How does the global economy work?

What is a global economy?

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.

The global economy includes several characteristics, such as:

  • Globalisation: Due to the global economy and globalisation, domestic economies have become cohesive, leading to an improvement in their performances.
  • International trade: International trade is the exchange of goods and services between different countries. It helps countries to specialise in products for which they have a comparative advantage, enabling them to produce goods and services at a lower opportunity cost than its trade partners.
  • International finance: International finance is a primary feature of a global economy. International finance consists of topics like currency exchange rates and monetary policy.
  • Global investment: Global investment mainly takes place via foreign direct investment.

Who controls the global economy?

The big banks and large corporations control and essentially fund governments. These large financial institutions dominate the global economy. For example, US banks participate in many traditional government businesses like power production, oil refining and distribution, and the operatation of public facilities like airports.

How does the global economy work?

The global economy works mainly through trade between different countries. The exchange of products between countries ranges from fruits and foods, to natural oil and weapons. Trade provides a foundation for worldwide economic growth by encouraging competitiveness between countries in various markets and raising productivity and efficiency across countries. The global economy helps underdeveloped countries by allowing them to import capital goods (machinery and industrial raw materials) and export primary goods (natural resources and raw materials).

What are the effects of global economy?

Countries usually specialise in products that they can produce efficiently, which helps in reducing overall manufacturing costs. Then, they trade these products with other countries. 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.

Sometimes countries add barriers to international trade, such as trade tariffs (taxes on imports) and trade quotas (limitation on the number of products that can be imported into a country). Trade barriers often affect the economies of the trading countries, and in the long run, it becomes difficult to keep employing such barriers.

What are the benefits of global economy?

There are numerous benefits of a global economy, which include:

  • Free trade: Free trade 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.
  • 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: A global economy has made it easier for countries to attract short-term and long-term investment.

Source: How does the global economy work?
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