THE GLOBAL ECONOMY

Learning Objectives
In this topic, it is expected that you will be able to:
1. Define economic globalization.
2. Identify the actors that facilitate economic globalization.
3. Define the modern world system.
4. Articulate a stance on global economic integration.

What is a global economy?

The global economy refers to the interconnected worldwide economic activities that take place
between multiple countries. These economic activities can have either a positive or negative impact
on the countries involved. An economic activity is the activity of making, providing, purchasing, or
selling goods or services. Any action that involves producing, distributing, or consuming products or
services is an economic activity.

The global economy comprises several characteristics, such as:

1. Globalization: Globalization describes a process by which national and regional economies,

societies, and cultures have become integrated through the global network of trade, communication,
immigration, and transportation. These developments led to the advent of the global economy. Due
to the global economy and globalisation, domestic economies have become cohesive, leading to an
improvement in their performances.

2. International trade: International trade is considered to be an impact of globalisation. It refers

to the exchange of goods and services between different countries, and it has also helped countries
to specialise in products which they have a comparative advantage in. This is an economic theory
that refers to an economy's ability to produce goods and services at a lower opportunity cost than its
trade partners.

3. International finance: Money can be transferred at a faster rate between countries compared
to goods, services, and people; making international finance one of the primary features of a global
economy. International finance consists of topics like currency exchange rates and monetary policy.

4. Global investment: An investment is using money to purchase assets in the hope that the
asset will generate income over time or appreciate over time. This refers to an investment strategy
that is not constrained by geographical boundaries. Global investment mainly takes place via foreign
direct investment (FDI).

Why is the global economy important?

We can understand the importance of the global economy by looking at it in relation to emerging
markets:

1. Economic importance at a micro and macro level: The increase in the world’s population
has led to emerging markets growing economically, making them one of the primary engines of
world economic growth. The growth and resilience shown by emerging markets is a good sign for
the world economy. Before delving into the next point, you need to understand the concept of
microeconomics. It refers to the study of the behavior of households, individuals, and firms with
respect to the allocation of resources and decision-making. In simpler terms, this branch of
economics studies how people make decisions, what factors affect their decisions, and how these
decisions affect the price, demand, and supply of goods in the market. Therefore, from the
perspective of microeconomics, some of the largest firms with high market value and a few of the
richest individuals in the world hail from these emerging markets, which has helped in the higher
distribution of income in these countries. However, many of these emerging countries are still
plagued by poverty, and work still needs to be done to work towards eradicating it.

2. Long-term world economic outlook: According to financial and economic projections based
on demographic trends and capital productivity models, the GDP in emerging market economies in
2019 are likely to keep increasing at a positive rate. According to an emerging markets economic
forecast for 2019 conducted by Focus Economics, the economy is set to increase by 7.5% in India,
6.6% in Philippines, 6.3% in China, 5.3% in Indonesia, 5.1% in Egypt, 4.9% in Malaysia, 3.8% in Peru
and 3.7% in Morocco.

Who controls the global economy?

Many people think that the global economy is controlled by governments of the largest economies
in the world, but this a common misconception. Although governments do hold power over
countries’ economies, it is the big banks and large corporations that control and essentially
fund these governments. This means that the global economy is dominated by large financial
institutions. According to World Economic News, US banks participate in many traditional
government businesses like power production, oil refining and distribution, and also the operating of
public assets such as airports and train stations. Examples of big banks include JP Morgan Chase
and Co., Bank of America Corp., Industrial and Commercial Bank of China, Wells Fargo, HSBC
Holdings, Citigroup, Bank of China, etc.. The examples of large corporations include Walmart,
Amazon, State Grid, China National Petroleum, Royal Dutch Shell, Saudi Aramco, Volkswagen,
Toyota, Mitsubishi, etc.

Actors of Economic Globalization

1. International governmental organizations

An intergovernmental organization or international governmental organization (IGOs)

refers to an entity created by treaty, involving two or more nations, to work in good faith, on issues of
common interest. IGO's strive for peace, security and deal with economic and social questions.
Examples include: The United Nations, The World Bank and on a regional level The North
Atlantic Treaty Organization, Association of Southeast Asian Nations among others.

2. International non-governmental organizations (INGO)

International non-governmental organizations include charities, non-profit advocacy

groups, business associations, and cultural associations (Greenpeace, Amnesty International,
Doctors Without Borders, International Rescue Committee, Bill and Melinda Gates
Foundation, etc.). International charitable activities increased after World War II and on the whole
NGOs provide more economic aid to developing countries than developed country governments.

3. Businesses

Since the 1970s, multinational businesses have increasingly relied on outsourcing and
subcontracting across vast geographical spaces, as supply chains are global and intermediate
products are produced. Firms also engage in inter-firm alliances and rely on foreign research and
development. This in contrast to past periods where firms kept production internalized or within a
localized geography. Innovations in communications and transportation technology, as well as
greater economic openness and less government intervention have made a shift away from
internalization more feasible. The examples of multinational businesses are the Microsoft
Corporation, General Electric, JP Morgan Chase., General Motors, Ford Motor
Company, Hewlett Packard, etc.

4. Migrant

A migrant is a person who moves from one place to another, especially in order to find work or
better living conditions. International migrants transfer significant amounts of money
through remittances to lower-income relatives. Communities of migrants in the destination
country often provide new arrivals with information and ideas about how to earn money. In some
cases, this has resulted in disproportionately high representation of some ethnic groups in certain
industries, especially if economy success encourages more people to move from the source country.
Movement of people also spreads technology and aspects of business culture, and moves
accumulated financial assets.

How does the global economy work?

The functioning of the global economy can be explained through one word —transactions.
International transactions taking place between top economies in the world help in the
continuance of the global economy. These transactions mainly comprise trade taking place between
different countries. International trade includes the exchange of a variety of products between
countries. It ranges all the way from fruits and foods, to natural oil and weapons. Such transactions
have a number of benefits including:

1. Providing a foundation for worldwide economic growth, with the international economy set to
grow by 4% in 2019 (WTO);

2. Encouraging competitiveness between countries in various markets;

3. Raising productivity and efficiency across countries;

4. Helping in the development of underdeveloped countries by allowing them to import capital goods
(machinery and industrial raw materials) and export primary goods (natural resources and raw
materials).

What are the effects of global economy?

Nearly every country in the world is in some way affected by things that happen in what may seem at
times, like unrelated countries - due to the influence of the global economy. A good example of this is
the economic impact that the Brexit vote will have to other countries, not only in Europe, but
across the globe. Brexit was a referendum decision for the United Kingdom to withdraw from the
European Union (EU).

The main cause of these effects is economics — based on the production and exchange of goods and
services. Restrictions on the import and export of goods and services can potentially hamper the
economic stability of countries who choose to impose too many.

The purpose of international trade is similar to that of trading within a country. However,
international trade differs from domestic trade in two aspects:
1. The currencies of at least two countries are involved in international trade, so they must be
exchanged before goods and services can be exported or imported;

2. Occasionally, countries enforce barriers on the international trade of certain goods or services
which can disrupt the relations between two countries.

Countries usually specialize in those products that they can produce efficiently, which helps in
reducing overall manufacturing costs. Then, countries trade these products with other countries,
whose product specialisation is something else altogether. Having greater specialisation helps
countries take advantage of economies of scale. Economies of scale refer to the proportionate
saving in costs gained by an increased level of production. Manufacturers in these countries can
focus all their efforts on building factories for specialized production, instead of spending additional
money on the production of various types of goods.

Occasionally countries add barriers to international trade. Some of these barriers include trade
tariffs (taxes on imports) and trade quotas (limitation on the number of products that can be
imported into a country). Trade barriers often affect the economies of the trading countries, and in
the long run, it becomes difficult to keep employing such barriers.

What are the benefits of global economy?

There are numerous benefits of a global economy, which include:

1. Free trade: Free trade is an excellent method for countries to exchange goods and services. It also
allows countries to specialise in the production of those goods in which they have a comparative
advantage.

2. Movement of labor: Increased migration of the labor force is advantageous for the recipient
country as well as for the workers. If a country is going through a phase of high unemployment,
workers can look for jobs in other countries. This also helps in reducing geographical inequality.

3. Increased economies of scale: The specialisation of goods production in most countries has
led to advantageous economic factors such as lower average costs and lower prices for customers.

4. Increased investment: Due to the presence of global economy, it has become easier for
countries to attract short-term and long-term investment. Investments in developing countries go a
long way in improving their economies.
Factors Affecting Global Economy
According to the latest economic news, here are some of the key factors that influence and affect how
well the global economy works:

1. Natural resources
2. Infrastructure
3. Population
4. Labor
5. Human capital
6. Technology
7. Law

Risk of Economic Globalization

1. Interdependence: Interdependence between nations can cause regional or global instabilities if

local economic fluctuations end up impacting a large number of countries relying on them.

2. National Sovereignty: Some see the rise of nation-states, multinational or global firms, and
other international organizations as a threat to sovereignty. Ultimately, this could cause some
leaders to become nationalistic or xenophobic.

3. Equity Distribution: The benefits of globalization can be unfairly skewed towards rich nations
or individuals, creating greater economic inequalities.