Discuss about the Globalization and International Trade.
Globalization these days have become very common and popular there is rarely a day when we do not hear about globalization. The global development of the economy is possible with the help of globalization only. The various actors in the economy are affected by the globalization like the social partners, individuals, government and the economy as a whole. The process that is involved in the integration and connectivity of the countries globally is termed as globalization. Globalization basically reduces the barriers between the countries and leads to greater integration among the various countries. It is very rightly said that the globalization is not only important for the survival but also required for the future growth of the domestic business. (Appadurai 2000) Globalization is considered to be an ongoing process that helps in facilitating the people in different countries. Globalization is often considered as a controversial and complex issue. In the last few decades globalization has become the main factor in the business. The globalization often affects the business life, economy, environment and the society in the different ways. There are various changes that are brought in by the help of the globalization. The national economies become inter-related and integrated with the help of globalization. (Juma 2012)
The globalization helps in the future growth of the domestic business in the following ways:
- Increased Wealth: The developing countries become wealthier with the help of globalization. It helps in the increase of the per capita income. There are lots of benefit of globalization in the economic development and increase in the standard of living of the people of the domestic country.
- Exchange of Technologies: Globalization also helps in the exchange of technologies between the two countries. When there is exchange of technology there are chances that the domestic business is benefited by the latest technology.(Scott 2000)
- Gives wider choice to the domestic firms: With the help of globalization wider choice is given to the domestic firms due to which they can export to a wider market. It further helps in increasing the economic welfare of the domestic companies.
- Helps in increase of specialization: The globalization has proved out to be very helpful in increasing the specialization that helps the firms to be benefited from the economies of scale which further helps in lowering the costs.
- Increased inward Investment: With the help of globalization the firms are benefited from the increase in the investment from the various other countries that helps in further development of the domestic business.
- Free trade: The countries can take the advantage of competitive advantage and specialize in the production of various goods and services which would further help in the free trade of the products and services.
- Rise of political philosophies: The other benefit that the globalization provides to the domestic business is in the rise of the political philosophies which proves out to be very helpful for the domestic business.
- Helps in the improvement of the standard of living: As the globalization increases the competition among various countries, automatically the countries are induced to increase there standard of living and efficiency which in turn helps in improving the economies of scale of the domestic companies.
Basically international trade is the exchange of services and the goods across the international borders. It is often believed by the various economists that the international trade brings about more productivity. There are various theories in the international trade. (Pettinger 2012)The two most important concepts in the international trade are comparative advantage and absolute advantage and they influence the trade in the international markets to a very large extent. (Copeland 2001) There are basically two types of cost advantage one is the absolute advantage and the other is the comparative advantage. Comparative advantage is the advantage or the benefit that an economy has when it is able to produce a commodity at a less opportunity cost as compared to various other entities. The law of comparative advantage was given by the famous economist David Ricardo. According to the law of comparative advantage all the partners are benefited by the specialization and free trade. The comparative advantage basically means when a firm or an individual is able to produce the products or services at the lower opportunity cost. (Mitchell & Coles 2003) The company gets the ability to sell the goods and services at the lower price with the help of the comparative advantage. With the help of comparative advantage everyone wins through the trade. Whereas the absolute advantage means when a firm or a country is able to produce more goods and services as compared to the other country or the firm with the same resources.
Point of Difference
Cost and opportunity cost
Condition in which goods can be produced at lower cost as compared to other countries
Condition at which the goods can be produced at lower opportunity cost as compared to other countries.
Mutual beneficial Trade
Trade is not mutually beneficial
Trade is mutually beneficial
There is a comparison of multiple goods
It looks in to the overall production
Limitations of the comparative advantage
- Comparative advantage can be outweighed by the transport costs
- There can be diseconomies of scale due to increased specialization
- There may be restrictions imposed by the government.
- There is a overtime shift in the comparative advantage as the less developed countries become more developed and often realize the latent opportunities.
- The theory of comparative advantage is based on incorrect assumption that there is no variation between the wages of the industries. As more wages are paid to the construction and manufacturing workers as compared to the retail workers.
- Sometimes the structure and the nature of some of the industries may be such that the trade benefits may accrue to only few workers.(Ma 2000)
- It is based on the assumption that the economies of the trading countries are fully competitive which is not true all the time.
- This theory often ignores the trading costs.
- This theory often assumes the frequency of returns that are constant which is not much realistic.
Limitation of absolute advantage
- The transportation costs that are incurred in selling the products in the international market are not taken in to consideration in the case of this theory.
- One of the major assumption on which this theory is based is that the exchange rates stay stable which is not always the case.(Kerin & Rajan 2000)
- The opportunity cost is not taken in to consideration in the case of the absolute advantage.
- It often assumes that the labor costs switch easily without affecting the efficiency which is not the case in reality.
- The size of the countries varies which is the biggest limitation of the absolute advantage theory.
- Only the labor costs are taken in to consideration where as the other important factors are neglected in the case of absolute advantage theory.(Nash 2000)
At last it can be concluded that the globalization is here to stay. The country be it developing of developed would want globalization for its further development and to enter in the competitive environment. Globalization helps in achieving the efficiency of the countries by driving the companies for responding to the competitive and trading environment. The major and the significant impacts of the globalization includes the increase in the migration of labor , changes in the work content and labor market flexibility. Globalization and international trade are one and the same thing. Globalization is incomplete without the international trade. The countries should make the better use of the competitive advantage and absolute advantage so that they can gain more and more from the international trade and the globalization. Though there are many practical issues raised by the globalization for the individual enterprises. There are various opportunities available for the host countries and the home country if they make the proper use of globalization and try to overcome the problems and issues that are associated with the globalization. it is basically a myth that the globalization is essential for the survival of the domestic business rather globalization is important for the survival as well as it offers various number of opportunities for the growth of the domestic business. So, the companies shall make use of the various opportunities of the globalization and try to gain maximum from it.
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Mitchell, D & Coles, C 2003, 'The ultimate competitive advantage of continuing business model innovation', Journal of Business Strategy, vol 24, no. 5, pp. pp.15 - 21.
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