How does the global economy work? | Edology (2024)

The global economy has changed significantly in recent decades in the way it is organized and managed by cooperating countries. These changes have consequences that affect not only the flow of goods and services between countries, but also the movement of people. As we have seen repeatedly over the past century, too great fluctuations in this international economic system can lead to...global economic crisis.

So what exactly is the global economy, how does it work and how does it impact our lives? Here we delve deeper into the complexities of the power that rules the modern world!

What is a global economy?

The global economy refers to the interconnected global economic activities that take place among multiple countries. These economic activities can have a positive or negative impact on the countries involved.

The global economy includes several characteristics, such as:

• Globalization:Globalization describes a process by which national and regional economies, societies and cultures have become integrated through the global network of trade, communications, immigration and transportation. This development led to the rise of the global economy. As a result of the global economy and globalization, domestic economies have become interconnected, leading to an improvement in their performance.
• International trade:International trade is considered onethe impact of globalization. It refers to the exchange of goods and services between different countries and has also helped countries specialize in products in which they have a comparative advantage. This is an economic theory that refers to an economy's ability to produce goods and services at a lower level. opportunity costs than its trading partners.
• International financing:Money can be transferred between countries faster than goods, services and people; makes international finance one of the most important features of a global economy. International finance consists of topics such as exchange rates and monetary policy.
• Global investments:This refers to an investment strategy that is not limited by geographic boundaries. Global investment takes place mainly through 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:

• Economic significance at micro and macro levels:The increase in the world's population has led to economic growth in emerging markets, making them one of the main engines of global economic growth. The growth and resilience of emerging markets are a good signthe world economy. Before going 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 in terms of resource allocation and decision-making. In simpler terms, this branch of economics studies how people make decisions, what factors influence their decisions, and how these decisions affect the price, demand, and supply of goods in the market. From a microeconomic perspective, some of the largest companies with high market capitalization and some of the richest individuals in the world come from these emerging markets, which has contributed to the higher income distribution in these countries. However, many of these emerging countries are still plagued by poverty, and efforts are still needed to eradicate it.
• Long-term prospects for the global economy:According to financial and economic projections based on demographic trends and capital productivity models, GDP in emerging market economies is likely to continue to grow positively in 2019. According to an economic forecast for emerging markets for 2019 conducted byEconomy focusThe economy is expected to grow by 7.5% in India, 6.6% in the 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 believe that the world economy is controlled by governmentslargest economies in the world, but this is a common misconception. Although governments have power over countries' economies, it is the big banks and big corporations that control and actually finance these governments. This means that the global economy is dominated by large financial institutions. According toworld economic newsU.S. banks participate in many traditional government businesses, such as electricity generation, oil refining and distribution, as well as the operation of public assets such as airports and train stations. This was proven when certain members of the US Congress sent onebriefto Fed Chairman Ben Bernanke. Here is an excerpt from the letter:

“Here are a few examples. Morgan Stanley imported four million barrels of oil and petroleum products into the US in June 2012. Goldman Sachs stores aluminum in large warehouses in Detroit and acts as a commodity derivatives trader. This “bank” extends to the ownership and operation of airports, toll roads and ports. JP Morgan markets electricity in California.

In other words, Goldman Sachs, JP Morgan and Morgan Stanley are no longer just banks – they have effectively become oil companies, port and airport operators, commodity traders and electricity companies.”

How does the global economy work?

The functioning of the global economy can be explained in one word: transactions. International transactions taking place betweentop economies in the worldhelp keep the global economy running. These transactions mainly involve trade between different countries. International trade involves the exchange of a number of products between countries. It ranges from fruits and foods to natural oil and weapons. Such transactions have a number of advantages, including:

• Provides a foundation for global economic growth, with the international economy expected to grow by 4% in 2019 (source:World Trade Organization);
• Promoting competitiveness between countries in different markets;
• Increasing productivity and efficiency in all countries;
• Assist 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 the global economy?

Almost every country in the world is affected in some way by things that happen in what sometimes seem like unrelated countries – due to the influence of the global economy. A good example of this iseconomic consequences of the Brexit votewant other countries, not only in Europe, but all over the world. Brexit was a referendum decision for Britain to leave the EU.

The main cause of these effects is the economy – based on the production and exchange of goods and services. Restrictions on the import and export of goods and services could potentially hinder the economic stability of countries that choose to impose too many.

The purpose of international trade is similar to the purpose of trade within a country. However, international trade differs from domestic trade in two respects:

• 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;
• Sometimes countries erect barriers to the international trade of certain goods or services, which can disrupt relations between two countries.

Countries typically specialize in the products they can produce efficiently, which helps reduce overall production costs. Countries then trade these products with other countries whose product specialization is very different. Greater specialization allows countries to benefit from economies of scale. Economies of scale refer to the proportional cost savings achieved through higher levels of production. Manufacturers in these countries can focus all their efforts on building factories for specialized production instead of spending extra money on the production of different types of goods.

Every now and then, countries add barriers to international trade. Some of these barriers include trade tariffs (taxes on imports) and trade quotas (which limit the number of products that can be imported into a country). Trade barriers often impact the economies of trading countries, and in the long run it becomes difficult to continue using such barriers.

What are the benefits of the global economy?

There are several advantages to a global economy, including:

• Free trade: Free trade is an excellent method for countries to exchange goods and services. It also allows countries to specialize in the production of those goods in which they have a comparative advantage.
• Labor movement:Greater labor migration is beneficial for both the receiving country and the workers. If a country goes through a phase of high unemployment, workers may look for jobs in other countries. This also helps reduce geographic inequality.
• Greater economies of scale: The specialization of goods production in most countries has led to favorable economic factors such as lower average costs and lower prices for customers.
• Increased investment:The presence of the global economy has made it easier for countries to attract short- and long-term investments. Investments in developing countries can go a long way in improving their economies.

Factors affecting the global economy

According to the latest economic news, here are some of the key factors that influence how well the global economy works:

• Natural Resources;
• Infrastructure;
• Population;
• Work;
• Human ability;
• Technology;
• Lief.

If you want to learn more about the global economy and how it works, Edology offers a certificate course on policy issues in the global economy. Find out moreher.