The Global Economy
Expert reviewed • 21 July 2024 • 10 minute read
What is the Global Economy?
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:
- The trade of goods and services between economies
- Financial flows between economies
- Including investment, capital, and transnational corporations
- The international division and movement of labour (labour refers to the workers in each economy)
- The technology, transport, and communication between economies
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.
What are the key Factors Influencing the Global Economy?
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
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:
- Economic Growth: Countries participating in trade agreements typically experience growth spurts due to access to larger markets.
- Job Creation and Loss: Trade agreements can lead to job creation in industries where countries have a competitive advantage. Conversely, sectors unable to compete with cheaper foreign products may suffer job losses.
- Consumer Benefits: Consumers often benefit from trade agreements through access to a greater variety of goods at lower prices, enhancing consumer welfare and purchasing power.
Technological Advancements
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:
- Market Expansion and Efficiency: Technology such as e-commerce platforms expands markets beyond traditional geographical limits and increases the efficiency of transactions.
- Innovation and Competition: Technological advancements foster innovation and increase competition among businesses. As companies innovate to stay competitive, they contribute to a dynamic market environment that can lead to better products and services.
- Disruption of Traditional Industries: While technology drives innovation, it also disrupts traditional business models. For example, digital streaming services have reshaped the entertainment industry, displacing older mediums like cable TV and DVD rentals.
Economic Power Shifts
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:
- Global Market Influence: Countries that gain economic power exert greater influence on global markets.
- Investment Patterns: Economic power shifts can redirect flows of investment. Developing economies attracting more foreign direct investment (FDI) can lead to enhanced infrastructure, technological adoption, and industrial growth.
- Political and Economic Policies: Powerful economies can shape global economic policies and standards. For instance, China's Belt and Road Initiative not only expands its economic reach but also sets new trade and investment standards across multiple continents. More about China's Belt and Road Initiative can be found at the following: China’s Belt and Road Initiative