general » Who Is Afraid of the Global Market Price?

Who Is Afraid of the Global Market Price?
Have we reached the pinnacle of globalization?

Photo by M. B. M. on UnsplashPhoto by M. B. M. on Unsplash

The worldwide opening of markets is coming under increasing pressure in the developed industrial countries. One explanation is that industrialized countries have already realized all possible economic advantages. for people in their role as owners of factors of production, as a result of the world market openings achieved to date. Further intensification of globalization would entail, the opening of agricultural and labor markets. This however would result in negative income effects for employees and capital owners in agriculture and for employees in the industrialized countries.

One market – one price: The Global Market Price

When the markets of different countries merge into a global market, there is only one world market price for the traded item. This global price is the average of all national prices. This means that in some regions there are price increases, in others there are price reductions. These price changes change people’s income situation:

  • Consumers benefit from price reductions because lower prices increase the purchasing power of consumers.
  • For capital owners and employees, price cuts are negative. If the revenue of a product unit sold drops, wages and/or profits fall.

Whether the opening of the world market to a particular country means a price reduction or increase depends on the scarcity situation in that country.

Scarcity conditions in western industrialized countries

To simplify matters, the scarcity situation in a developed industrial economy like Germany can be outlined in this way:

  • The supply of capital is high compared to the rest of the world. That is why the price for capital, i.e. the interest rate, is low.
  • Labor is scarce compared to population-rich countries such as China and India. The result is a relatively high wage rate.
  • Western industrialized countries are often characterized by a high population density. As a result, land, an important production factor for agriculture, is relatively scarce. This means a high price for this factor. The same applies to the provision of natural resources.

The supply with factors of production is again decisive for the prices of goods produced in an economy:

  • Products whose production requires a lot of labor and land have high costs of pro-duction in industrialized countries and thus a high market price.
  • Products that are produced with a lot of capital and technology, but only a little labor and land are relatively low priced.

Conflicts of interest in industrialized countries: Global Market Price

In an industrialized country like Germany, the preferences of citizens  on whether development towards a world market should be promoted or prevented cannot be clearly described.
In their role as consumers, citizens have an interest in the lowest possible prices for goods:

  • For products whose potential world market price is lower than the domestic market price, Germany’s integration into the world market is advocated. Such a price reduction is to be expected above all for products whose production requires a lot of labor and land.
  • In the case of products whose global average price is higher than the price in Germany, consumers are more likely to oppose a world market. The additional demand from abroad causes a shortage of the product in question. The result is a price increase in Germany. Products with high export potential are goods in whose production a great deal of capital and technology is used.

In their role as owners of factors of production, people have opposite preferences:

  • Capital owners and employees who earn their income in industries with a high capital intensity of production have an interest in the higher world market price that they can achieve with a global market opening.
  • Workers and capital owners working in sectors with a high labor intensity of production have no interest in a world market. The result would be a price reduction for the products they produce. The same applies to land-intensive products.
  • Irrespective of the sector, workers are against a global labor market because the global average wage would be below the German wage level.
  • Capital owners in Germany – again independent of the industry – are in favour of a global capital market. They benefit from a global interest rate that is higher than the German interest rate.

Outlook

At present, the opening of the world market is most advanced in the area of capital markets and industrially produced goods. The labor markets, on the other hand, are largely closed due to numerous immigration regulations. In addition, industrialized countries impose considerably higher import duties on agricultural products than on non-agricultural products. These regulations regarding the opening of the world market essentially correspond to the interests of the suppliers x– a result that can be predicted from the considerations of the political economy.

Even in the market for industrially produced goods, the industrialized countries are coming under increasing pressure: here they are more and more losing their price advantages to emerging markets, above all to China. It is therefore doubtful whether there will be further developments towards more globally integrated markets in the future.

Read More on The Future of Globalization’s:

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The Pros and Cons of Globalization

The Global Economic Balance of Power is Shifting

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