International Trade and Global Change - Essay Example

? International Business and Global Change Globalization helps nations to make sound macroeconomic policies and help to educate the workforce. In short, nations who ‘globalize’ experience wide range of goods and services, low prices, improved health for citizens, better paying jobs etc. all initiating an improved standard of living with higher per capita incomes. Institutions like World Bank, International Monetary Fund facilitates globalization. World Trade Organization helps to regulate norms and rules of international trade between nations. International Trade helps nations to make sound macroeconomic policies and help to educate the workforce. In short, nations who ‘globalize’ experience wide range of goods and services, low prices, improved health for citizens, better paying jobs etc. all initiating an improved standard of living with higher per capita incomes. Institutions like World Bank, International Monetary Fund facilitates globalization. World Trade Organization helps to regulate norms and rules of international trade between nations. The key finding of the study is that globalization is indispensible but should be checked with the policy of import substitution and export promotion of every nation. Introduction Choice of production and scarcity of resources is the central economic problem of any nation across the world. A nation should always engage its resources in the production of goods and services over which it has comparative cost advantage (Ricardo, 1992). This is only possible when the world economy is open and there is international trade between nations. International trade involves imports and exports. The level of international trade in a country can be found from the gross domestic product (GDP) of the country. International trade as a % of world GDP has increased from 42.1% in 1980 to 62.1% in 2007. This is due to the emergence of globalization between nations which involves flow of funds, technology, products between nations. The foreign direct investment increased from 6.5%$ of GDP in 1980 to 31.8% in 2006. This is highly beneficial for the growth of developing nations and it also facilitates the progress of rich developed countries. The objective of this project is to analyse to what extent globalization in 1980 resulting in more even distributions of income. This essay also helps us to understand the importance and progress of international trade in the world economy. The study then emphasises the emergence of globalization in the eve of modern trade accelerating growth. It also shows the changing pattern in international trade for the last 50 years. The work also gives an overview of the current scale and distribution of international trade across countries. Definitions and Measures of Inequality The level of development between nations is not same. There always exists income inequality between nations due to social, economical, political and natural differences. Income inequality is the inequality of income distribution. Blau (1977) defined income inequality as the average difference in status among a pair having relatively average status. Similarly, Firebaugh (2006) defined disparities in wealth status between people and Nations is defined as wealth inequality. Income inequality divides the economy into ‘haves” and “have nots”. Income inequality is detrimental to the growth of an economy, social justice and welfare of the peoples of a nation. People with low level of income remain dissatisfied with their financial status thus inequitable income status in an economy often threatens the political stability of a nation. Income Inequality is also responsible for health problems in a country. It can often raise corruption in the society that can finally cause misallocation of resources in the society. There are various measurements of income inequality; the most commonly used is Gini Coefficient. The range of this index lies between 0 to 1 (0% to 100%), where 0 means perfect inequality and 1 shows no inequality. But it does not show why the inequality exists; it only shows the basic situation empirically. So two separate income distribution can have same Gini index. We can compare two different income distributions with Lorenze Curve diagrams which show the Gini index in a ratio of two income distributions. The 20:20 Ratio compares the difference of top 20% high income population to the lowest 20% poor income group of a country. This helps to intuitively find the differential income levels in a population. Hoover Index shows the proportion of income that should be redistributed to attain a state where there is no income inequality. “Theil index” of measuring income inequality shows a state of perfect equality in income when valued at 0. It the value of this index becomes 1 it means that the ratio of rich vs. poor in an economy is 82:18. This index can also be converted to Atkinsons Index whose range is 0 to 1. Here 0 shows equitable distribution in income and 1 shows inequitable income distribution. Palma Ratio shows the ratio of the rich 10% population (in terms of Gross National Product) to the income share of poorest 40%. This ratio was based on a Chilean economist Gabriel Palma who found that approximately half of a country’s Gross National income is contributed from the middle class and the remaining is divided among the 10% rich income group and 40% poor income group people. This ratio states that the Gini Index is oversensitive for any changes in the middle income distribution group and under sensitive to the top and bottom income distribution group. The different measure of income inequality clearly shows different quantitative assessments to the various qualitative structure of income inequality. The developing nations like India, Bangladesh export agricultural goods like rice maize wheat jute and other types of food as well as cash crops. These countries are economies that are based on agriculture as the primary sector. On the other hand industrial nations like USA export low priced, cost efficient industrial goods like electronics good. The Middle Eastern countries like Dubai have large quantities of crude oil reserves so they mainly concentrate in exports of gasoline and various other forms of petrochemicals. Being a capital surplus economy these nations are now investing in tourism industry. The exports of one economy become the imports of the others. The traditional economies have large trade deficits showing imports exceeding the exports while the modern economies has trade surplus. Results of Key Studies into Changing Income Distribution The Global economy is growing rapid with the emergence of international trade and globalization. Most of the countries have increased their level of economic activity and improved their socio, political and economic factors. Since 1098’s the Chinese economy has experienced rapid economic growth and improved health status. The Infant Mortality Rate had reduced showing a healthy future population. If the health status of infants in an economy is strong then it clearly shows a good workforce participation contributing to future economic growth (Gao et al, 2002). The United Arab Emirates (UAE) has rapidly grown after emergence of Globalization. The discovery of oil and its exports to world market have largely restructured the economic as well as the social status of the region. UAE has now become a capital surplus economy. Majority of GDP comes from the crude oil sector and with Globalization the tourism sector is also improving substantially in the resent years (Rizvi, 1993). The world economy has grown in the past two decades of the 20th century the level of income inequality has also fallen due to economic globalization. Both in China and South Asia where 40% of the world population exist are industrializing and showing that the force of equalizing income is even faster than the average growing income of the world. Firebaugh analyzed that the income inequality of world has mainly fallen due to the rise in average income of countries like China and India (UCSC, 2004). Figure 1- (Change in income inequality from 1947 to 1998) (Source: US Census Bureau, 2000) It is clear from the above diagram that income inequality has reduced among all households by less than 5% during 1970’s, but then again started to increase from late 1980’s. Since 1947 the Census Bureau measures income inequality with Gini Coefficient. They show that the value of Gini Coefficient fallen from 1947 to 1968, this shows decline in income inequality by 7.5%. The value has increased from 1968 to 1998 increased showing an average rise in the level of income inequality between families. This is because as initially globalization begins it benefits only those sectors where investments are being made or where there is proper trade taking place. But gradually the development of these sectors creates spill over effect to other sectors. So though there is rise in income inequality but still it would be beneficial when the country attains complete industrialization. Critical Review of Key Studies and Results The world economy in 1980’s was inequitable in terms of income distribution. There were a large number of countries who came to be known as the third world nations who were developing or underdeveloped in nature. The economic growth of such nations was meagre, low GDP, poor health status, high income inequality, illiteracy; agriculture is the primary sector. On the other hand, there were rich nations with high income, less income inequality, good health status, major sector being the Industrial sector etc. The world economy could only progress if the income inequality between nations could be reduced. Rather the Developing nations like India, Pakistan etc. required economic support from developed economies in order to sustain the growing demand of the population. In 1980’s India had less than one quarter cereal reserves to sustain its domestic demand. Thus Globalization and Liberalization came into existence. Organizations like IMF and World Bank started to give economic support to these poor performing economies in return demanded for some economic reforms in these nations in order to stabilize the economy in future (IMF, 2007). There are also different programs between nations that help in transfer of technology example the Indo-Us Nuclear deal in recent times. Thus globalization since 1980’s was indispensible for growth .The resources in countries were utilized in cost efficient manner. The consumers were able to buy goods and services in a wide variety at lower and more competitive prices. The corporate firms could get wider markets. The emergence for Globalization is solely the cause of Green Field investments in developing nations. Multinational Companies like Microsoft, Apple, IBM, Intel, Google, Vodafone etc. are companies having headquarters in rich developed nations like America, United Kingdom have established their branches in different developing nations; this helps to generate new employment opportunities in these countries and thus help in income inequality. Globalization has also helped in building integrity between nations. Considering the market for investment Globalization helps for a better scope for investors. Even the countries with low income can win and growth Globalization. Simon Kuznets clearly emphasized that even if in the initial stage Globalization increase the income inequality of a nation but eventually as a country completes the journey from an agricultural nation to an industrial nation its income inequality reduces. According to the World Economic Outlook (2007) has analyzed that globalization in a nation is creating spill over effect in the business cycle in a nation and also in the market for labour. Income inequality has declined in developing countries with globalizations with rising per capita incomes for the common mass. The World Bank review has clearly stated that income share of poor people is greater in the open economies. In these Globalized nations the income of the so called middle class rises relatively closer to the rich income group (Milanovic, 2005). In the recent situation there are two big oil price shocks in the world economy, recession is high all over , supply fails to meet demand in such a state it is better to have proper policy coordination between nations that help to reduce spill over effect of one nation to others this is only possible with globalization(CEPR, n.d.) Progress and equitable distribution of income is hence not possible without Globalization and Liberalization. Though “every cloud has a silver lining” but still “all that glitters is not gold”. The emergence of Globalization has made strong pharmaceutical firms who often act as monopolists in the market and intervene in the socio political affairs of the state. This often affects the policies of the state in favour of them and adversely goes against the public health affairs (Amirkhanyan, 2012). Sometimes the effect of globalization is bad when it increases inequality instead of reducing it by making richer nation’s further rich and poorer nations worse off. Excessive globalization in a developing economy promotes cheaper imports and hereby weakens the domestic industries. Often the international policies coordinated goes against the favour of developing nations and goes in favour of the developed countries. Tremendous globalization is also responsible for weakening a country’s on productive power and makes it totally dependent on the foreign investments flowing in the economy. Thus is found that globalization is now not blessed for poor economies although it can make the rich economies wealthier (Baldwin, 1999). Conclusion This is an era of globalization and liberalization. The economy of any country can never remain closed and sustain its own needs. Right from the period of Industrial Revolution the developed countries needed raw inputs from countries where the primary sector is agricultural. Rather no industrialized nation can state that the market of less developed economies is not profitable for its own economic growth. The developing nations also require the help if developed economies to foster its own investments. Foreign Institutional Investments are very important for the growth of growing economies. Thus globalization is indispensible but should be checked with the policy of import substitution and export promotion of every nation. Thus international business and global change in income distribution is considerably responsible due to rise in per capita GDP and fall in income inequality in the nation. Thus we can say that globalization has not really succeeded to reduce income inequality but still has actually helped the backward nations to progress substantially. Reference List Amirkhanyan, 2012. Globalization and International Relations. [pdf] Available at: [Accessed 16 June 2013]. Baldwin, R., 1999. Two Waves of Globalization: Superficial Similarities Fundamental Differences. [pdf] Available at: [Accessed 16 June 2013]. Blau, P. M., 1977. Inequality and Heterogeneity: A Primitive Theory of Social Structure. London: Macmillan Company. CEPR, No date. International Economic Policy Coordination. [online] Available at: [Accessed 16 June 2013]. Firebaugh, G., 2006. The New Geography of Global Income Inequality. Harvard: Harvard University Press. Gao, J. et al., 2002. Health Equity In Transition From Planned To Market Economy In China. Health Policy and Planning. 17 (1), pp. 20-29. IMF, 2007. Globalization and Inequality. [pdf] Available at: [Accessed 16 June 2013]. Milanovic, B., 2005. Can We Discern the Effect of Globalization on Income Distribution? Evidence from Household Surveys. World Bank Economic Review. 19 (1), pp.21-44. Ricardo, D., 1992. David Ricardo: Notes on Malthus's: Measure of Value. Cambridge: Cambridge University Press. Rizvi, S., 1993. From Tents to High Rise: Economic Development of the United Arab Emirates. Middle Eastern Studies, 29 (4), pp. 664-678. UCSC, 2004. Is Global Income Inequality Increasing or Decreasing? [online] Available at: [Accessed16 June 2013]. US Census Bureau, 2000. The Changing Shape of the Nation’s Income Distribution. [pdf] Available at: [Accessed 16 June 2013]. Read More