Globalization and the Global Economy

The Global Economy

Definitions

  • The global economy refers to interconnected worldwide economic activities between multiple countries, with potential positive or negative impacts.

  • It is the system of industry and trade around the world that has developed as a result of globalization.

  • The global economy is the sum of activities within and between different countries, each with its own:

    • Industrial production

    • Labor market

    • Financial market

    • Resources

    • Environment

Participants

  • Countries, states

  • Enterprises, businesses

  • International organizations

  • Individuals, citizens

  • Note: State =
    /= nation

Submarkets

  • Market of goods

    • Hard commodities

    • Soft commodities

  • Market of services

  • Financial market

    • Stock (equity) and bond markets

    • Foreign exchange markets

    • Derivatives markets

  • Capital market

  • Labour market

Characteristics

  1. International trade and transactions

  2. Reduction of international trade barriers (free trade)

  3. International finance

  4. Global investments

  5. Dominated by large financial institutions

  6. Specialization, greater economies of scale

  7. Movement of labor

  8. Globalization

History of Globalization

  • 1945, end of World War II: Unbroken development of Western countries.

  • The basis of development was oil: small domestic oil base import.

  • Early 1970s: OPEC countries oil price explosion.

  • Reactions:

    • Replace oil with green energy solutions.

    • Make oil use and production processes more efficient (outsourcing).

New Participants

  • Transnational corporations:

    • Companies operating in several countries.

    • They develop a layered, complex, and differentiated structure, and each type of activity is carried out in different countries.

  • Regional economic integrations (EU, ASEAN, USMCA, etc.)

    • Some groups of countries realize that they are more competitive on the global market if they group together.

  • International organizations (WTO, World Bank, UN, etc.)

    • They regulate processes that have arisen in connection with globalization and which, as a result, can no longer be effectively regulated at the local level.

Effects of Globalization

  • The globalization of production

  • The globalization of consumption

  • The globalization of trade and logistics

  • The globalization of finances

  • The changing roles of states

  • The globalization of culture

  • The globalization of information

  • The globalization of values

  • HOMOGENIZATION

Advantages of Globalization

  1. Economic growth

  2. Decrease in consumer prices (due to greater competition)

  3. Benefits of technology transfer

  4. Job creation

  5. Cultural ties

  6. Access to resources

Disadvantages of Globalization

  1. Rising global inequality

  2. Precarious jobs

  3. Cultural Invasion

  4. Tax Avoidance

  5. Environmental Pollution

  6. Spread of Epidemics

How Globalized is Our World?

The Depth and Breadth of Globalization

  • Pankaj Ghemawat, an Indian-American economist.

  • 4 pillars: trade, investment, information, people.

Depth of Globalization

  • What portion of the domestic and international flows go over the border of a country

  • Law of semi-globalization: international interactions are not negligible, but significantly less intense than domestic interactions.

Breadth of Globalization

  • How much the flows that do go over the border spread globally

  • Law of distance: distance in cultural, administrative, geographical, and economical aspects of countries hold back interactions between them

  • CAGE paradigm

CAGE Paradigm

  • Cultural distance (C)

    • Different language

    • Different ethnic groups, lack of connecting ethnic and social network

    • Different religions

    • Different social norms

  • Administrative distance (A)

    • Lack of previous colonial relationship

    • Absence of a common monetary and political union

    • Political conflict or feud

    • Government policies

    • Weak institutions

  • Geographical distance (G)

    • Physical distance

    • Lack of shared border

    • Lack of river or sea exit

    • The size of the country

  • Economical distance (E)

    • Different consumer incomes

    • Differences in available resources

    • Different quality of human resource

    • Differences in infrastructure

    • Industries and products affected by distance

Industries and Products Affected by Distance

  • Cultural aspects:

    • Products with high language content (e.g., TV program)

    • Products affecting the cultural and national identity of consumers (e.g., food)

  • Administrative aspects:

    • Industries where the participation of the government is traditionally high (e.g., electricity, public transport, crude oil extraction and refining, pharmaceutical industry)

  • Geographical aspects:

    • Fragile and perishable products (e.g., glass, fruits, and vegetables)

  • Economic aspects:

    • Industries where economies of scale and standardization are important (e.g., mobile phones)

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