Economics Assignment - International Business and Economics

This economics assignment delves into several key areas of international business and economics. It begins by evaluating the costs and benefits of regional economic integration for both producers within trade blocs and global free trade. The assignment then explores the new trade theory, discussing its relevance compared to the classical notion of comparative advantage. Political risk is defined, and the concept of 'distance' in identifying such risks is examined with real-world examples. The assignment also differentiates between individualism and collectivism, illustrating how cooperation can be fostered in each culture. It further analyzes the economic and ethical arguments surrounding sweatshop labor, and what global manufacturers can do to address them. The role of free trade agreements is critically evaluated, as is the role of multinational corporations in host countries' economic development. The assignment also covers various aspects of globalization, including its nature, drivers, impact, and future, and includes discussions on economic indicators.

Running head: ECONOMICS ASSIGNMENT
ECONOMICS ASSIGNMENT
Name of the Student
Name of the University
Author Note
Course ID:

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Table of Contents
Response to 1:............................................................................................................................2
Part A:....................................................................................................................................2
Part B:.....................................................................................................................................2
Response to 2:............................................................................................................................3
Response to 3:............................................................................................................................5
Response to 4:............................................................................................................................6
Response to 5:............................................................................................................................8
Response to 6:............................................................................................................................9
Part A:....................................................................................................................................9
Part B:...................................................................................................................................11
Response to 7:..........................................................................................................................11
Response to 8:..........................................................................................................................13
Response to 9:..........................................................................................................................14
Response to 10:........................................................................................................................16
Response to 11:........................................................................................................................18
Part A:..................................................................................................................................18
Part B:...................................................................................................................................18
Response to 12:........................................................................................................................19
Response to 13:........................................................................................................................21
Response to 14:........................................................................................................................22
Response to 15:........................................................................................................................24
Response to 16:........................................................................................................................25
Part A:..................................................................................................................................25
Part B:...................................................................................................................................26
References................................................................................................................................28

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Response to 1:
Part A:
Economic integration is a type of union where a certain number of member countries
agree to become a single unit. Under this integration, member countries can trade with one
another without the excess burden of tariff (Adb.org 2019). As a result, trade between nations
increases. This helps the producers of the export sector to earn a higher amount of revenue
from liberalized trading practices. As a result, their cost falls and profit increases. In addition
to this, domestic producers can use imported capital and raw material at a low cost that helps
in increasing their productivity and sales revenue. Moreover, economic integration helps
them in specializing in the production of a good in which they have a high comparative
advantage. This increases the total amount of production leading to efficiency and optimal
allocation of available resources. Furthermore, economic integration leads to political
stability in the country that supports business growth in the region. This stable growth attracts
foreign investments that provide sufficient finances to develop business in the region.
However, there are certain negative effects that can affect the producers operating in the
region. The imports from non-members can lead to an increase in costs and avoidance of a
cheaper source of the product (Nello 2013). Although the demand within the region
increases, yet the demand from non-members remains the same. Therefore, economic has
both its pros and cons for the producers operating inside the economic integration.
Part B:
Economic integration can affect global free trade in both negative and positive ways.
It has the capability of creating as well as deflecting trade. Under the economic integration,
only member nations are allowed to trade with lower tariffs or no tariffs at all (Gilbert 2017).

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However, the non-members are not exempted from the tariffs. Thus, there is a greater trade
between the members of the integration. However, there is a fall in trade among the members
of the integration and the rest of the world. Suppose, before the integration a country imports
a good from a cheaper source and after the formation of the integration, the tariff increases
the price of the cheaper imported from the non-member country relative to the price of the
member country. This creates a trade with the member nation and diverts the trade from the
non-member or the cheaper source of the same product (Wits.worldbank.org 2019).
Economic integration tends to affect the free movement of trade in the global market. It
creates a trade in a particular region and distorts the trade in the rest of the world. In addition
to these issues, economic integration affects the laws of WTO and creates turmoil in the
process of the free flow of goods and services between countries. However, within the region,
economic integration tends to create employment, enables capital to flow freely, improve
business and development in the region. Thus, even if integration restricts a certain degree of
trade with the other countries of the world, it increases development within the region. The
successful evidence can be derived from the ASEAN and the EU.
Response to 2:
New Trade theory opposes the view of comparative advantage as it includes the
notion of economies of scale and networking dynamics. As per this theory, different kinds of
firm operates in an imperfectly competitive environment (Erdogan 2014). This all begins
with the theory that if two or more countries producers similar goods and there is an absence
of difference between their opportunity cost than the early entrant can benefit from
specialization. This is because the experience of the firm in the market has helped it to gain a
substantial amount of economies of scale. Thus, it can benefit from specialization and lead to
market imperfection. The new trade theory indicates that in a real life scenario an existing
dominant firm can affect the growth and expansion of the new entrants. As a result,

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competition is absent and leads to imperfect competition. Therefore, this can be said that
industries with high economies of scale can eliminate competition and lead to the formation
of monopoly or monopolistic competition in the market. Due to the strong competitive
advantage of the large firm, it can lead to a reduction in the welfare of the emerging
industries in the market. Therefore, the welfare denoted by the comparative advantage is
nullified in this case.
On the other hand, when two countries produce and manufacture different
commodities with almost similar opportunity cost, one can gain from comparative advantage
by specializing in the product and raise its economies of scale. The other country can gain
from this specialization by importing the product. Similar is the case with similar products, if
both the economies are producing the same commodity with no major difference in their
opportunity cost then one can specialize and increase its returns to scale and the other country
can gain from importing the same good. Let us consider an example of a country, which is
both producing and importing electronic gadgets from foreign countries. This helps the
buyers to consume varieties of gadgets at the same time. This helps in raising their welfare. In
addition to this, it can lead to knowledge spillover and improve innovation in both the
economies (Costinot and Rodríguez-Clare 2014). Therefore, the theory of comparative
advantage is not relevant in these situations.
As per the theory of comparative advantage, all the economies especially the
developing economies tend to fare well by specializing in a particular product. This view is
opposed by the new trade theory, which indicates that the developed nations try to dominate
the emerging nations by their technologically improved production system. This is also
because the economies of scale of the developing world are at a lower level than already
developed and modernized economies. Another aspect mentioned by the new trade theory is
that geographical locations emit the value of the comparative advantage. If two countries are

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located close to each other, and trades with one another without the presence of comparative
advantage in products (Gómez-Herrera 2013). The third country with higher comparative
advantage fails to attract import demand due to the large gap between the geographical
locations. This is known as the gravity theory that indicates the irrelevancy of the
comparative advantage theory (Chaney 2018). Therefore, the above explanation implies that
in a modern and practical world comparative advantage theory is absent.
Response to 3:
Political risks are the threats faced by industries or business operations from the
political instabilities in a country. Political turmoil can lead to financial losses, market
instabilities and reduction in investments (Kerner and Lawrence 2014). Political risks occur
due to inefficient political decisions taken by authorities and governments. More precisely,
political turmoil occurs due to conflict between the ruling party and opposition parties of a
country to get the power to rule over the state. Political decisions about the various
macroeconomic indicators and various policies can affect the business of a country. Investors
are not interested in investing in companies of a country that faces risks from political
turmoil. Political risks tend to affect business operations and reduce profitability by deducing
market effectiveness (Jensen Malesky and Weymouth 2014). Therefore, political risk can
affect the macroeconomic activity and performance of an economy.
Political distance as mentioned in the CAGE analysis is the differences created in the
formulation of governmental laws, various policies designing and institutions. This also
includes a distance between international agreements, treaties and organizational
memberships (Miloloža 2015). This occurs due to the distances between policy formulation
and implementation. Political risk develops when the gap in between these agreements and
policies widens. This leads to turmoil in business, global trade operations and market
activities. Political risks develop when there is an absence of colonial ties among nations,

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absence of political association or faulty in the decision-making process. This leads to
institutional weakness and turmoil in the country. If a country has wider differences of
opinion between the government policies it can lead to political risks. This affects the
effectiveness of government policies and leads to risks. This risk reduces investment inflows,
business activities and stagnates the growth of an economy. Let us consider an example of a
business in the United States, which is required to follow various rules formulated by the
administration of the region. These policies include environmental regulations, tax rates,
safety and security issues. All these policies can reduce its international operations and
profitability. In addition to this, a host country can affect the productivity and functioning of
the business of a company by imposing protectionist trade policies, elections, riots and rallies
(Hasan Ibrahim and Uddin 2016). This can induce the firm to flee to another country and
affect the growth of the economy. The current example is from China, the conflict between
the US and China has induced several American companies to shift their operations to
another country to avoid the huge amount of tariffs. This turmoil is affecting the business as
well as the domestic operation of China. Therefore, distance in trade, policies, opinions and
agreements can lead to political risk that threatens business operations in a country.
Response to 4:
Individualism refers to displaying one's individual character and freedom without
considering the need for group and opposed to state control. It bases on the fact that every
person is different and has a unique value of its own. This concept is based on self-reliance
and pursuing independent attributes. Individualism indicates that people should have the
liberty to acquire freedom without the interference of the state. The United States is an
example of a state that pursues the phenomenon of individualism. Under individualism,
people are exempted from the control of the state or a leader and enjoy ultimate freedom. On
the other hand, collectivism is based on groups neglecting the view of individual interests.

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Collectivism provides priority to groups over the self-interest of individuals (Kuo 2013).
Collectivism provides an undue advantage to society and the community. Individualism
stresses on the rights and goals of individual people. Whereas, collectivism uplifts the goals
of the entire community or a group. Individualism deals with self-motivation by earning
rewards from performing individual targets. Under this concept, workers prefer working with
autonomy or individually but do not prefer to be a part of a team.in contrast to this;
collectivism is motivated by fulfilling group or team goals (Saad Cleveland and Ho 2015).
Fulfilling the interest of the entire community and pursuing long-term relationships is the
principal interest of the people. Under collectivism, an individual's interest is neglected and
importance is given to the interest of the community. Thus, collectivism tends to eliminate
the rights and benefits of the people. In addition to this, freedom is eliminated and sacrificed
for the success of the entire group. Collectivist cultures are followed by countries such as
Japan, China and Korea (Kim 2017). All these economies prefer satisfying community
interests, emphasize family relationships and subside individual goals. Additionally,
collectivism prefers cultural values contrary to the single motives in individualism.
Cooperation implies the importance and value of working together. Therefore,
cooperation is fostered well under collectivism. While working in a group, individuals learn
to cooperate and raise the efficiency level of the group collectively. Thus, cooperation works
and exists in a group or community. On the other hand, individualism does not require
cooperation. This is because people pursue their individual goals and targets according to
their will. As a result, cooperation is not present under the independent behaviour of people.
Therefore, cooperation is valuable for the collective cultures and raising the value of the
community. In addition to this, cooperation works well in distant cultures and families
(Zhang Liang and Sun 2013). Moreover, cooperation is more prominent in organizations
where a group of people works together to increase the returns of the organization. The

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greater is the cooperation more is the efficiency and productivity of the team. Therefore,
cooperation can raise sustainability under the concept of collectivism and foster the growth of
the group, which is absent in individualism.
Response to 5:
Sweatshops are factories that are characterized by poor working conditions, extremely
low wages, lack of employment benefits, unreasonable working hours and child labour. Thus,
the United States Department of Labour defines sweatshops as the place that violets labour
laws and guidelines prescribed by the ILO. The economic benefits provided by the
sweatshops are that these factories provide employment to the low-skilled and unqualified
labour force of a country. They bring out these rural labourers to the countryside for
employment and provides them minimum amounts for supporting a living. Sweatshops
located in emerging economies provides benefits to the low-qualified labour force of the host
country (Coakley and Kates 2013). As a result, they provide minimum income to this kind of
labour force and increase the employment level of a country. Thus, raising the level of
economy and contributing to output growth. This is because the greater the level of
productivity and business activity in a country, the higher is the economic growth of that
country. Therefore, sweatshops provide employment to the needy and help in lowering
poverty and unemployment in a country (Lazonick 2016). However, sweatshops tend to
destroy the basic human rights of the labour and distort their freedom of expression. In
addition to this, the wages provided by these factories are below average that affects the
living conditions of the workforce. This tends to violate the rights of the labourers working in
different sweatshops. Moreover, sweatshops do not reduce poverty levels but increase the
helplessness of the people. This is because the entire amount earned from working
unspecified labour hours in sweatshops goes into purchasing necessities such as food for the
family. Therefore, the living standards of the people are extremely low. In addition to this,

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sweatshops include children in the process of production. As a result, it tends to destroy the
future of the country. Thus, even if sweatshops creates employment in a country, yet it
destroys the living conditions and liberty of the working population (Sollars and Englander
2018).
Manufacturers should adopt certain policies to reduce the effect and operation of sweatshops.
Labour protecting organizations find it difficult to find and reduce the activities of
sweatshops. The manufacturers and the producers should aim at conducting lean
manufacturing to let the workers learn varieties of production techniques and product quality
efficiency (Bang 2014). This helps to grow and reduces the need for sweatshops. The need
for sweatshops occurs because producers tend to reduce the cost of production to increase
profitability. As a result. There is a growing demand for sweatshops as they produce low-cost
products. In addition to this, there is a need for educating the unskilled labourers that agree to
work in poor working conditions. Moreover, there is a need for encouraging local businesses
to produce goods away from using the concept of sweatshops. This can curtail the negative
operations and illegal working story of the sweatshops. Furthermore, industries and
administrative organizations should include and promote safe, fair, secure and legal working
conditions. This will help in eliminating sweatshops and their effect on the workers living
conditions.
Response to 6:
Part A:
Regional economic integration has its rewards that render consumers and producers
with various kinds of benefits. Economic integration such as the European Union (EU) and
ASEAN (Association of Southeast Asian Nations) benefits the consumers and producers
operating within the region. The EU is devoted to a single unique market that can be used by

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the members of the union. This is an example of a customs union. It confers business and
people to move freely across borders of the member countries without documentation
procedure. The manufacturers receive tax benefits from this economic integration (Sutherland
and Figari 2013). This enables the free movement of capital that helps the smooth functioning
of business activities in the region. There is a complete absence of tariff between the member
countries and people can purchase goods at a relatively lower cost. As a result, economic
integration is highly developed and organized. This helps in creating trade and employment
in the region. Consumers can purchase properties in any member country and can import
products with no tariffs. Therefore, economic integration can be fruitful for the producers as
well as the consumers residing in the region (Cheneval Lavenex and Schimmelfennig 2015).
However, they are affected by the huge amount of tariffs imposed on non-member countries.
Consumers and producers are unable to access the products of the economies outside the EU
due to high tariff rates. This leads to trade diversion and effects business operations. This can
be summarized with the help of a diagram,
Figure 1: Effect of trade diversion from economic integration
(Source: Urata and Okabe 2014)

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The above diagram indicates that New Zealand is a relatively cheaper source of butter
than Denmark. Before the imposition of the tariff, the EU used to purchase butter from New
Zealand at a lower price. However, the imposition of tariff after the formation of the EU,
Denmark became the cheaper source of butter that led to trade diversion. Thus, this can be
seen that consumers face welfare loss due to the deflection of trade. Therefore, integration
can lead to welfare loss as well.
Part B:
Regional economic integration can create trade within the area of regional economic
integration. It distorts the global free trade by the imposition of tariff rates on the rest of the
economies present in the world. The members of the integration are free from all kinds of
trade barriers as shown in the example of the European Union (Dreyer and Popescu 2014).
However, this eliminates or restricts trade with other cheaper sources. This is because it
deflects trade from a cheaper source to a relatively costlier source (Urata and Okabe 2014).
This is shown in figure-1, which implies that the formation of unions restricted consumers
from purchasing butter from a cheaper source and created trade with the expensive seller of
the same product. Therefore, it restricts global free trade operations and affects international
trade activities. This also highlights that integration tends to favour its member nations
because of the wealth benefit it receives from the member countries.
Response to 7:
The globalization process has emerged the growing activity of multinational
corporations (MNCs) all over the world. Multinational corporations are global companies that
operate in several countries in the world to manage their costs and benefits (Kurtishi-Kastrati
2013). MNCs tends to create both positive and negative impact on the operation of a country.
Emerging markets and developing nations largely depend on multinational organizations for