Globalization and market perfection: an empirical study based on testing purchase power parity.

Author:Zhao, Jian

    Over the past few years, a body of literature has developed exploring how Globalization, generally referring to the rising trade and financial integration of the world economy, affects other aspects of economic activity in the United States and around the world. For example, the new economy, economic growth, income, inflation and synchronization of business cycles are considered to have strong relationships with globalization. There remains a basic unanswered question however, 'What is globalization and how do we measure it?' In this paper we suggest a globalization measurement method that applies the well accepted Purchase Price Parity (PPP) ratio in a new manner and extends the prior work of Patel (1990) to include such dimensions as international trade cost, short-term and random impacts, the anticipation of exchange factor and trend to the model.

    Across the existing literature in economics, globalization is generally considered to the growth of international, commercial and financial trade and communication integration. Based on this general concept, globalization is usually measured by economists using international trade indices such as import/GDP and Foreign Direct Investment (FDI)/GDP for example. These measurement methods are useful but do not provide any insight into the essence of globalization. If we consider globalization as just the quantity growth of economic factors, we are perhaps missing many aspects of this phenomenon. The purpose of this paper is not to debate the definition of globalization; rather we suggest a more comprehensive and complete understanding of globalization by considering the market structure improvement and handicap elimination among different countries and regions of the world. Our measurement method is based on the argument that there is a strong relationship between the strength of Purchase Power Parity (PPP) and the degree of globalization. It is reasonable then that increased strength in the PPP stemming from the improvement of market power and handicap elimination among different countries and regions will lead to higher levels of globalization. We will measure globalization through testing the strength of PPP.

    The paper is organized as follows: the second part concentrates on defining and understanding globalization and PPP, not only from economic theory but also from a sociological perspective. The third part develops the methodology of the model development and includes econometric testing. The fourth part describes the data used for model testing and the test results from which we discern the trends and support our conceptualization of globalization. Our conclusion and further discussions are in the last section.


    The phenomenon of globalization, which has been debated since the 1990s, usually refers to the rising trade and financial integration of the global economy in an economic framework. Based on this definition, economists usually measure globalization using any of several economic quantity indices such as ratio of imports and exports to GDP or the Currency Broad Index. (Kose, Prasad and Terrones, 2003; Lee, Peek and Rensel, 2008). In general, when using these measures, a higher index indicates greater globalization. The economic quantity indicators tend to be good measuring instruments as they capture most of the characteristic phenomenon of globalization from an economic perspective. However, considering a broader view, globalization should not be regarded solely as the change in economic quantities. Globalization encompasses not only the economic activities, but also contains technological, political, communication and cultural dimensions (Kellner, 2002). This broader scope suggests that a more robust measure of globalization needs to be explored.

    Sociologists have indeed been critical of the over simplified, one-sided perspective of globalization found in economic literature (Kellner 2002). Kellner states in his paper on theorizing globalization, "I argue that the key to understanding globalization is theorizing it as at once a product of technological revolution and the global restructuring of capitalism in which economic, technological, political, and cultural features are intertwined" Kellner, 2002 p286). Considering this wider perspective, the economic quantity indices, although they contain empirical data, may just reflect the results of the phenomena but not the complete nature of globalization. In fact, the attempts to measure globalization within the sociology literature include variables such as social and culture communication in alternative countries (Kellner, 2002).

    Considering the insight provided by the sociologists, a more comprehensive measurement method needs to be developed in order to thoroughly investigate the globalization of United States. According to some scholars, globalization marks the triumph of capitalism and the free market economy. A free market economy provides more freedom for economic activities and fewer handicaps and barriers among markets in different countries and regions...

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