Theories of Globalization and Trade

1 Theories of Globalization and Trade 1.

(a). Music software such as Tidal, Spotify and iTunes have revolutionized the

music business. With the advent of peer to peer sharing via the internet, it is no longer necessary to purchase the physical copies of music such as CDs, music software distributor companies have made it possible for consumers to purchase soft copies of the music they need at the time and place of their convenience. However, the online purchase of music does not eliminate the transaction costs of purchasing the music. To distribute music on their platforms, music software companies must first acquire music licenses through purchase them from the music publishers and then sell the music to the consumers at a profit. Piracy is one of the main issues hindering the legal purchase of music.

To reduce piracy, music software companies such as iTunes provide an easyto-use platform where consumers can access any music of their choice and purchase it at a relatively cheap price. For instance, iTunes charges $0.99 per song on average. This amount is distributed among the music software company, the music publishers and record companies.

The music software company receives only around $0.10 while the publishers and record companies receive the most significant proportion of the amount paid by the customers.

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2 However, the low price works to the music software companies’ advantage since hundreds of millions of songs are downloaded per day, therefore generating ample revenues for the companies. (b) The prices of downloading music from a music store such as iTunes varies in each country according to the strength of the country’s currency. The stronger the country’s currency, the lower the amount paid by customers. The prices of music on the iTunes store are $0.69 for old unpopular songs, $0.99 for a majority of its music and $1.29 for the newest and most popular music, such as the BillBoard top 30 songs. The pricing model also depends on the amount of competition in the country. For instance, in wealthier countries where people have more disposable income and a relatively larger appetite for music, the pricing is higher than in poor countries where customers have lower income. Poorer countries also have a higher rate of music piracy, and it is therefore essential for companies such as iTunes and Spotify to price music affordably to encourage consumers to purchase music through the legal channels as opposed to downloading it illegally (Milner, & Rudra, 2015). (c.) If Australia was a net importer of music via iTunes, the Australian consumers would pay more for iTunes music despite the relative stability of the Australian dollar due to the exchange rate Apple uses to determine price levels for the Australian market. Other factors such as local licensing and tax also affect the prices of the music of music in the region, leading to an increase in the price of music. Australian music producers would gain from distributing their music through iTunes since it provides a platform that enables them to reach a wider audience and it also allows them to sell their music at a higher price, thus earning more royalties. Consumers, on the other hand, are at a disadvantage because they are forced to pay an extra price for music which could have been used to purchase more music.

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a.) Market integration refers to the ease with which countries are able to trade

with each other (Ekins, & Voituriez, 2012). The disparity between inter-Canadian trade and Canadian-American trade is an indicator that there are high barriers to trade between the two countries. One of these barriers is high prices; however, as foreign trade increases between the two countries, the prices of the commodities traded between them will deescalate until they match. One of the signs of market integration are mobility of labor, conducive tax policies, favorable commercial policies and stability of currency exchange rates between the two countries. b.)

If the Canadian and American markets were intergrated, there would be an ease

in the movement of commodities and factors of production between the trading nations.

Integrated markets also have better price transmissions than unintegrated markets. Market integration between Caanada and the United States is hindered by the homogeneity of the goods produced, and the differences in currency strength which puts Canada at a disadvantage when importing goods from the US. 3. a.) There are two primary factors of production; labour and capital. Mopst countries are either rich in capital or labor. The intensity of the use of either capital or labor is dependent on the technologies and prices used in production. The commodity that requires a high level of capital is referred to as being capital intensive, while the commodity that requires a high level of labor is referred to as being labor intensive. International trade is most favorable in situations where countries have different labor and capital endowments.

In the example of China and the United States, China is the more labor intensive country and has an abundant supply of labor and therefore would charge lower for the price of

4 walking tours and higher for the price of cars . The United States, on the other hand, is capital intensive and therefore, in comparison to China, the price of cars relative to the price of walking tours would be lower. b.) As the world continually becomes global due to advancements in technology, the inequality between China and the United States continues to increase due to differences in income, wages and wealth (Krist, 2013). Trade differences between China and the United States continue to increase due to the differences in the factors of production. According to the Heckscher-Ohlin model countries export the model which they have an abundant supply of and imports the factor which they have the least supply of. For instance, the United States In the United States, a majority of the workforce has tertiary education, therefore there is a higher level of skilled labor than China which is more densely populated and has lower literacy levels. As a result of the difference between the quantity of skilled labor between the United States and China, there is a significant difference in remuneration and the standards of living. In China, there is an abundant supply of unskilled workers, who are paid relatively wages, resulting in lower standards of living. c.) The United States is one of China’s largest consumers. China’s economy lags behind the United States’ because it is more labor intensive. If China and United States did not trade in commodities, both countries would be able to thrive economically without each other. Both countries are technologically advance and have vibrant economies that are able to manufacture goods on their own. In some technologies, the United States is more advanced than China, while China is more advanced in others. Both countries are also rich in diverse in natural resources and agricultural resources (Pelkmans, 2013). Therefore, the relative prices

5 and factor prices would converge since both the United States and China have strong partnerships with other countries. d.) The relative price of cars in the United States and China are different because China offers trade incentives to foreign direct invesotrs to encourage investment in the country and also to avoid importation charges. When China joined the World Trade Organization in 2001, its manufacturing industry lagged far behind the United State, however, the government of China induced investment into the country by eliminating trade barriers to allow foreign countries to inject capital into the county. China’s foreign direct investment in the United States is lower due to the trade restrictions it imposes on foreign countries investing in the country. In some instance, the United States sells more of its cars in China than it does in its own domestic market. For example, in 2016, General Motors, an American motor-vehicle brand sold 3 million vehicle units in the US and approximately 4 million units in China, it therefore earned higher reveneus in China than it did in its domestic market. The United States restricts China from selling a large number of vehicles in its market by imposing high taxes and other constrictive policies. Through these measures, the United State motor vehicle industry has a trade surplus with China.

6 References Ekins, P., & Voituriez, T. (2012). Trade, Globalization and Sustainability Impact Assessment.

Hoboken: Earthscan.

Krist, W. (2013). Globalization and America's trade agreements. Washington, DC: Woodrow Wilson Center Press.

Milner, H. V., & Rudra, N. (2015). Globalization and the Political Benefits of the Informal Economy. International Studies Review, 17(4), 664–669. doi:10.1111/misr.12268 Pelkmans, J. (2013). Market Integration in the European Community. Dordrecht: Springer Netherlands.