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The global economy has changed significantly over the past few decades, in the
way that it is organised and governed by collaborating nations. These changes
have repercussions that not only affect the flow of goods and s ervices between
countries, but also the movement of people. As we’ve seen on occasions over the
last century, too great a fluctuation in this international economic system can lead
to a global economic crisis.
So what exactly is the global economy, how does it function, and how does it affect
our lives? Here we take a closer look to help you understand the complexities of
the force that governs the modern world!
The global economy refers to the interconnected worldwide economic activities that
take place between multiple countries. These economic activities can have either a
positive or negative impact on the countries involved.
“Here are a few examples. Morgan Stanley imported 4 million barrels of oil and
petroleum products into the United States in June, 2012. Goldman Sachs stores
aluminium in vast warehouses in Detroit as well as serving as a commodities
derivatives dealer. This “bank” is also expanding into 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,
commodities dealers, and electric utilities as well.”
How does the global economy work?
The functioning of the global economy can be explained through one word —
transactions. International transactions taking place between top economies in the
world help in the continuance of the global economy. These transactions mainly
comprise trade taking place between different countries. International trade
includes the exchange of a variety of products between countries. It ranges all the
way from fruits and foods, to natural oil and weapons. Such transactions have a
number of benefits including:
Nearly every country in the world is in some way affected by things that happen in
what may seem at times, like unrelated countries - due to the influence of the
global economy. A good example of this is the economic impact that the Brexit
vote will have other countries, not only in Europe, but across the globe. Brexit was
referendum decision for the United Kingdom to withdraw from the European Union
(EU).
The main cause of these effects is economics — based on the production and
exchange of goods and services. Restrictions on the import and export of goods
and services can potentially hamper the economic stability of countries who
choose to impose too many.
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;
Occasionally, countries enforce barriers on the international trade of certain goods
or services which can disrupt the relations between two countries.
Countries usually specialise in those products that they can produce efficiently,
which helps in reducing overall manufacturing costs. Then, countries trade these
products with other countries, whose product specialisation is something else
altogether. Having greater specialisation helps countries take advantage of
economies of scale. Economies of scale refer to the proportionate saving in costs
gained by an increased level of production. Manufacturers in these countries can
focus all their efforts on building factories for specialised production, instead of
spending additional money on the production of various types of goods.
Free trade: Free trade is an excellent method for countries to exchange goods and
services. It also allows countries to specialise in the production of those goods in
which they have a comparative advantage.
Movement of labour: Increased migration of the labour force is advantageous for
the recipient country as well as for the workers. If a country is going through a
phase of high unemployment, workers can look for jobs in other countries. This
also helps in reducing geographical inequality.
Increased economies of scale: The specialisation of goods production in most
countries has led to advantageous economic factors such as lower average costs
and lower prices for customers.
Increased investment: Due to the presence of global economy, it has become
easier for countries to attract short-term and long-term investment. Investments in
developing countries go a long way in improving their economies.
According to the latest economic news, here are some of the key factors that
influence and affect how well the global economy works:
Natural resources;
Infrastructure;
Population;
Labour;
Human capital;
Technology;
Law.