According to Oxford Living Dictionaries, the definition of global economy is ‘the economies of the world’s individual countries considered together as a single economic system’. The global market is made up of several components – trade, finance, commerce and industry, and is often discussed in today’s globalised world. Whilst there may still be state lines and country borders, the barriers and restrictions between all the countries in the world is becoming ever decreasing.
A global economy, in one form or another, has existed for over 2,000 years with the dawn of trade. The first long-distance trade is believed to have occurred between Mesopotamia and the Indus Valley in Pakistan around 3,000 BC. Trade routes like the spice routes (or silk roads) delivered spices, ivory, silk, metals and gems from the east to the west. Back then the middle east was the epic-centre for trade and brought about the beginnings of what we now recognise as the global economy. Part of the culture of trade in this time was not only the exchange of products, but also language, religions, science and all sorts of other information.
A thousand years ago, economic activity centred near the middle of the Eurasian landmass. By the early 20th century, the Industrial Revolution in Europe and the growth of the United States pulled the centre to the west. But since 1980 or so, Asia has been growing faster than the US and Europe and dragging the middle back to where it was centuries ago. By 2025, consulting firm McKinsey thinks the global economy will once again balanced around the middle of Eurasia.
Before the trade routes became established, human civilisation existed on a self-sufficient basis. Villages grew, foraged or gathered the food they required and created the tools they needed to do so. They may have traded with the next door village, or a passing trader, but the scope of the products they could buy and sell existed right outside their front door.
With the increase in trade, products (including food) that couldn’t be obtained in one particular place imported from another, at a cost. This expanded to a point where now we buy food from a local supermarket that is not restricted by seasonal growth – e.g. if we want strawberries out of the UK strawberry season (summer) they can be imported from another country. We have forgotten the value of the local economy and have become dependent on remote suppliers.
The import and export of foods has now also crossed into other industries such as manufacturing and commodities. If you consider thee industries that drove the Industrial Revolution in the 18th Century, they barely exist in this country today. There are no more cotton mills or coal mines in the north of England; shirts are now made in high-labour, low-capital locations such as China or Vietnam and coal is mined in Australia.
What drives this global trading is cost and availability. Today’s world is fast paced and immediate, we don’t want to wait 6 months for the next good strawberry season, if we want them in February then we can get them. It was also only a matter of time before large businesses and corporations started to relax their local loyalty and look elsewhere for their workforce or manufacturing arm if it can be provided at a lower cost. Investment banks may have a historic tie to their national country, but the reality is that their operations will be spread out across the world, with a proportion in less expensive countries than their ‘home’ country. This has recently been couple with a fashion for replacing local workers with those from other countries prepared to do to the same work for less money.
The drawback of this focus on cost is that is drives unemployment locally and will eventually drive up the costs in the ‘less expensive’ countries due to supply and demand.
In terms of finance, each country’s economic performance is represented by their GDP (gross domestic product). The country with the largest GDP is the US which accounts for almost one quarter of global GDP.
As politics and economics are so closely linked, any changes in a country’s political environment has an impact on the global economy as shifts form to take advantage of any beneficial movement. One key example of this is Brexit and the effect that has had on more than just the UK and Europe. The value of the pound has fluctuated which means that there are deals to be had by other countries with regards to investment opportunities. The financial markets trade well in fluctuating markets so that this can be beneficial for global financial conditions. In some countries, changes in growth prospects can lead to changes in commodity prices, such as gas and oil. As the global economy links all countries of the world, and not just those with the largest GDP, any changes that effect the global economy effect the local economy of even the smallest in the world. According to VOX EU, estimates indicate that 1% increase in US growth could boost growth in advanced economies by 0.8% and in emerging markets and developing economies by 0.6% after one year.
While globalisation has led to the union of more developed countries, many argue that the welfare gap between the more and less developed economies is growing. In theory, the global economy is about finance and maintaining the consolidated state of wealth so it can be redistributed through social programs, but less wealthy countries from those among the industrialised nations may not have the same beneficial effect from globalisation as more wealthy countries but free trade increases opportunity for international trade. It can have a negative impact on some countries whose domestic industry becomes endangered due to an absolute advantage in other countries.
The global economy is deep rooted in the history of trade and industry and with the world becoming ever more globalised, the links that join each country together will become stronger and more free-flowing. People, products and industries travel across the globe with very little barrier and the result of all this movement is global economy – where the world’s individual countries are considered as a single unit.
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SmartPA Partner Charlotte Frank
Charlotte has supported executives in London as a Personal Assistant for 17 years and then moved into project management within a global investment bank. Charlotte's key skills lie in core administrative duties as well as event management, project management, research, data analysis and the creation of presentations.