The Global Economy and Growth

Economic Globalization

A process making the world economy an “organic system” by extending

transnational economic processes and economic relations to more and more

countries, and by deepening the economic interdependencies among them

Post-World War II Economic System

Keystone International Economic Organizations (Bretton Woods Institutions):

o International Monetary Fund

o International Bank for Reconstruction and Development (World Bank)

o General Agreement on Tariffs and Trade

International Monetary Fund (IMF)

- The IMF has the primary purpose of promoting global monetary cooperation and

international financial stability, and was designed to monitor the system of pegged

or fixed exchange rates (exchange rates are related to gold and the US dollar) and

to provide short-term loans to prevent the trade wars that occurred during the

interwar period due to competitive devaluations of currencies states suffering

from balance-of-payments deficit, which occurs when countries spend more than

it takes in (currency devaluations are done to boost exports with cheaper products

and decrease imports).

- Used to be dominated by western countries, marginalizing and sidelining

emerging economies in decision-making.

- The Global Financial Crisis of 2007-2009 forced the IMF to reform through:

o Resource expansion to enhance its capacity for financial crisis management

o Quota increase and voting power of emerging economies within the

institution

old role
International Bank for Reconstruction and Development (World Bank)

grant long-term loans for the economic

development of less developed countries and the reconstruction of war-torn

countries in Europe

renewed role
International Bank for Reconstruction and Development (World Bank)

reduce extreme poverty and address

the imperfections of global capital markets.

International Bank for Reconstruction and Development

Provides lending to middle-income and creditworthy low-income

countries

International Development Association

§ Grants credits and loans to lowest-income countries

General Agreement on Tariffs and Trade

the purpose of avoiding trade wars by raising protectionist barriers

as witnessed during the interwar period

International Monetary System

A set of general rules, legal norms, instruments, and institutions shaping payment

conditions in foreign trade, brought by the multilateral international agreements

of trading participants, facilitated by international financial organizations

The Gold Standard (1816)

o Countries would determine the gold content of their national currencies

o Primary features of the Gold Standard:

§ Unlimited convertibility of currencies into gold

§ High stability is facilitated by the trade among countries that

eliminated exchange rate fluctuations and risks

o Non-inflationary because the issuance of money is dependent on a state’s

gold resources

o Weaknesses of the Gold Standard

§ Limited cash flow

§ Curbed economic development

o Dissolved during the First World War with the shift to paper money

The Gold Bullion Standard (1922)

o Bank notes were exchangeable for gold bullion of fixed weight, therefore

involving only the exchange of large sums of money.

o Weakness of the Gold Bullion Standard

§ Failed to facilitate the free convertibility of currencies to gold

The Dollar-Gold Standard or Gold-Exchange Standard (1959)

o The US dollar as the only convertible currency that is considered to be as

good as gold. (1oz of gold = US$35)

o Weaknesses of the Dollar-Gold Standard

§ Difficulty to maintain the stable price of gold in the face of constant

price increase globally

§ The US began to suffer from its balance-of-payment deficits

The Floating System

o Allows flexibility among member states to determine their exchange rates

or tie them to major currencies (US Dollar)

o Central Banks can intervene to address the fluctuations in the exchange

rate by buying and selling currencies. (Countries are not allowed to

manipulate their currencies to achieve short-term gains at the expense of

other economies)

Increases in the extent of the market

The increased flow of goods, ideas, finance, and people—via

globalization and urbanization—have increased the extent of the

market for all workers and consumers

Accelerating growth

For thousands of years, growth in both population and per capita

GDP has accelerated, rising from virtually zero to the relatively

rapid rates observed in the last century

Variation in modern growth rates

The variation in the rate of growth per capita GDP increases with

the distance from the technology frontier

Large income and total factor productivity differences

Differences in measured inputs explain less than half of the

enormous cross-country differences in per capita GDP. Poor

countries are poor not only because they have less physical and

human capital per worker than rich countries, but also because they

use their inputs much less efficiently.

Increases in human capital per worker

Human capital per worker is rising dramatically throughout the

world

Long-run stability of relative wage

The rising quantity of human capital, relative to unskilled labor, has

not been matched by a sustained decline in its relative price

Geography

Geography relates to the advantages and disadvantages posed by a

country’s physical location (latitude, proximity to navigable waters,

climate, and so on)

Trade and integration

Integration relates to market size, and the benefits (as well as costs)

of participation in international trade in goods, services, capital, and

possibly labour.

Institutions

Institutions refer to the quality of formal and informal socio-

political arrangements— ranging from the legal system to broader

political institutions—that play an important role in promoting or

hindering economic performance.

Culture

The set of shared attitudes, values, goals, and practices that

characterizes an institution, organization or group can sometimes

explain growth occurrences (e.g. the Industrial Revolution)

Policies

Differences in economic policies have traditionally been what

economists have looked to for differences in economic

performance.