SYNOPSIS

GLOBAL ECONOMY

The global economy can be defined as the sum of all activities that occur both within and
between countries. Each country is a distinct entity with its own industrial output, labor market,
financial market, natural resources, and environment. Globalization aided and accelerated the
development of international trade, finance, and labor migration, all of which are examples of
areas where countries must collaborate and find shared solutions. One of the consequences of
globalization is that significant changes in one country have an impact on other countries. For
instance, Brexit affects not only the United Kingdom, but also the European Union as a whole.

GDP

There are numerous indicators which allow to measure and analyze the economic activity –
they are called economic indicators. One of the most important economic measures is gross
domestic product (GDP), which is the total value of all goods and services manufactured within
one year. Global GDP increased from around 25 trillion U.S. dollars in the 1990s to 84.9 trillion
U.S. dollars in 2020. The United States was the country with the largest gross domestic product
in 2020, followed by China, Japan, and Germany. According to a forecast for 2030, this ranking
will look quite different in the future as emerging countries, such as China, India, Russia, or
Brazil, are growing faster than the mature economies.

If we compare the gross domestic product with the number of inhabitants and take a look at
GDP per capita, such countries as Macao, Luxembourg, and Singapore emerge as world
leaders. On the other hand, Burundi, South Sudan, and Malawi led the ranking of the countries
with the lowest GDP per capita in 2020. In 2020, global GDP per capita amounted to 10.92
thousand U.S. dollars.

In general, global economic growth could be observed in previous years. The year 2020 was
an exception, as the coronavirus (COVID-19) pandemic took its toll on almost every country
in the world.
Other Economic Indicators

According to the preliminary estimates for 2020, about 220.28 million people were
unemployed worldwide, which translates to a global unemployment rate of approximately 6.57
percent. The world regions with the highest unemployment rate are the Arab World, Latin
America & Caribbean, and North America.

The global inflation rate was 3.18 percent in 2020 and it was forecast to increase to 4.35 percent
in 2021. The price levels increased most significantly in Venezuela and Zimbabwe, while the
lowest inflation rates were reported in Qatar and Fiji.

The leading export country in 2020 was China, with exports worth about 2.59 trillion U.S.
dollars, followed by the United States and Germany. The ranking of the leading import
countries, however, sees the United States at the top, followed by China and Germany.

US DOLLAR

A global currency is one that may be used for international trade. Most international
transactions accept some of the world's currencies. The most common currencies are the US
dollar, euro, and yen. The reserve currency is another name for a global currency. The US
dollar is the most widely used currency, according to the International Monetary Fund. It
accounts for more than 60% of all known central bank foreign exchange reserves as of the
fourth quarter of 2019. Despite the lack of foreign designation, it has become the world’s
official currency. The euro is the next closest reserve currency. It accounts for 20% of all known
foreign currency reserves held by central banks. The eurozone crisis has harmed the euro's
chances of becoming a global currency. It exposed the challenges of a monetary union
governed by two political entities.

The dollar's value is supported by the relative strength of the US economy. It is for this reason
that the dollar is the most powerful currency in the world. The United States had $2.04 trillion
in circulation at the end of 2020. It's estimated that half of that amount is in circulation outside
of the United States. Many of these bills come from countries in the former Soviet Union and
Latin America. In everyday transactions, they are frequently used as physical currency. The
dollar is king in the foreign exchange market. The US dollar is used in over 9 0% of forex
transactions. According to the International Standards Organization List, the dollar is one of
185 currencies in the world, but most of these currencies are exclusively used within their
respective countries. Furthermore, rather than a single currency, the reduction in the US dollar's
share has been absorbed by a wide range of other currencies. Consequently, while countries
have diversified their reserve holdings during the last two decades, the dollar remains by far
the most important reserve currency.

The financial crisis increased the use of the dollar. In 2018, German, French, and British banks
owned greater liabilities denominated in dollars than liabilities denominated in their own
currencies. Furthermore, bank regulations enacted to avoid another financial catastrophe may
make money scarce. When the Federal Reserve raises the fed funds rate, this can also happen.
This reduces the money supply by making borrowing dollars more expensive. Because of the
dollar's strength, nations are prepared to keep it in their foreign exchange reserves.
Governments acquire currencies as a result of international trade. They also get them from local
businesses and tourists who exchange them for local currency.

Some nations put their foreign currency reserves to work. China and Japan buy the currencies
of their biggest export partners on purpose. The United States is China's and Japan's major
export partner. They attempt to maintain their currencies low in comparison in order to keep
their exports competitive.

US SHARE OF WORLD GDP vs US DOLLAR SHARE OF INTERNATIONAL

RESERVES
 FOREIGN EXCHANGE RESERVES

A currency's primary function is to serve as a store of value that can be saved and retrieved in
the future without losing considerable purchasing power. The use of a currency in official
foreign exchange reserves is one indicator of confidence in it as a store of value. In 2021, the
dollar accounted for 60% of internationally declared official foreign reserves, as indica ted in
the graph. Although this percentage has decreased from 71 percent in 2000, it still outnumbers
all other currencies, including the euro (21%), Japanese yen (6%), British pound (5%), and
Chinese yuan (5%). (2 percent).
Factors Driving the US Dollar:

1. Supply vs Demand:
Customers must pay for goods and services in dollars, therefore when the United States
exports things or services, it creates a demand for dollars. As a result, they will have to
sell their local currency in order to purchase dollars in order to make the payment.

Furthermore, payments will have to be made in dollars when the US government or

significant American corporations issue bonds to obtain capital that are then purchased
by overseas investors. This also applies to non-U.S. investors purchasing U.S.
corporation equities, requiring the foreign investor to sell their currency in order to
purchase dollars.

2. US Dollar’s Market Psychology:

If the US economy suffers and spending slows as a result of rising unemployment, for
example, the US faces the risk of a sell-off, which might take the form of returning
funds from bond or stock sales in order to return to their home currency. The dollar
suffers a depreciation when overseas investors buy back their home currency.

3. Technical Factors:
Traders must predict whether the supply of dollars will exceed or fall short of the
demand for dollars. To assist us in determining this, we must keep an eye on any news
or events that may have an impact on the dollar's value. This involves the publication
of various government statistics such as payroll data, GDP data, and other economic
data that might assist us in determining whether the economy is strong or weak.

In order to evaluate the general economic sentiment, we must also take into account the
opinions of major market actors, such as investment banks and asset management
businesses. The market is frequently driven by sentiment rather than supply and demand
economic fundamentals.
The Bretton Woods Conference (1944):

In July 1944, around 730 delegates from 44 countries gathered in Bretton Woods with the
primary goals of establishing an efficient foreign exchange system, eliminating competitive
currency devaluations, and fostering worldwide economic growth. These objectives were made
possible by the Bretton Woods Agreement and System. The Bretton Woods Agreement also
established the International Monetary Fund (IMF) and the World Bank, two major institutions.
Despite the fact that the Bretton Woods System was disbanded in the 1970s, the IMF and the
World Bank have maintained significant pillars for international currency exchange.

Delegates from 44 countries negotiated the Bretton Woods Agreement in July 1944 at the
United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. As a
result, the agreement is known as the "Bretton Woods Agreement." The US dollar was tied to
the value of gold under the Bretton Woods System, and other currencies were fixed to the value
of the US dollar. When President Richard M. Nixon announced that the US would no longer
exchange gold for US money in the early 1970s, the Bretton Woods System effectively came
to an end.

Despite the fact that the Bretton Woods meeting only lasted three weeks, the preparations for
it had been ongoing for some years. The Bretton Woods System was conceived by John
Maynard Keynes, a famous British economist, and Harry Dexter White, the US Treasury
Department's Chief International Economist. Keynes hoped to establish the Clearing Union, a
powerful worldwide central bank, and issue the bancor, a new international reserve currency.
Rather than creating a new currency, White's plan called for a smaller lending pool and a larger
role for the US dollar. In the end, the chosen plan incorporated elements from both, with a
preference for White's plan. The Bretton Woods System did not become fully operational until
1958. Its terms, once enacted, called for the dollar to be tied to the value of gold. Furthermore,
the value of all other currencies in the system was then tied to that of the US dollar. The then
exchange rate placed the price of gold at $35 per ounce.
The Nixon Shock:

The Nixon Shock was an economic policy shift initiated by President Richard Nixon to place
a greater emphasis on job creation and exchange rate stability in the United States. It effectively
ended the Bretton Woods Agreement and the ability of US dollars to be converted into gold.
As the US currency plummeted, the Nixon Shock became the spark for the 1970s stagflation.
Central banks now have more influence over their own money, thanks in large part to the Nixon
Shock, making it easier to "manage" variables like interest rates, overall money supply, and
velocity.

Following President Nixon's televised New Economic Policy address to the country, the Nixon
Shock occurred. The main point of the speech was that in the post-Vietnam War age, the United
States will focus on domestic matters. Nixon outlined the plan's three key objectives:

• Better job creation

• Keeping the cost of living from rising
• The US dollar is being protected against international money speculators.

The best options for strengthening the job market and lowering the cost of living, according to
Nixon, were tax cuts and a 90-day price and pay freeze. Nixon advocated delaying the dollar's
convertibility into gold in response to speculative behavior toward the US dollar (USD). In
addition, Nixon suggested a ten percent tax on all duty -paying imports. The charge was
designed to persuade the United States' primary trading partners to raise the value of their
currencies, similar to the policy of suspending dollar convertibility.

The Bretton Woods Agreement was centered on foreign currency exchange rates. The value of
foreign currencies was fixed against the US dollar and expressed in gold at a price set by
Congress. In the 1960s, however, the system was jeopardized by a dollar excess. The United
States did not have enough gold at the time to cover the volume of dollars in circulation around
the world. As a result, the dollar became overvalued. With the Kennedy and Johnson
administrations attempting to discourage foreign investment, limit foreign financing, and alter
international monetary policy, the government moved to shore up the dollar and Bretton
Woods. Their efforts, however, were mostly in vain.
The Brexit (Britain’s Exit from TCA)

On April 27, 2021, the European Parliament ratified the EU-UK Trade and Cooperation
Agreement (TCA), almost four months after its provisional application. Although the United
Kingdom left the European Union in January 2020, the terms of the transition period meant
that the trading relationship between the two parties remained largely unaltered throughout
2020. This changed in January 2021, when the TCA provisionally came into force, and the
United Kingdom ceased to be a member of both the Single Market and the Customs Union. As
a result of this sudden change in the UK's trading relationship, the value of goods exported to
the European Union fell by approximately 5.3 billion British pounds, while imports fell by 7.2
billion pounds. This dramatic fall in trade was also likely exacerbated by the fact that the terms
of the TCA were still being negotiated a week before it came into force, leaving businesses on
both sides of the channel little time to adapt to changes. In March 2021, almost 40 percent of
British exporters were still experiencing additional paperwork, and 15.2 percent disruption at
UK borders.

The global economy can be divided into 3 categories:

• Developed countries
• Developing countries
• Under-developed countries

1. Developed Countries:

A developed country (or industrialized country, high-income country, more economically

developed country (MEDC), advanced country) is a sovereign state that has a high quality
of life, developed economy and advanced technological infrastructure relative to other less
industrialized nations. Most commonly, the criteria for evaluating the degree of economic
development are gross domestic product (GDP), gross national product (GNP), the per
capita income, level of industrialization, amount of widespread infrastructure and general
standard of living.
Which criteria are to be used and which countries can be classified as being developed are
subjects of debate? A point of reference of US$20,000 in 2021 USD nominal GDP per
capita for the International Monetary Fund (IMF) is a good point of departure, it is a similar
level of development to the United States in 1960.

Developed countries have generally more advanced post-industrial economies, meaning

the service sector provides more wealth than the industrial sector. They are contrasted with
developing countries, which are in the process of industrialization or are pre-industrial and
almost entirely agrarian, some of which might fall into the category of Least Developed
Countries. As of 2015, advanced economies comprise 60.8% of global GDP based on
nominal values and 42.9% of global GDP based on purchasing-power parity (PPP)
according to the IMF.

Several factors determine whether or not a country is developed, such as its political
stability, gross domestic product (GDP), level of industrialization, social welfare programs,
infrastructure, and the freedoms its citizens enjoy. Countries that are not quite yet
developed are called developing countries.

The Human Development Index was developed by the United Nations to measure human
development in a country. HDI is quantified by looking at a country's human development,
such as education, health, and life expectancy. HDI is set on a scale from 0 to 1, and most
developed countries have a score above .80. HDI can be used to determine the best
countries to live in, as more developed countries typically offer their residents a higher
quality of life.

Because there are so many factors to consider, defining what countries are developed can
be a challenge. Moreover, it's possible for a country to be developed in the view of one
institution, but not in the eyes of another.

For example, the United Nations classifies Turkey as a developed country thanks to its HDI
of .807. The CIA World Factbook, G-20, and several other international organizations all
agree. However, organizations including Dow Jones and the Financial Times Stock
Exchange Group (FTSE) classify Turkey as still developing. This is likely due to factors
such as Turkey's slightly elevated infant mortality rate (12 per 1,000) and its citizens'
comparatively low life expectancy (75 years).

THE G7 COUNTRIES

The Group of Seven (G7) is an inter-governmental political forum consisting of Canada,

France, Germany, Italy, Japan, the United Kingdom, and the United States. In addition, the
European Union is a 'non-enumerated member'. Its members are the world's largest IMF
advanced economies and wealthiest liberal democracies; the group is officially organized
around shared values of pluralism and representative government. As of 2020, the
collective group accounts for over 50 percent of global net wealth (which is $418 trillion),
32 to 46 percent of global gross domestic product, and approximately 770 million people
or 10 percent of the world's population. Members are great powers in global affairs and
maintain mutually close political, economic, social, legal, environmental, military,
religious, cultural, and diplomatic relations. From 2022, Germany has taken over the
rotating presidency of the G7, following the presidency of the United Kingdom.

Originating from an ad hoc gathering of finance ministers in 1973, the G7 has since become
a formal, high-profile venue for discussing and coordinating solutions to major global
issues, especially in the areas of trade, security, economics, and climate change. Each
member state's head of government or head of state, along with the Commission President
and Council President of the European Union, meet annually at the G7 Summit; other high -
ranking officials of the G7 and the EU meet throughout the year. Representatives of other
states and international organizations are often invited as guests, with Russia having been
a formal member (as part of the Group of Eight) from 1997 to 2014.

The G7 is not based on a treaty and has no permanent secretariat or office; its presidency
rotates annually among the member states, with the presiding state setting the group's
priorities, and hosting and organizing its summit. While lacking a legal or institutional
basis, the G7 is considered to wield significant international influence; it has catalyzed or
spearheaded several major global initiatives, including efforts to combat the HIV/AIDS
pandemic, provide financial aid to developing countries, and address climate change
through the 2015 Paris Agreement. The group has been criticized for its allegedly outdated
 and limited membership, narrow global representation, and ineffectualness. It is also
opposed by anti-globalization groups, which often protest at summits.

Country GDP GDP per capita

United Kingdom $2.44 trillion 35,046.59
United States $15.68 trillion 45759.46
Japan $5.96 trillion 33523.37
Germany $3.4 trillion 34065.12
France $2.61 trillion 31161.17
Italy $2.01 trillion 29393.12
Canada $1.82 trillion 38065.13

2. Developing Countries:

A developing country has a low economic output compared to other countries. There has
been much dispute about where to draw the line between developed and developing
countries, as seen by the lack of a uniform definition for the phrase. The United Nations
has certain guidelines for determining which countries are developed and which are
developing. The World Bank has replaced this terminology with others based on gross
national income (GNI) per person, such as "low-income" or "lower-middle-income"
economies.
Investors frequently categorize countries based on their level of economic development.
There are several levels, and investors utilize a variety of economic and social variables to
determine them. These factors include anything from per capita income to life expectancy
and literacy rates. Lower ratings are given to developing countries, least developed
countries (LDCs), and emerging markets.
Classifying countries became popular in the 1960s as a means of better understanding the
outcomes of countries within each group. Sorting countries into these divisions makes
policy talks about redistributing money to impoverished countries much easier. Different
measures are used by different organizations to classify countries. Brazil, Russia, India,
China, and South Africa (BRICS), for example, are frequently considered of as rapidly
developing countries.
Characteristics of Developing Economies:

1. Low per Capita Real Income

The low per capita GDP of emerging countries is the first distinguishing attribute.
According to World Bank estimates for 1995, the average per capita income of low -
income countries is $ 430, compared to $ 24,930 for high-income countries such as the
United States, the United Kingdom, France, and Japan. According to these estimates
for 1995, India's per capita income was $340, China's was $ 620, Bangladesh's was
$240, and Sri Lanka's was $ 700. In comparison, the United States had a per capita
income of $ 26,980 in 1995, Sweden had a per capita income of $ 23,750, Japan had a
per capita income of $ 39,640, and Switzerland had a per capita income of $40,630.

The dominance of low-productivity agriculture and informal sectors in developing

economies, low levels of capital formation – both physical and human (education,
health), lack of technological progress, and rapid population growth are all
characteristics of the developing economies' underdeveloped nature. They can enhance
their productivity and income by utilizing their natural resources, increasing capital
formation, and progressing in technology, and thereby break the poverty cycle that has
gripped them.

2. High Population Growth Rate and Unemployment:

Another common feature of emerging countries is that they have big populations or
high population growth rates. This is frequently due to a lack of family planning
alternatives and the notion that having more children will result in a larger labor force,
which will allow the family to earn more money. There are many factors due to which
developing countries experience a high population growth rate Thanks to developments
in medical research, which have considerably lowered the death rate due to plagues and
diseases, this rate has been climbing even faster in recent years.

While the death rate has decreased dramatically, the birth rate has not decreased in
lockstep, resulting in a considerably higher natural survival rate. The greatest danger
posed by this high rate of population expansion is that it renders all attempts at
 development futile, as much of the increasing output is absorbed by the growing
population. One important consequence of this rapid rate of population growth is that
it forces an increasing number of people onto the land and into the informal sector to
eke out a living from agriculture, because alternative occupations do not develop at the
same time and thus are unable to absorb the growing number of people looking for
work. As a result of the increased population strain on land and in the informal
economy, "hidden unemployment" emerges.

Disguised unemployment means that there are more people working in agriculture than
are actually needed, so their addition does not increase agricultural p roductivity, or, to
put it another way, with the technology and organization in place, even if some people
leave the land, production does not diminish. As a result, the marginal productivity of
a wide spectrum of agricultural laborers is zero.

3. Dependence on Agriculture:

Furthermore, agriculture accounts for 30 to 50 percent of these countries' national GDP.

This overwhelming reliance on agriculture is a result of their agriculture's low
productivity and backwardness, as well as a lack of contemporary industrial expansion.

In today's industrialized countries, contemporary industrial expansion has resulted in

structural changes, with the proportion of the working population employed in
agriculture declining dramatically and the proportion employed in modern industrial
and service sectors skyrocketing. This occurred as a result of the quick growth of the
modern sector on the one hand, and the great increase in agricultural productivity on
the other.

When a growing number of individuals are unable to find work in modern non-
agricultural occupations such as industry, transportation, and other services, they return
to farming and perform whatever work they can. As a result, there is hidden
unemployment in agriculture. The strain of manpower on land in emerging countries
has risen dramatically in recent decades as a result of population boom
4. Low Level Capital Formation:

The lack of physical and human capital is so common in developing economies that
they are commonly referred to as 'capital-poor' economies. The low amount of capital
per head of population is one indicator of a capital shortage. Not only is the capital
stock extremely low, but so is the current pace of capital production. In the early
1950s, investment in most developing countries ranged from 5% to 8% of national
income, but it ranged from 15% to 30% in the United States, Canada, and Western
Europe.

Since then, the rate of saving and investment in developing countries has increased
significantly. However, their capital per capita remains very low, and as a resu lt, their
productivity stays low. The low level of capital formation in a developing country is
attributable to a lack of investment incentives as well as a lack of willingness and
capacity to save. The low rate of saving in underdeveloped countries is due to their
low level of national income. The low level of per capita income in such an economy
limits the magnitude of the market demand for manufactured output, weakening the
incentive to invest. The shortage of capital also contributes to the low level of
investment. The lack of savings is at the basis of capital insufficiency.

Due to the low level of per capita income, the majority of it is spent on meeting the
essential necessities of life, leaving only a small amount of money for capital
accumulation. Even when individual incomes rise in a developing economy, there is
usually little increase in the pace of accumulation because of the temptation to
replicate the higher levels of spending seen in industrialized countries.
BRICS:

BRICS stands for Brazil, Russia, India, China, and South Africa, five developing countries.
Some predict that by 2050, these countries will be the leading suppliers of manufactured goods,
services, and raw materials. For years, Brazil, Russia, India, China, and South Afric a have been
among the world's fastest-growing emerging market economies, owing to low labor costs,
favorable demographics, and an abundance of natural resources during a global commodities
boom. China and India will overtake the United States as the world's leading manufacturers
and service providers. Brazil and Russia have become equally prominent as raw material
providers. South Africa joined the organization in 2010, and it was dubbed BRICS.

Since the term BRIC was coined 20 years ago, China has solidified its position as the most
powerful of the BRICS economies, surpassing the United States to become the world's second
largest economy (in terms of GDP). China's economic boom began in the late 1970s, when it
began to renounce many isolationist policies, open up to international trade, and implement
free market reforms. China became regarded as the "world's factory" due to rapid
industrialization and urbanization of the world's largest workforce; the infusion of income and
foreign investment improved living standards and opened up new domestic markets. Most
projections suggest that China will overtake the United States as the world's largest economy
by 2030 as its manufacturing industries move to the production of more technologically
advanced goods.

Economic development has been a slower and more recent process in Brazil, India, and South
Africa, and has generally followed demographic development. India surpassed China as the
world's fastest-growing economy in the 2010s, and some forecasts say it may overtake the
United States by the middle of the century. India, along with China, has the world's largest
domestic market, and its broad economic expansion is likely to resemble China's in many
aspects, while its international role will differ. Brazil saw substantial growth in the early 2010s
before experiencing a recession brought on by economic and political issues, from which it has
taken a long time to recover.

Russia's economic progress, on the other hand, has been very different from the other four
BRICS countries. Russia's predecessor, the Soviet Union, was the world's second largest
economy in the late twentieth century. However, the fall of the Soviet Union caused economic
stagnation throughout the 1990s, until it recovered in the 2000s, when it w as classified as a
"developing" economy.

3. Under-Developed Countries:

An "underdeveloped country" is a country characterized by widespread chronic poverty

and less economic development than other nations. "Underdeveloped country" is an
unofficial term, but countries that would qualify as underdeveloped are generally classified
as developing countries or least-developed countries (LDCs) by the United Nations, which
lists 46 nations as least-developed as of 2021. Underdeveloped countries are alternately
called low-income countries (a term growing in popularity) by World Bank and called
emerging markets, newly industrialized countries, or members of the "Global South" by
various other organizations.

Underdeveloped Countries and the Human Development Index (HDI)

One common method used to categorize the development of a country is the United
Nations' Human Development Index (HDI). The Human Development Index evaluates
each country's human development by tracking indicators such as life expec tancy,
education, and per capita income. Human Development Index ranks countries on a scale
from 0-1, from least developed to most developed. There are four tiers: low human
development (0-.55), medium human development (.55-.70), high human development
(.70-80), and very high human development (.80-1.0).

Useful as HDI is as a predictor, it is worth noting that a low HDI does not guarantee that a
country will appear on the list of least-developed countries, and a relatively high HDI does
not guarantee a country will not be classified as an LDC. For example, Nigeria does not
make the list despite its HDI of 0.539, but Bangladesh is on the LDC list with an HDI of
0.632. This is because the least-developed list is based upon a similar, but different set of
criteria than HDI, so some variances exist between the two lists. In the case of Nigeria, its
income may not be the most efficient, but it is large enough to not be at risk, so the country
is not considered least developed.
Country GDP GDP per capita
Nepal 19.41 billion $1,013.43 per capita
Tanzania $28.25 billion $1,440.68 per capita
Uganda $19.88 billion $1,311.32 per capita
Afghanistan $18.03 billion $949.00 per capita
Mozambique $14.59 billion $989.88 per capita
Yemen $35.65 billion $2,529.85 per capita
Madagascar $9.98 billion $1,000.77 per capita
Angola $114.20 billion $5,979.46 per capita
Burkina Faso $10.44 billion $1,275.19 per capita
Democratic Republic of the Congo $17.87 billion $347.45 per capita
Ethiopia $43.13 billion $1,057.44 per capita
Niger $6.57 billion $687.02 per capita
Malawi $4.26 billion $906.65 per capita

Characteristics of Underdeveloped Countries

Underdeveloped countries have very low per capita income, and many residents live in very
poor conditions with little access to education or health care. Additionally, underdeveloped
countries tend to rely upon obsolete methods of production and social organization. These
nations often experience high birth rates and population growth, which strains their
infrastructure and supply chains, further contributing to their widespread poverty. In fact,
these seven common economic traits appear in most every underdeveloped country:

1. Low income per capita and widespread poverty—The citizens of underdeveloped

countries tend to make very little money. For example, the United States per capita
GNP in 2006 was $44,970 (US$). The average for low-income countries was $650
(US), less than 1.4% that of the U.S.
2. Lack of capital, both public and private—Not only do very few citizens of
underdeveloped countries own lumberyards, factories, and other businesses, the
government is nearly as impoverished and lacks funds to properly build and support
roads, railways, schools, hospitals, and so on.
3. Population explosion—In most underdeveloped countries, the birth rate far exceeds
the death rate, leading to excessive population growth. If the growth happens too
 quickly, systems such as infrastructure, food supplies, and social services may fail
to keep pace.
4. Excessive unemployment—One of the most impactful results of disproportionate
population growth is skyrocketing unemployment, caused by a slow-growing job
market matched with a quickly expanding population.
5. Predominance of Agriculture—Agriculture still makes up 40-50% of national
income in most underdeveloped economies, as opposed to 2 -8% in developed
economies.
6. Small and unproductive investments—Both the citizens and the governments in
underdeveloped countries have little extra income to save or invest, and the little
they do have if often invested in ways that do not lead to national growth (physical
treasures rather than business investments, for example).
7. Diminished productivity—In underdeveloped countries, the land, labor, and capital
all tend to produce less than in developed countries. Labor (workers) are
undereducated, underfed, and have poor medical care. Existing resources tend to be
managed less well or with less-technological solutions.
The Picture Shows the GDP of Nations that Contributed the Most in
FY21-22
 THE COVID-19 AND THE RUSSIA-UKRAINE CONFLICT

From the March of 2020, or even prior to that, an unprecedented event hit the world by surprise
in the form of Covid-19, a deadly virus that spread from China to the rest of the world,
damaging the happy lives of the common man and their families and eventually the economic
state of the world. As we have gone through almost three deadly waves of Covid, the global
economy was volatile as usual but was soon stabilizing in this year of 2022 even though due to
the Omicron wave, where China went into multiple lockdowns which caused a supply
disruption globally, and thus Central Banks of multiple countries had to monitor their interest
rates and tighten their policies. Simultaneously, along with the lockdowns in China, another
unprecedented event hit the global economy again. This time being, the invasion of Ukraine by
Russia which has inevitably turned into a war, time and again this proves that unprecedented
and unfortunate events of human disaster led to a disruption and a major hit to the economy of
the world. This war is going to set back the recovery of economy due to Covid and will also
slow down recovery in 2022 and in the years to come. Global growth is set to be reduced by
0.8% and 0.2% points as per the January forecasted growth of 3.6 in 2022 and 3.8 in 2023 from
the growth of 6.1 in 2021 respectively.

This downgrade is solely due to the direct impacts of the war on the global economy. The GDPs
of both Russia and Ukraine are going to differentiate majorly from what they were expecting
to be. Ukraine has been constantly hit by Russia’s military power, their infrastructure being
completely destroyed and the evacuation of its people while Russia has been constantly using
its military resources and inserting huge amounts of money into this war means that the GDPs
of these two countries are going to take a major hit. While Russia is a major exporter of natural
gas, it is also a major exporter for wheat along with Ukraine and thus the rampant effect of this
war has not only created a huge problem globally for the agricultural and energy industry but
also goes far beyond the industries due to the various supply shocks sustained during the war.
Supply distributions are closely incorporated and as a result, a disruption in even one country
escalates globally. A shortage of resources and inputs from organizations in Ukraine and Russia
has had a major impact on car manufacturers especially in Europe.

Even prior to the war, prices of various commodities had increased due to the pandemic and an
increase in the demand of these commodities thus inducing a slow rise in inflation. Multiple
countries had increased their interest rates to keep their economy in check even before the war
but the war will only amplify the negative impact on these countries’ economies. The energy,
commodity and agricultural-food industry will be the major industries whose prices will be
increased owing to supply disruptions. Due to the further tightening of bottlenecks in the
supply-chain, inflation will continue to be present in all economies, be it an emerging economy
or even well-advanced economy. While there is going to be a slow and steady growth in the
global economy, inflation will continue to rise. Inflation is expected to remain for a long time,
further than what was expected in the previous forecast in January 2022 due to war-driven price
increases in commodities.

Inflation is expected to be 5.7 percent in advanced economies and 8.7 percent in emerging
market and developing economies in 2022, respectively, up 1.8 and 2.8 percentage points from
January projections. Although the baseline prediction predicts a gradual resolution of supply-
demand imbalances and a minor increase in labor supply, lowering price inflation over time,
the forecast is once again clouded by uncertainty. Due to inflation, many central banks have to
toggle and choose between two important trade-offs which are crucial for the country’s
economy both in the short term and in the long term. One is fighting the inflation and protecting
the economy for the future and another is maintaining and implementing fiscal buffers and
reinforcing the unprotected.

This rise in inflation will lead to a tightening of monetary policies of multiple countries as their
purchasing power will increase and, in a bid, to fight against inflation, countries will increase
their interest rates. An increase in interest rates will lead to lesser borrowings and a reduction
in unemployment of the country and customers will purchase items or commodities that will
decrease in value slowly.

Effects of Inflation:

1. Decrease in Purchasing Power.

2. Encourages Investing.
3. Lowers Cost of Borrowing and reduces Unemployment.
4. Increases Growth.
5. Decreases the Value of Currency.

While it comes to the GDPs of the countries at war-Russia and Ukraine, their GDPs are
expected to drop in double digits which will be extremely significant in terms of the global
economy. The cost and impact of war will not only extend through the commodities and energy
market but will also extend to the financial markets. Prior to the war, there was already an
ongoing food crisis with the increases in prices of commodities and food and now the war in
Ukraine has been instrumental in increasing these prices further and concentrating the global
supply distribution giving rise to inflation. Interest rates are slowly rising as a result and the
volatility of asset prices has increased since the start of the year. In many parts of the global
economy, the potential increase in borrowing costs has increased the cost of extended fiscal
support.

Inflationary pressures may be stronger than expected, necessitating more forceful policy
responses. Tighter financial conditions will put a magnifying glass on debt vulnerabilities
among sovereign and corporate borrowers, potentially resulting in widespread debt hardship.
Furthermore, sustained restrictive restrictions toward the real estate sector, as well as the
likelihood of more extensive lockdowns as part of the rigorous zero-COVID plan, might cause
China's economy to stagnate more than currently anticipated, with implications for Asia and
beyond. This could delay the recovery even more, especially in emerging market and
developing economies.

The above picture shows the current inflation in consumer prices of countries across the globe.
Turkey has the highest inflation at the moment with a rate of 19.6%. The Russian Federation
has a rate of roughly 6.69%. The United States has a rate of 4.7% wh ile the United Kingdom
has a rate of 2.52%.

Inflation Rate Changes in Consumer Prices from 1990-2021 Annually

 GLOBAL IMPLICATIONS OF THE WAR IN UKRAINE

• Commodities Market

The war in Ukraine disrupted trade supplies from Ukraine and Russia especially in the
commodities of food and energy. The extent of these shifts is determined by the elasticity of
global supply and demand, as well as the drop in exports as a result of the Ukraine-Russia war
and sanctions pertaining to it. Despite the fact that oil prices have risen dramatically, spare
capacity in other countries and the release of petroleum reserves will likely keep these increases
in check in the short term. The transportation of natural gas is easier than compared to oil as
the infrastructure that is required for it is relatively inflexible thus meaning that the rise in
prices for natural gas will take longer. On the other hand, the prices of agricultural commodities
are expected to increase further as Russia and Ukraine together, constitute of about 30% of the
global exports of wheat. These price changes will add to the current soaring prices of food
commodities in the world leading to the food crisis going on globally.

• Direct Trade Links with Russia and Ukraine

Belarus, the Baltic nations, and Caucasus countries, which send a substantial s hare of their
exports to Russia, may see a drop in external demand for their goods. Importers will face higher
import prices as well as potential supply constraints. Specific markets, such as metals and
minerals, noble gases, and agricultural exports, particularly wheat, are likely to be affected.

• Cross-Border Production Network

The incorporation of Ukraine and Russia global supply linkages does not just provide a direct
trade link with respect to commodities. For example- Neon gas, which is important for the
manufacturing of silicon chips, is produced in Russia and Ukraine and thus this will already
add to the current chip shortage which has already slowed down production of automobiles and
electronics across the world.

The war is affecting global car manufacturing in other ways as well: interruptions in Ukraine's
supply of electrical wiring systems have already contributed to the closure of automobile plants
in Germany. Long-term shortages of metals such as palladium and nickel, which are exported
from Russia, will raise the cost of equipment such as catalytic converters and batteries. In
addition, disruptions in Belarusian potash fertilizer exports will have an impact on agricultural
production elsewhere, exacerbating food price hikes.

• Financial Markets

Direct financial ties between Russia and other major economies tend to be limited and
concentrated in a small number of countries, especially in Europe. Austrian and Italian banks
are the ones with the most Russian counterparties.

Because a major portion of European banks' direct exposure to Russia is through their locally
funded Russian companies, exposures to Russia appear manageable. A greater increase in
geopolitical uncertainty, in general, could lead to a more severe risk repricing by investors.
This would most likely have an impact on emerging market and developing economies,
particularly those with significant foreign debt.

SOURCES:

1. International Monetary Fund, World Economic Outlook, April 2022

https://www.imf.org/en/Publications/WEO
2. United Nations Conference on Trade and Development, Global Impact of War in
Ukraine on Food, Energy, and Finance Systems.
https://unctad.org/system/files/official-document/un-gcrg-ukraine-brief-no-1_en.pdf
3. Statista.com
https://www.statista.com/topics/1467/global-economy/#topicHeader__wrapper
https://www.statista.com/topics/3126/brexit-and-eu-trade/#dossierKeyfigures
4. Trading economics
https://tradingeconomics.com/
5. World population review
https://worldpopulationreview.com/country-rankings/developed-countries
6. Un.org
https://www.un.org/development/desa/dpad/wp-
content/uploads/sites/45/publication/ldc_list.pdf
7. Nation master
https://www.nationmaster.com/country-info/groups/Least-Developed-Countries
8. Department of Economic and Social Affairs and Economic Analysis
https://www.un.org/development/desa/dpad/publication/world-economic-situation-
and-prospects-2022/
9. Wikipedia
https://en.wikipedia.org/wiki/Brexit
10. https://www.economicsdiscussion.net/developing-economy/characteristics-
developing-economy/common-characteristics-of-developing-countries-
economics/29990
11. https://www.thebalance.com/what-is-a-developing-country-197898
12. https://www.statista.com/topics/1393/bric-countries/
13. https://enotesworld.com/characteristics-of-developing-countries/
14. https://www.investopedia.com/terms/b/bric.asp