Economic Globalization

The political and economic institutions of a country influence a country's economic growth and development. In international business there is considerable risk involved; risk in the political, economic and legal systems of countries. The level of development of the political and economic stability and development determine the ability of foreign investment to mange its risk. In today's world economy, global markets are sometimes key to increased profits and expansion. The political and economic institutions set the rules of the game, providing the framework in which business can establish their market.

Economic growth can be measured in different ways including GDP (gross domestic product), HDI (human development index), and PPP (purchasing power parity). Each of which have their flaws however they are still good indicators as to the level of development.

Long run growth can be attributed to innovation and entrepreneurship. The political economy will affect the development of these factors.

Innovation and Entrepreneurship are main characteristics of a market economy which have shown to increase economic growth. Through these activities the economy will grow into diverse markets if the market can sustain it.

Democracy creates a better environment for innovation and entrepreneurship due the freedoms available in a market economy.

Legal Protection of Property Rights has the largest impact on businesses providing incentives to do business in another country. The attractiveness of the market aids in the stimulation of innovation and entrepreneurship. Protective rights give security and peace of mind to conduct cross-border business.

A Market Economy is most favorable to increasing the advancement of these growth factors due to the nature of this type of economy, which allows liberties other economies do not.

Economic Incentives increase the attractiveness of markets including free trade, tax breaks and of course profits.

Question 2

The globalization of markets and production has been rapidly increasing over the past century. Markets are merging due to falling barriers to cross border trading. These merging markets are also converging; standardized products create similar tastes and preferences. Globalization of production institutes the sourcing of goods and services from locations around the world to take advantage of national differences in the cost and quality of production factors.

The move to a more integrated global economy can be directly attributed to two main characteristics: Declining trade and investment barriers and technological change.

The free flow of goods, services and capital has had a tremendous impact on the globalizing economy. The reduction of trade barriers was aided by the formation of the General Agreement on Tariffs and Trade (GATT) treaty which also led to the World Trade Association (WTO) in an attempt to avoid the incidences such as the Great Depression of the 1930's. The aim of tariffs was to protect domestic industries from foreign competition but unfortunately this only depressed world demand. The liberalization of trade and investment has made the globalization of markets and production possible.

With the possibility of globalization of markets and production the only development need is technological change. Advances in communication, information technology and transportation technology have made globalization a reality. The emergence and increased usage of the Internet has effectively shrunk the world making globalization a business possibility through improved communication and transportation systems. Technological change has decreased costs of doing cross border business. The saturation of domestic markets increased the need to internationalize markets and production to further economic growth.

Question 3

GUNS ROSES

NORTHLAND 2 12

SOUTHLAND 5 15

output per unit of input

a) NORTHLAND-50 UNITS

SOUTHLAND-60 UNITS

GUNS ROSES

NORTHLAND 75 150

SOUTHLAND 200 300

Totals 275 450

N= 75/2=37.5units 37.5-50units=12.5units 12.5X12=150units of roses

S=200/5=40 units 40-60 units=20 units 20X15=300 units of roses

b) Absolute advantage, from the works of Adam Smith, cannot be applied to determine specialization and trade between the countries because this theory states that a country should not produce something it can buy at a lower cost from other countries. In this case Southland can produce more output per unit of input than Northland thereby having absolute advantage in both guns and roses.

c) To determine who should specialize in which commodity one must determine who has the comparative advantage in each.

Northland

* produces 2 guns or 12 roses per one unit of input

* 1 gun or 6 roses (2/2 and 12/2)

* .167 gun or 1 rose (2/12 and 12/12)

Southland

* produces 5 guns or 15 roses per one unit of input

* 1 gun or 3 roses (5/5 and 15/5)

* .33 gun or 1 rose (5/15 and 15/15)

Therefore in comparing these numbers one can see that Northland has the comparative advantage in roses and Southland has the comparative advantage in guns.

Northland would have to give up 6 roses in order to make 1 gun whereas Southland would only have to give up 3. Southland would have to give up .33 guns in order to make one rose whereas Northland would give up .167 guns.

GUNS ROSES

NORTHLAND 0 600

SOUTHLAND 300 0

Totals 300 600

*after specialization according to comparative advantage

(N=12X50=600 roses and S=5X60=300 guns)

Therefore 300-275= 25 more guns