The global economy has more than doubled in the last two decades, citing data from the World Bank. Nominal GDP increased from USD32.54 trillion in 1999 to USD85.91 trillion in 2018. During the period, we have also seen the spread of the new economic paradigm, i.e., globalization. It encourages interdependence between countries.
Now, the world economy is more connected. It is not only through international trade flows and capital flows but also through information flows. Technological progress has also changed. It not only turns the economy but also various things in our lives. It creates new opportunities and challenges that were unpredictable before. And, in 2020, these changes may still be early and will continue to transform the world in the next few years.
What is the global economy? What are its characteristics now? And, what are the challenges now? Let’s discuss it one by one.
What is the global economy
The global economy is an economy in which wealth and resources move across national borders. The movement also includes goods, services, people, skills, and ideas.
The global economy comprises an aggregate of economic activities throughout the country. If we take a parable, it is like the national economy, which is the sum of economic activities by economic actors within the borders of a country.
In the national economy, economic actors, goods, services, labor can freely move from one region to another within one country. But, that does not apply to the global economy. Various constraints limit such movements, for example, trade and capital flow protections.
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A country deals with the global economy through international trade and capital flows. The development of technology also allows the flow of information from one country to another.
Yet, the presence of the state bounded the movement. Governments in each country have different national interests. They put in place various regulations to limit the flow of resources, wealth (capital), and information. They reasoned, not all these movements were in line with national interests.
When those boundaries are reduced, that is what we call globalization. Movement between countries has become more accessible, and globalization has increased with:
- Reduction of regulatory obstacles
- More sophisticated technology
- Low transportation costs
- Increased interdependence between countries
Globalization leads to greater efficiency of economic resources. Companies can take advantage of cheaper labor in developing countries. And developing countries can adopt to developed country’s technology to build their economies.
Characteristics and implications of the global economy
The world economy has become integrated with increasing globalization. Mobility of goods, services, technology, information, capital has intensified in recent years. And, globalization plays a vital role in driving economic activities in a country. Some countries get to enjoy more mobile production factors and goods.
Information technology is taking a prominent role
The internet and information technology ease more intense trade and production. We can sell products, not only in the local market but abroad. It’s also not only big companies that can do it, but small companies can also do it. So, so in globalization, not only is the market more extensive, but competition is also increasing.
Furthermore, technological progress also disrupts conventional business models. Some industries, such as newspapers and retail, began to be depressed by the presence of new business models. Technological advancements erode entry barriers. Large companies, small companies, or even individuals, can exploit digital channels.
The emergence of new economies
China, Indonesia, India, and several other developing countries emerged as a new power in the global. They began to rival the status quo of western countries in global output. Their participation is increasing as enjoying stronger growth than developed countries. Their contribution to world trade is also getting more significant from time to time.
The government plays a role in international business
Some governments are eager to support domestic companies, both directly and indirectly. Many state-owned companies began to expand overseas. Success in the local market is its resources to also be successful in foreign markets. That is one form of government participation in the international business.
Another case is the emergence of sovereign wealth funds (SWFs). It also represents the role of government in the global business. Many SWFs invest in various companies abroad to benefit the economy and citizens. Its funding comes from central bank reserves, privatization, and income from exporting natural resources.
A growing global value chain
Transnational companies try to take specific advantages from each country. For examples are abundant raw materials supply and cheaper labor costs. To do this, they break down the production process in various countries to exploit those benefits.
For example, the company has four subsidiaries in different countries. In the first country, its subsidiary produces cheap raw materials. The company then exports the raw materials to the subsidiary in the second country.
In the second country, companies produce semi-finished goods, utilizing the benefits of low wages. The company then exports it to the third subsidiary.
A third subsidiary assembles semi-finished goods to produce the final product. The subsidiary enjoys a more trained workforce but has a relatively low wage than the parent company.
The parent company then imports the finished product and markets it domestically. It can sell products at competitive prices because it can cut costs along the production value chain.
Homogenization of culture
Globalization transmits ideas, meanings, and values from one country to another. People are starting to adopt trends in other countries as their lifestyle. Culture, for example, K-Pop, is increasingly global. More and more people are using English as a conversational language. It all leads to the globalization of culture globally.
Global economy challenges
A connected global economy not only has positive impacts, but it can also have negative consequences. These adverse effects can be a country-specific problem or a common problem as a global community. Among the issues of adverse effects are:
- Global economic inequality and uneven economic development
- Global poverty
- Endless non-renewable resources
- Environmental depletion and global warming
- More vulnerable to contagion effects of the economic and financial crisis
- The increasing geopolitical tension