Principles of Macroeconomies and Business
Answer:
Introduction:
Globalisation may be defined as the expansion of various economies and business beyond the national borders into the international marketplace. In the last couple of decades, globalisation has resulted on a unprecedented scale especially as the third world countries are increasingly becoming more receptive to the presence of foreign companies and capital. It is argued that this has led to growth and prosperity especially for the third world countries as their economies and businesses are flourishing. Further, globalisation has ushered a ‘global era’ of less restrictive capital movements that have led to opening up of newer opportunities that are not only limited to economic sphere but rather permeates through every sphere of life (Weiss, 2002). The aim of the given essay is to critically analyse the importance of globalisation for domestic businesses not only for survival but also for growth.
Globalisation as a key force has transformed the business climate for domestic businesses. The information technology and communication revolution have acted as key enablers for globalisation. Globalisation has become a critical survival factor for domestic businesses based in both developing and developed nations. In the developed nations, owing to globalisation, the customers have access to global products and thus have become increasingly demanding in terms of price and quality (Akram et. al., 2011). The domestic businesses owing to globalisation have the option of outsourcing their non-core and expensive functions to third world countries like India, China,Vietnam where the cost of labour is comparatively cheaper. As a result, the cost competitiveness of the domestic businesses based in developed countries is enhancing which is critical for their survival (Rodrik, 2002). On the other hand, in the absence of globalisation, the developing world domestic businesses continue to follow processes that are inefficient and hence lead to low productivity. This leads to creation of inefficient behemoths that are a drag on the resources of the nation. These inefficiencies in the long run may be detrimental to the interest of these businesses and lead to closure (Hamdi, 2013). However, with globalisation, these domestic businesses get access to capital and more importantly knowledge due to which the overall efficiency of the business increases and economic growth is also fostered (Berman & Machin, 2000).
Besides, globalisation also presents a lucrative opportunity to the business growth for domestic businesses. For domestic businesses based in developed countries, one of the key concerns is the limited market size which in most cases has already reached the saturation limits. However, with globalisation these businesses can expand into various developing nations where there is huge market potential. This presents a lucrative opportunity for the businesses in developed world to grow and thereby deliver a sustainable return to the shareholders (Redding, 1999). Globalisation also presents an opportunity for the businesses in developing world as there is more outsourcing work which flows to the third world countries. Besides, as the multinationals set up their shops in developing countries, they require a lot of ancillary support which presents an exciting opportunity for the domestic players (Hartungi, 2006).
However, globalisation also causes considerable harm to the domestic businesses especially to the small ones. For instance, in developed nations with the increase in global supply chain and outsourcing, any small business which does not outsource would not be able to compete and perish. Similarly, in case of developing nations, the presence of global giants with deep financial pockets creates unprecedented issues as the small businesses are not able to compete with this and hence eventually would die a slow death (Stiglitz, 2002). As a result, there are protests by various quarters that globalisation tends to hurt national interests and hence its incidence should be curbed. But, it has become a necessary evil and tends to lead to the survival of the fittest. However, there is a need to ensure that smaller businesses should not be led to the mercy of the market forces and the government should ensure that the nation’s social objectives are not jeopardised for economic objectives (Weiss, 2002).
Based on the above discussion, it may be concluded that globalisation is indeed become an imperative for survival for domestic businesses and also fosters new opportunities for expansion to new markets where consumers can be found. The domestic businesses in the developed nations are tend to achieve cost competitiveness by outsourcing their non-core functions and also able to gain access to lucrative markets of the developing nations. On the other hand, the domestic businesses based in the developing nations tend to gain more business due to outsourcing contracts and additionally gain access to capital and knowledge which enables better productivity and size.
Trade is an important economic activity in the modern world which had its foundation laid in the theories which are more than couple of centuries old. These theories provides theoretical framework with regards to trade patterns and how to ensure that international trade serves as a means to ensure that the scarce resources available in the countries engaged in international trade is put to the most efficient usage. Two of the most influential trade theories in this regard are absolute advantage and competitive advantage trade theories. Even though these theories are age old, but still these have relevance in the modern world (Mankiw, 2012). The aim is to discuss the difference between the above two theories of international trade while highlighting their limitations.
Economic efficiency with regards to production of a particular good is different for nations due to innate variations in the requisite factor endowments. The main difference between the absolute advantage and comparative advantage theory is with regards to the actual measure deployed for determining this efficiency in production.
The absolute advantage theory of international trade was given by Adam Smith. In accordance with this theory, absolute advantage in the context of the manufacturing of a good is possessed by the nation which has a lower manufacturing cost or cost of production. Further, it advocated for efficiency gains from international trade between two nations, the nation which has the absolute advantage in good production should only produce that good while the other country should import it from the country having absolute advantage. However, this theory has certain limitations (Dombusch, Fischer & Startz, 2012). Firstly, it does not take into consideration the logistics cost involved in transporting the product from exporting nation to importing nation and hence may erode the advantage. Secondly, it implicitly assumes that the exchange rates between the two nations would be stable which is not true in the modern world. Thirdly, it makes an incorrect tacit assumption that the labour can be switched between various products and there would not be any loss of any efficiency. Clearly, this is not true in the modern world when the products tend to be highly specialised and require specific skills (Koutsoyiannis, 2013).
Another issue with regards to absolute advantage was its inability to provide guidance in case a particular nation had absolute advantage with regards to the other good in production of all goods and services (Dombusch, Fischer & Startz, 2012). The solution to this dilemma was provided by the comparative advantage theory which was extended by Ricardo as an alternative theory to absolute advantage. Ricardo differed from Adam Smith and opined that the advantage tends to comparative and tends to be derived by the nation which has a lower opportunity cost for the production of a particular item. Thus, as per this, there may be a situation where a nation having absolute advantage in production of all the goods may have higher opportunity cost with regards to production of a particular item. In such case, that good should be produced by the other country despite not having absolute advantage (McConnell, Brue & Flynn, 2014).
It is apparent that comparative advantage is superior to the absolute advantage and hence it forms the basis of modern trade theories. However, it also has certain limitations similar to the absolute advantage theory. Firstly, it does not take into consideration the logistics cost involved in transporting the product from exporting nation to importing nation which may erode the advantage. Secondly, the increasing trend of specialisation initially may reap economies of scale but in the long term would lead to diseconomies of scale (Koutsoyiannis, 2013). Thirdly, it does not consider the impact of various tariff and non-tariff restrictions that may be put by the government and thus would alter the trade dynamics between two nations. Finally, the concept advantage is inherently static and does not consider the possibility of a particular country improving due to spending on state of art technology and other factors (Mankiw, 2012). However, the theory seems to be in line with the era when it was propounded.
Based on the above discussion, it may be concluded that the major difference between the comparative advantage theory and absolute advantage theory is with regards to measurement of economic efficiency. However, both of these theories are based in hypothetical worlds where there is no government regulation of trade and erection of barriers, transport cost is ignored and the efficiency of factor endowments essentially remains constant. Even though, these assumptions do not hold ground for modern trade but the underlying concept of mutual gains and efficiency still continues to drive modern day trade theories.
References
Akram, M, Faheem, FA, Dost, MKB & Abdullah, I 2011, ‘Globalization and its Impacts on the World Economic Development’, International Journal of Business and Social Science, vol. 2, no.23, pp. 291-297
Berman, E & Machin, S 2000, ‘Skill-biased Technology Transfer around the World’, Oxford Review of Economic Policy, Vol.16 No 2, pp.12-22.
Dombusch, R, Fischer, S & Startz, R 2012.Macroeconomics, McGraw Hill Publications, New YorkHamdi, FM 2013, ‘The Impact of Globalization in the Developing Countries’, Development Country Studies, Vol. 3 No. 11, pp.141-143
Hartungi, B 2006, ‘Could developing countries take the benefit of globalisation?’, International Journal of Social Economics, Vol. 33 No. 11, pp.728 – 743
Koutsoyiannis, A 2013. Modern Macroeconomics, Palgrave McMillan, LondonMankiw, G 2012. Principles of Macroeconomics, Cengage Learning, London
McConnell, C, Brue, S & Flynn, S 2014. Macroeconomics: Principles, Problems, & Policies, McGraw Hill/Irwin Publications, New York
Redding, S 1999, ‘Globalisation’, Economic Review, Vol. 17 No. 2, pp. 16â€19,
Rodrik, D 2002, ‘Globalization for whom?’, Harvard Magazine, Vol. 104 No. 6, pp. 27-32
Stiglitz, JE 2002, ‘Globalism's Discontents’, The American Prospect, Vol. 13 No. 1, pp.37-43
Weiss, J 2002, Industrialisation and Globalisation: Theory and Evidence from Developing Countries, Routledge, London.
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