The Structure of the World Economy. International Integration and Trade.

1. The economy of the world is considered as an international exchange of goods and services. Some economists call it the borderless world. It also refers to the increasing integration of national markets for goods and services into a single global market. In such a market, companies may source from one country, conduct research and development (R&D)[1] in another country, take orders in a third country, and sell wherever there exists demand regardless of the customer's nationality. While nobody would argue that national borders are completely irrelevant, certain influences have caused the globe to become smaller and smaller. These include technological advances in global communication and transportation, the dilution of culture, a decrease in tariff and non-tariff barriers. The world economy, like the economy of a single country, can be visualised as a system of interdependent processes. Each process, be it the manufacture of steel, the education of youth or the running of a family household, generates certain outputs and absorbs a specific combination of inputs. Direct interdependence between two processes arises whenever the output of one becomes an input of the other: coal, the output of the coal mining industry, is an input of the electric power generating sector. The world economy covers such spheres as international integration and trade, world banking system, international organisations and multinational corporations.

2. Global economic integration is not a new phenomenon. Some communication and trade took place between distant civilisations even in ancient times. Since the travels of Marco Polo seven centuries ago, global economic integration – through trade, factor movements, and communication of economically useful knowledge and technology – has been on a generally rising trend. This process in the economic domain has not always proceeded smoothly. Nor has it always benefited all whom it has affected.

3. Nowadays one of the reasons for facilitating global integration is technological advances. For example, dramatic improvements in supply-chain management, made possible by advances in communication and computer technologies, have significantly reduced the costs of co-ordinating production among globally distributed suppliers. Another common feature of the contemporary economic landscape and the experience of the past is the continued broadening of the range of products that are viewed as tradable. In part, this broadening simply reflects the wider range of goods available today – high-tech consumer goods, for example – as well as ongoing declines in transportation costs.

4. Government policy plays a critical role in supporting or at least permitting, global economic integration. Progress in trade liberalisation has continued in recent decades. Moreover, the institutional framework supporting global trade, most importantly the World Trade Organisation, has expanded and strengthened over time. Regional frameworks and agreements, such as the North American Free Trade Agreement and the European Union's "single market," have also promoted trade. Government restrictions on international capital flows have generally declined, and the "soft infrastructure" supporting those flows – for example, legal frameworks and accounting rules – have improved, in part through international co-operation. Production processes are becoming geographically fragmented. Rather than producing goods in a single process in a single location, firms are increasingly breaking the production process into discrete steps and performing each step in whatever location allows them to minimise costs. For example, the U.S. chip producer AMD locates most of its research and development in California; produces in Texas, Germany, and Japan; does final processing and testing in Thailand, Singapore, Malaysia, and China; and then sells to markets around the globe. The international capital markets have become substantially more mature. Flows of foreign direct investments are also much larger than they were fifty or a hundred years ago. The emergence of China, India, and the former USSR implies that the greater part of the earth's population is now engaged, at least potentially, in the global economy.

5. International trade as a part of the world economy is worth mentioning here. We can define it as economic transactions that are made among countries. Among the items commonly traded are consumer goods, such as television sets and clothing; capital goods, such as machinery; and raw materials and food. Other transactions involve services, such as travel services and payments for foreign patents. International trade transactions are facilitated by international financial payments, in which the private banking system and the central banks of the trading nations play important roles.

6. International trade is in principle not different from domestic trade as the motivation and the behaviour of parties involved in a trade does not change fundamentally depending on whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or a different culture. International trade uses a variety of currencies, the most important of which are held as foreign reserves by governments and central banks. Another difference between domestic and international trade is that factors of production such as capital and labour are typically more mobile within a country than across countries.

7. International trade and the accompanying financial transactions are generally conducted for the purpose of providing a nation with commodities it lacks in exchange for those that it produces in abundance; such transactions, functioning with other economic policies, tend to improve a nation's standard of living. Much of the modern history of international relations concerns efforts to promote freer trade among nations. Many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non-tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures.

8. The regulation of international trade is done through the World Trade Organisation at the global level, and through several other regional arrangements such as the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico, and the European Union between a bundle of independent states.

9. Changes in communications and transportation technology, convergence of consumer tastes and preferences, trade liberalisation, and the emergence of global competitors have all combined to create a much more integrated world economy. The global marketplace seems likely to continue its expansion as new technological advances continue to shrink the importance of geographic distance.