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CHAPTER 2
The Global Economy
CHAPTER OUTLINE
V. International Trade: An Overview
A. International Dependence of Nations
C. Managed Currencies
D. Implications for Global Marketers
X. International Agencies for Promoting Economic and Monetary Stability
A. International Monetary Fund (IMF)
B. World Bank
B. Customs Unions
C. Common Markets
D. Monetary Unions
XIII. The Globalization Controversy
XIV. Conclusion
CHAPTER OBJECTIVES
At the end of this chapter students should be able to do the following:
Distinguish among the basic theories of world trade: absolute advantage, comparative
advantage, and competitive advantage.
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Discuss the pros and cons of global outsourcing.
QUESTIONS FOR DISCUSSION
1. Suppose that Brazil can produce, with an equal amount of resources, either 100 units of
steel or 10 computers. At the same time, Germany can produce either 150 units of steel
or 10 computers. Explain which nation has a comparative advantage in the production
of computers. Choose a mutually advantageous trading ratio and explain why this ratio
increases the welfare of both nations.
2. What problems could export tariffs cause?
Governments sometimes utilize export tariffs for reasons that make sense to them. A
government might utilize export tariffs to keep scarce resources in the country that are
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3. Do you agree with the critics who claim that the WTO has excessive power over national
governments? Will free trade widen the gap between rich and poor? Why or why not?
This, of course, is one of the toughest questions of our time. The WTO strongly supports
4. What makes regional integration more difficult for developing countries?
Several suggestions may be presented:
The economies of these countries are more volatile.
CASE 2.1: ARGENTINA: TROUBLE IN MERCOSUR
This case examines the challenges of Mercosur over a period of nearly 20 years. It highlights the
problems of regional integration in developing countries as well as the difficulties these problems
pose for businesses.
DISCUSSION QUESTIONS
1. How might Argentina’s devaluation in 2002 and again in 2014 affect a U.S. exporter of
heavy machinery? A European exporter of cosmetics? A Brazilian exporter of
automobiles? An Argentinian textile exporter with debt denominated in U.S. dollars?
U.S. exporter of heavy machinery: This company is most likely be hurt by these
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An Argentinian textile exporter with debt denominated in US dollars: This firm
2. Why do you think Argentina enacted certain export taxes at the same time creating more
barriers to imports?
These actions appear contradictory if the governments goal is simply to improve its balance
2. What are some of the unintended consequences of protectionism?
Protectionism is often used to encourage local industry. But it can raise the cost of inputs
.
4. What problems related to regional integration agreements are illustrated in this case?
Several points may be made:
All sides need to feel as if they are gaining from the association.
CASE 2.2: TEXTILE TRAUMA
When GATT was formed in the middle of the 20th century, clothing and textiles (along with
agriculture) was an industry considered too hot to handle politically. Because of this, it was
excluded from GATT and its successor the WTO until the 21st century. Then relatively sudden
trade liberalization in this controversial industry threatened the economies of many developing
countries. This is a good case to illustrate why globalization is controversial. Students are
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challenged to come up with solutions for certain countries threatened by globalization when good
solutions are hard to find.
DISCUSSION QUESTIONS
1. What factors contribute to a country’s success as an apparel exporter?
Two factors appear to dominate this market1) keeping costs low and consequently prices
2. Which theory best explains a nation’s success in this industry post MFA—the theory of
comparative advantage or the theory of competitive advantage?
Competitive advantage helps explain more in this case. For example, Chinas competitiveness
is partially due to two key factors mentioned in the theory of competitive advantage:
3. What actions would you suggest for textile and garment producers in Mexico and
Turkey?
China threatens both industries in these countries. Unfortunately, mid-income countries like
Mexico and Turkey have been the losers in globalization. Rich countries and poor countries
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3. What advice would you give to garment producers in Mauritius and Bangladesh?
These two nations are very different but both depended heavily on exports of apparel for
recent economic development and were both profoundly threatened by China in the post-
MFA era.
Mauritius is relatively well educated and bilingual. However, its small size and
geography work against it.
oGarment manufacturers could move to cheaper locations.
Bangladesh has half the wage rate of China but to date has managed to be so
unproductive that this advantage is offset. Bangladesh suffers from political risk and from
being unfriendly to business. However, what China did to Bangladesh, Bangladesh could