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How does the global economy work?

Over the past few decades, the way that countries work together to organise and run the global economy has changed a lot. These changes not only affect the flow of goods and services between countries, but they also affect the flow of people. We've seen this happen a few times in the last 100 years: when the international economic system changes too much, it can cause a global economic crisis.

So, what is the global economy, how does it work, and how does it affect our lives? Here, we take a closer look at the force that runs the world today to help you understand how complicated it is.

How does a global economy work?

The term "global economy" refers to the way that the economies of different countries are connected and work together. These economic activities can be good or bad for the countries that take part in them.

There are many things that make up the global economy, such as:

Globalization is the process by which the economies, societies, and cultures of different countries and regions have become more connected through a global network of trade, communication, immigration, and transportation. The global economy came about because of these changes. Because of the global economy and globalisation, national economies have become more connected, which has helped them do better.

International trade: Many people think that international trade is one effect of globalisation. It means that different countries trade goods and services with each other. It has also helped countries focus on making products that they are better at than other countries. This is an economic theory that talks about how a country can make more goods and services for less money than its trade partners.

International finance: Money can move between countries more quickly than goods, services, or people, so it is one of the most important parts of a global economy. Things like currency exchange rates and monetary policy are part of international finance.

Global investment is an investment strategy that isn't limited by where the money is being put. Foreign direct investment is the main way money is invested around the world (FDI).

Why does the world economy matter?

When we look at how the global economy affects emerging markets, we can see how important it is:

Microeconomic and macroeconomic importance: As the world's population has grown, emerging markets have grown economically, making them one of the main drivers of world economic growth. The fact that emerging markets are growing and staying strong is a good sign for the world economy as a whole. Before you can understand the next point, you need to know what microeconomics is. It is the study of how households, individuals, and businesses decide how to use their resources and make decisions. This branch of economics looks at how people make decisions, what influences those decisions, and how those decisions affect the price, demand, and supply of goods on the market. So, from a microeconomics point of view, some of the biggest companies with high market values and some of the richest people in the world come from these emerging markets. This has helped make sure that income is spread more evenly in these countries. But poverty is still a problem in many of these emerging countries, and more needs to be done to get rid of it.

Long-term outlook for the world economy: Based on demographic trends and models of capital productivity, financial and economic forecasts say that the GDP in emerging market economies will likely keep growing at a positive rate in 2019. Focus Economics predicts that the economies of India, the Philippines, China, Indonesia, Egypt, Malaysia, Peru, and Morocco will all grow by 7.5% in 2019, 5.3% in Indonesia, 5.1% in Egypt, 4.9% in Malaysia, 3.8% in Peru, and 3.7% in Morocco.

Who is in charge of the world economy?

Many people think that the governments of the largest economies in the world run the global economy, but this is not true. Even though governments are in charge of their countries' economies, it is really the big banks and corporations that control and fund them. This means that big banks and other financial institutions run the world economy.

World Economic News says that US banks are involved in a lot of traditional government businesses, like making and distributing electricity, refining and distributing oil, and running public assets like airports and train stations. This was shown when some people in the US Congress wrote a letter to Ben Bernanke, the head of the Federal Reserve. Here is a piece of the letter:

"Let me give you some examples. In June of 2012, Morgan Stanley imported 4 million barrels of oil and oil products into the United States. Goldman Sachs is a commodities derivatives dealer and also has huge warehouses in Detroit where it stores aluminium. This "bank" is also buying and running airports, toll roads, and ports as part of its growth. In California, JP Morgan sells electricity.

In other words, Goldman Sachs, JP Morgan, and Morgan Stanley are no longer just banks; they are also oil companies, operators of ports and airports, dealers in goods, and electric utilities.

How does the economy around the world work?

The way the global economy works can be summed up in one word: transactions. When the top economies in the world do business with each other across borders, it helps the global economy to keep going. Most of these deals have to do with trade between different countries. Different kinds of goods are traded between countries as part of international trade. It includes everything from food and fruit to natural oil and weapons. There are many benefits to these kinds of deals, such as:

  • The international economy grows, according to the World Trade Organization.
  • It also helps countries compete with each other in different markets.

  • Increasing countries' productivity and efficiency;
  • helping underdeveloped countries develop by letting them import capital goods (machinery and industrial raw materials) and export primary goods (natural resources and raw materials).

What effects does the world economy have?

Because of the global economy, almost every country in the world is affected in some way by what happens in other, sometimes seemingly unrelated countries. One good example of this is how the Brexit vote will affect the economies of other countries, not just in Europe but all over the world. Brexit was the result of a vote by the people of the United Kingdom to leave the European Union (EU).

The main thing that causes these effects is economics, which is based on making and trading goods and services. If a country has too many restrictions on the import and export of goods and services, it could hurt its economic stability.

The goal of trading with other countries is the same as that of trading within a country. But international trade is different from trade within a country in two ways:

  • Before goods and services can be exported or imported, the currencies of at least two countries must be exchanged.
  • Sometimes, countries put up barriers to the international trade of certain goods or services, which can hurt the relationships between two countries.

Countries tend to specialise in making products that they can make well, which helps keep manufacturing costs down overall. Then, countries trade these goods with other countries that specialise in something different. Economies of scale can be used to help countries save money when they specialise more. Economies of scale are savings in costs that are proportional to the amount of production. Manufacturers in these countries don't have to spend extra money making different kinds of goods. Instead, they can put all of their efforts into building specialised factories.

Countries sometimes make it harder for other countries to trade with them. Trade tariffs, which are taxes on imports, and trade quotas are two of these barriers (limitation on the number of products that can be imported into a country). Trade barriers often hurt the economies of the countries that use them, and in the long run, it's hard to keep using them.

What are some of the benefits of the global economy?

There are many good things about a global economy, such as:

Free trade: is a great way for countries to trade goods and services with each other. It also lets countries focus on making the goods for which they have a comparative advantage.

Movement of labour: More workers moving to another country is good for both the country that gets the workers and the workers themselves. When unemployment is high in a country, people can look for work in other countries. This also helps make the world a more equal place.

Increased economies of scale: In most countries, the specialisation of goods production has led to economic benefits like lower average costs and lower prices for customers.

Increased investment: The global economy has made it easier for countries to get both short-term and long-term investments. When money is put into developing countries, it helps their economies a lot.

Factors affecting the global economy

According to the most recent economic news, the following are some of the most important factors that affect how well the global economy works:

  • Natural resources;
  • infrastructure;
  • population;
  • labour;
  • human capital;
  • technology;
  • law.

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