The Contemporary World

GED0035
 Module 6 Subtopic 1
The Economic Problem and Market Integration
Objectives

1. Understand what is the global economy and

who are its important actors.
2. Understand why people need to engage in
trade.
3. Differentiate economic choice and opportunity
cost and learn how they relate to each other.
4. Analyze how markets behave in a globalized
environment.
The Global Economy
What is the Global Economy?
• The global economy is all of the
economies of the world which we
consider together as one economic
system. It is one giant entity.
• Another way to define it is that it is the
system of trade and industry across the
world that has emerged due to
globalization. In other words, it is the
way in which countries’ economies have
been developing to operate collectively
as one system.
Major Actors of the Global Economy
There are many actors in the global economy, but the biggest roles are:
Major Actors
International Composed of member nations, they focus on peace, security, and
Governmental economic and social issues, fostering global economic connectivity,
Organizations (IGOs) especially through free trade.
International Non- Private entities like charities, advocacy groups, and business
Governmental associations; they provide economic and other types of aid to
Organizations (INGOs) developing territories.
Engage in global trade by sourcing materials, outsourcing, and
Businesses
expanding into international markets to access a larger customer base.
Contribute significantly to local economies through their spending
habits. For instance, remittances from overseas Filipino workers
Migrants
(OFWs) bolster the Philippine economy, illustrating their vital role as
modern-day heroes.
The Economic Problem
Overview
• In the global economy, there is one
particular activity that countries all over
the world regard with great importance.
This activity has been in practice even
before globalization reached its current
level.
• This activity is international trade.
Countries engage in trade with each other
and the global economy enables this. But
this brings up a critical question. Why do
nations trade with each other?
The Economic Problem
The Fundamental Reason Why Nations Trade

• Nations trade because of the

economic problem. And the
economic problem is to match
limited resources to unlimited
wants and needs.
• If a country were to use its limited
resources to directly address its
unlimited wants and needs, this
approach would be ineffective
and inefficient.
The Economic Problem
The Importance of Specialization
• Instead of using limited resources to
directly but ineffectively address
unlimited wants and needs, nations can
specialize in certain products instead.
• Specialization creates tradeable
surplus. Tradeable surplus can be used
to get other goods that others offer.
• These other goods can be used to
address the wants and needs that a
nation does not have abundant
resources for prior to trading.
The Economic Problem
The Nature of Limited Resources
• Understanding the economic problem entails recognizing two fundamental
limitations of resources. These limitations underscore the importance of
specialization, ensuring resources are utilized efficiently and effectively to
address diverse needs.

Resource Limitations
Limited in physical Resources have finite quantities, necessitating
quantity careful allocation.
Limited in physical Resources have specific purposes and cannot fulfill
use all functions.
The Economic Problem
Opportunity Cost
• Every decision to utilize limited resources to
address unlimited wants and needs is an
economic choice that leads to an opportunity
cost.
• Opportunity cost is what a person sacrifices when
they choose one option over another.
• Managing the economic problem requires making
choices that minimize detrimental opportunity
costs.
• This principle applies to nations' economic
choices regarding specialization and product
selection, where gains must outweigh losses for
favorable outcomes.
The Economic Problem
Paul Samuelson’s Three-question Approach to the Economic Problem
• Paul Samuelson addresses the economic problem by posing three key
questions:

Resource Limitations
What to produce? Deciding where to allocate limited resources to meet
demand.
How to produce? Determining the most efficient methods for
production and specialization.
For whom to Ensuring resources are directed towards producing
produce? goods or services with demand.
Market Integration
What is Market Integration?
• Because of globalization, many things get
interconnected including markets. This
interconnection leads to many phenomena
including market integration.
• Market integration occurs when prices among
different locations or related goods follow
similar patterns after a long period of time.
• The uniformity in prices eventually happens
as supply and demand shifts in markets as a
result of consumers gaining greater access to
more markets, including those that are not
immediately accessible to them.
Comprehension Check
If you can answer these without coaching, you are ready for the next lesson.

1. Why are migrants included among the main actors of the global
economy?
2. How does specialization help nations address their unlimited wants and
needs using limited resources?
3. According to Paul Samuelson, what are the three steps to addressing the
economic problem?
4. What is market integration?
 Module 6 Subtopic 2
The Dynamics of Trade and The Modern World System
Objectives

1. Identify the two most common policies towards

international trade and how they work.
2. Analyze the advantages and disadvantages of the two
most common policies towards international trade.
3. Classify countries based on the roles they play in
international trade.
4. Analyze trading patterns in order to learn why some
countries experience an advantage and others
experience a disadvantage in international trade.
The Dynamics of Trade
Free Trade and Protectionism
• The existence of “the economic problem” leads to the need of nations to
trade with each other. Trade is among the most important activities in
the global economy. There are two common approaches to international
trade:

Approaches
Free trade (trade Imports are encouraged by implementing minimal
liberalization) tariffs, quotas, and restrictions.
Protectionism Imports are discouraged through the use of high
import tariffs, quotas, and/or restrictions.
The Dynamics of Trade
Ideal Scenarios
• Free trade and protectionism are simple
concepts. But these open up the
question of when is it best to use one or
the other.
• Generally, free trade benefits countries
that have businesses capable of
competing at the international level.
• Generally, protectionism benefits
countries that have struggling
businesses incapable of going against
international competition.
Advantages and Disadvantages of International Trade
Advantages

1. Leads to the exploitation of a

country’s comparative
advantage, which means that
trade encourages a country to
specialize in producing only
those goods and services
which it can produce more
effectively and efficiently, and
at the lowest opportunity cost.
Advantages and Disadvantages of International Trade
Advantages

2. Producing a narrow range of

goods and services for the
domestic and export market
means that a country can
produce it at higher volumes,
which provides further cost
benefits in terms of economies
of scale.
Advantages and Disadvantages of International Trade
Advantages

3. Trade increases competition

and lowers world prices, which
provides benefits to
consumers by raising the
purchasing power of their own
income, and leads to a rise in
consumer surplus.
Advantages and Disadvantages of International Trade
Advantages

4. Trade also breaks down

domestic monopolies, which
face competition from more
efficient foreign firms.
Advantages and Disadvantages of International Trade
Advantages

5. The quality of goods and

services is likely to increase as
competition encourages
innovation, design and the
application of new
technologies. Trade will also
encourage the transfer of
technology between countries.
Advantages and Disadvantages of International Trade
Advantages

6. Likely to increase
employment, given that
employment is directly related
to production. Trade means
more will be employed in the
export sector and, through the
multiplier process, more jobs
will be created across the
whole economy.
Advantages and Disadvantages of International Trade
Disadvantages

1. Trade can lead to over-

specialization, with workers at
risk of losing their jobs should
world demand fall or when
goods for domestic
consumption can be produced
more cheaply abroad. Jobs
lost through such changes
cause severe structural
unemployment.
Advantages and Disadvantages of International Trade
Disadvantages

2. Certain industries do not get a

chance to grow because they
face competition from more
established foreign firms, such
as new infant industries which
may find it difficult to
establish themselves.
Advantages and Disadvantages of International Trade
Disadvantages
3. Local producers, who may
supply a unique product
tailored to meet the needs of
the domestic market, may
suffer because cheaper
imports may destroy their
market. Over time, the
diversity of output in an
economy may diminish as
local producers leave the
market.
The Modern World System
Overview
• The chart on the right is from a study
conducted by the Brookings
Institution and it shows a forecast of
the amount of people living in extreme
poverty from 2010 to 2030.
• The green line represents Africa while
the grey line represents the rest of the
world.
• Fewer and fewer people from the rest
of the world will be living in extreme
poverty, but Africa’s numbers is
expected to remain the same.
The Modern World System
Overview
• This next chart from the
Brookings Foundation is a
comparison of the 2018
global poverty ranking
together with the predicted
2030 global poverty ranking.
• By 2030, African countries
will represent most of the
top 10 most impoverished
countries in the world.
The Modern World System
Overview
• Predictions based on observable trends
suggest that Africa's poverty situation
may persist for more years to come.
• This is attributed to the dynamics of the
global economy, where international
trade plays a pivotal role. Countries with
abundant natural resources and access to
technology are better positioned to
participate in global trade, while others
may struggle due to resource or
technological limitations.
The Modern World System
What is the Modern World System Theory?
• Immanuel Wallerstein's Modern World
System theory examines the economic
relationships between core, periphery,
and semi-periphery countries facilitated
by global trade.
• Core countries, typically industrialized
and developed, specialize in the
production of finished products using
advanced technology. They import raw
materials and export finished goods to
semi-periphery and periphery countries.
The Modern World System
What is the Modern World System Theory?
• Periphery countries, mostly developing or
underdeveloped, export cheap labor and
raw materials due to a lack of technology
for value addition, resulting in lower
economic gains.
• Semi-periphery countries, like the
Philippines, possess some technology for
both raw material production and
finished product manufacturing but are
not fully reliant on finished product
exports.
The Modern World System
What is the Modern World System Theory?
• Note that in the value chain, finished
products have greater value than raw
materials.
• If a country can only produce raw materials
but are buying finished products from
other countries, it creates a situation where
they are earning less but spending more.
• These dynamics explain why certain
countries, reliant on raw material exports
and finished product imports, remain
impoverished.
Comprehension Check
If you can answer these without coaching, you are ready for the next lesson.

1. What is free trade and give an example of a situation where using this is
ideal.
2. What is protectionism and give an example of a situation where using this
is ideal.
3. Give one example each of an advantage and disadvantage of international
trade.
4. What is the difference between core countries, periphery countries, and
semi-periphery countries?
This serves as a visual aid. For a more detailed discussion, you can watch the video courseware
prepared by the course designer.