it initiated industrial revolution. Competition with Great Britain as well the diffusion of its technology, led to the worldwide industrialization efforts, where other countries followed suite including European countries and the rest of its overseas territories (Dunning & Lundan, 2008). The main impact of industrial revolution is that it initiated the systematic application of science into technology, which is one of the modern characteristics of economic growth. Structural changes were observed not only in Britain but also in most of the British Commonwealth countries. This tremendous growth was characterized by major technological development. It was estimated that the average increase of labor productivity of the OECD countries between 1820 and 1913 was almost seven times that of 1700 to 1820 (Lechner, 2009). The volume of world exports also grew by almost thirty fold. As a result, both global financial system and global economy was created. There was increased movement of global capital and population. This was beneficial in connecting European economy with other territories. One of the aspects of industrial revolution was that the trade was liberal such that there were very few restrictions to free movement of goods and services from one continent to the other, which a general characteristic of eras of high growth of world economy(Bayne & Woolcock, 2007). Further, no or few tariffs were put in place on raw materials or imports of foods. There were also varying degrees of protection of industries and free international movements was also allowed. This played a great role in necessitating labor movement and capital. In addition, the world was experiencing a fixed rate of nominal exchange, which was under the gold-sterling-standard. The reduced transportation cost saw an increase in the importation of goods to European nations from various countries of the world. This, complemented by the invention of the refrigerated shipping, helped in the transportation of goods over long distances. These initiatives saw the emergence of new pattern of division of labor, as well as specialization of production and trade in the world. Differential of the world economy soon emerged where the world economy was divided into developed and developing economies. Development of the Current OECD Countries It is worth noting that not all countries underwent industrial change at the same time or rate. Countries started industrial revolution at different times and later progressed at varying paces (Dunning & Lundan, 2008). Some countries were able to move faster since they had already developed institutions or were able to adapt faster to the economic growth. However, most countries lagged behind since there were no strong institutions developed to support massive economic growth at the time. The formulation of institutions of these countries was later able to diffuse the economic progress that was being experienced by early industrializers. The follower countries would later adapt the new transformation into capitalistic economies, which is depicted in the current global economy. This saw the removal of existing institutional barriers to the development of market systems. The government’s investment, finances and demands, also assisted OECD latecomers (Bayne & Woolcock, 2007). Policies were established to support production, especially in agriculture and other sectors. These would later become the foundation of the OECD countries. Colonization and Migration The colonization process and movement of people from one continent to another led to the growth of world economy. 19th century was marked with long cycles of economic growth, migration, capital formation, institution building, which were connected to developed countries from the settled lands overseas(Bayne & Woolcock, 2007). The capital from European nations saw them expand their economies in the expense of colonized nations. For instance by 1914, the total Britain’s assets were estimated to be more than one and half times of its GDP. One of the motive forces of this development was the migration of European settlers to foreign countries. By 1830, more than 50m million Europeans had migrated to overseas nations thus forming one third of the total population of Europe by then(Bayne & Woolcock, 2007). These settlers were instrumental in bringing back to their mother countries technological knowhow, financial capitals, institutional and political cultures, as well as business skills and networks. The growth of economy in Europeans nations was evident. Overseas territories acted as the source of raw materials and production centers. Imports from these destinations increased dramatically. The balance of trade, on a bigger margin, favored the settlers. At the same time, increased demand for labor in European, Central and Northern America meant that people from overseas nations would be moved, to go and work as casual laborers. As time went on, these laborers would later learn business skills and form part of the important economic resources of these nations. The net result is that skills and knowledge would be transferred from one continent to the other. The impact of this migration of both settlers and laborers can be felt in the status of various world economies. Features of International Economy Several features characterize international economy. As noted earlier, one of the main features is the globalization of trade and world markets. In economic terms, globalization refers to the ‘‘move that is taking place in the direction of complete mobility of capital and labor and their products, so that the world's economies are on the way to becoming totally integrated’’ (Goloboy, 2008). the forces of globalization include the reduction of trade barriers among nations , which hinder movement of goods and services. Others include the reduction of the cost of communicating as well as the transport. In the last five decades, globalization has gathered a tremendous trend in the world. The main objective of globalization is to have factors of trade nearly equal in all markets of the world. These include the tariffs imposed on trade, wages and interest rates, among others. These will be driven by continued competition among nations and players, wage earners, personal and corporate taxpayers and so on. However, it must be agreed that achieving such milestones will not be easy, though some steps have already been made (Gilpin & Gilpin, 2001). Economists argue that the world is currently less integrated as it was before the World War I and therefore efforts need to be put in place if such goals are to be realized. Further, more production options are now featured in the international economy. The competition aspect has made it possible for various firms to open up business in many parts of the world. This means that some services or goods can be found in various regions in the world. It must however be emphasized that this has been attributed to the globalization. The only aspect that one needs to know is where these services are located and how accessible they are. At the same time, one can outsource production to get finished products for distribution to the market. However, one need to understand the tradeoffs involved. Trade policies and established institutions are also featured in the control of international economy. Various governments through policy makers ensure that they protect domestic industries from foreign competition through developing barriers such as quotas and tariffs (Lowenfeld, 2008). These measures are geared towards ensuring that a country or region remains strong economically by controlling the imports or export levels. For instance, the application of quotas prompts foreign suppliers in ensuring that they raise their prices of the products or services towards a given domestic economy. However, in addition to this, is the deadweight loss to the international economy. Under the General Agreement on Tariffs and Trade (GATT), quotas were banned, which made America, European Union and Britain to formulate an almost similar policy that was called voluntary export restraints (VERs) or voluntary restraint agreements (VRAs). These new rules were supposed to be negotiated with the exporting countries, though they still were also banned later. Tariffs are believed to be less harmful compared to quotas. The net effect of tariffs can be felt during the downwards and upwards trends in imports (Lowenfeld, 2008). Further, governments impose non-tariff barriers, which are compared to quotas, though some are recognized under the World Trade Organization agreements. In addition, international economy is under the control of various institutions such as world trade organization, International Labor Organization among others. At the same time, regional blocks have formed their own institutions to ensure that they have a competitive advantage over their rivals. These include, European Union, ECOWAS, SADCC, among others. It should as well be noted that some of these institutions are political but with an economic agenda such as African Union and so on. These institutions are usually relied upon when it comes to any international economic issue that may affect the members. Exchange rates as well as capital mobility also determine the world economy (Lechner, 2009). Governments and institutions involved in the buying and selling of international financial assets use exchange rates. Exchange rates affect international economy in many ways. The strength or weakness of a country’s currency determines the gains in exportation or importation of products and services. Extreme changes of exchange rates have caused massive economic crisis previously. Any changes in these rates affect the cost of products and services, which influence international economy. However, this depends on the influence of the currency in the world markets such as United State’s dollar, which literally the currency of the world economy as was witnessed during the Great Depression. Factors Affecting Current International Economy The global economy is influenced by various factors including social and environmental changes (Kumar, 2008). These include changes of common products more specifically, oil. Changes in oil production among oil producing countries affects the world economy in various ways. For instance, the current drop in the price of oil has greatly favored those countries that do not have oil deposits. This means that these nations can save more, which can be used in other expenditures. At the same time, the cost of other products also reduces since the production cost of goods and services is also influenced (Goloboy, 2008). On the other hand, the producing countries do not get much revenue from the oil products. The growth of their economies is thus adversely affected. Further, conflicts in various countries or regions also affect international economy. Various political conflicts are currently going on such as Syria, Ukraine, Iraq, Libya, Afghanistan and Yemen. These conflicts affect the free movement of goods and services. Therefore, suppliers are not able to reach such markets due to ongoing conflicts (Lechner, 2009). The populations, who are the consumers of such products, are not able to get them either. This means that a lot of business is lost. There are also illicit trade that go on in such environment, for instance drug trafficking. At the same time, these nations have resources, which they are not able to produce and export for revenue. It is unfortunate that most of the conflict prone regions or countries are rich in natural resource deposits such as oil, which affect the global market. Terrorism has become one of the main concerns in the current economic environment. In the last few decades, terrorism incidents have increased tremendously in the world. They affect the domestic and the regional economies, in that investors are reluctant in putting their money in such areas or countries. Tourism is as well affected since tourists fear visiting those countries that are prone to such incidents (Goloboy, 2008). Economic sanctions also impacts greatly on a given country or region(Lechner, 2009). A good example is the continuing European sanctions on Russia due to its alleged involved in the Ukrainian conflict. If a county is barred from exporting or importing some products or services to or from another region or country, then the citizens , businesses or countries that depend on that country in one way or another is equally affected (Goloboy, 2008). Conclusion International economy is influenced by many factors. However, as mentioned, globalization has positively influenced global economy in a massive way. Goods and services can be moved from one market to another, though there are some challenges as noted above. However, it has as well increased illegal trade including wildlife poaching, drug and human trafficking, counterfeit products, among others. Despite such challenges in the international economy, some economies are still strong. References Bayne, N., & Woolcock, S. (2007). The new economic diplomacy: Decision-making and negotiation in international economic relations. Aldershot, England: Ashgate. Carbaugh, R. J. (2013). International economics. Dunning, J. H., & Lundan, S. M. (2008). Multinational enterprises and the global economy. Cheltenham, UK: Edward Elgar. Gilpin, R., & Gilpin, J. M. (2001). Global political economy: Understanding the international economic order. Princeton, N.J: Princeton University Press. Goloboy, J. L. (2008). Industrial revolution: People and perspectives. Santa Barbara, Calif: ABC-CLIO. Kenen, P. B. (2006). The international economy. Cambridge.: Cambridge Univ. Press. Kumar, R. (2008). International economics. New Delhi: Excel Books. Lechner, F. J. (2009). Globalization: The making of world society. Chichester, U.K: Wiley- Blackwell. Lowenfeld, A. F. (2008). International economic law. Oxford: Oxford University Press. Rolf, D. S., Nathaniel, O. A., & William, W. B. (2011). Spaces of International Economy and Management: Launching New Perspectives on Management and Geography. Palgrave Macmillan, Basingstoke, GB. Read More