Expert reviewed • 22 November 2024 • 10 minute read
Traditionally, the study of economics focuses on the operations of individual economies. However, due to trade, agreements, and communication between economies, we can assume that all economies are inherently connected. This is essentially the basis of the theory of the global economy.
Thus, the global economy refers to the interconnected system of economies of the world's nations, encompassing all economic activities and transactions that take place across the world. When exploring what the global economy is, the major indicators of integration between economies must be considered. This includes:
As such, the network for the global economy is built upon the foundation of international trade agreements, economic policies, and varying degrees of economic integration among countries.
The global economy as a whole is influenced by various factors. These factors influence the upturns and downturns in the global economic cycle over time. Thus, discussed below, each influence has its own effects on the global economy.
Trade agreements and economic policies dictate the flow of goods, services, capital, and labour across international borders. Trade agreements such as NAFTA (North American Free Trade Agreement) reduce trade barriers such as tariffs, quotas, and regulations, to facilitate a smoother and more cost-effective exchange of products and services between countries.
Economic policies such as Made in China 2025, are policies that complement trade agreements to enhance the benefits of increased trade. This specific policy, created by the Chinese government in 2015, aimed to upgrade the country's manufacturing base. Policies such as these stimulate job creation, foster competitive markets, and promote economic diversification.
As such, trade agreements and economic policies have the general effects on the global economy:
Technological advancements enable faster communication, efficient production processes and increased innovation. These technologies streamline operations, reduce costs, and open new opportunities for businesses and economies at large. For example, the introduction of e-commerce platforms like Amazon and Alibaba makes it easier to buy and sell retail goods across borders.
Thus, the main effects of technological advancements in the global economy are:
Shifts in economic power are typically characterised by changes in the economic dominance among countries or regions. As emerging markets like China and India grow, they alter the balance of economic power globally, influencing international trade, investment patterns, and economic policies worldwide.
The effects of economic power shifts on the global economy are: