Overview

Put simply, globalization is the connection of different parts of the world. In economics, globalization can be defined as the process in which
businesses, organizations, and countries begin operating on an international scale. Globalization is most often used in an economic context, but it
also affects and is affected by politics and culture. In general, globalization has been shown to increase the standard of living in developing
countries, but some analysts warn that globalization can have a negative effect on local or emerging economies and individual workers.

Activation!

In 5-10 sentences, briefly explain your idea and undersatanding of the picture provided.

Learning Objectives
At the end of the lesson, students are expected to:
 1. Understand the concept of global economy;
2. Explain how global economy works; and
3. Identify the importance of global economy in our life.

Learning Experiences and Self-Assessment Activities

Introduction

The global economy has changed significantly over the past few decades, in the way that it is organized and governed by collaborating
nations. These changes have repercussions that not only affect the flow of goods and services between countries, but also the movement of
people. As we’ve seen on occasions over the last century, too great a fluctuation in this international economic system can lead to a global
economic crisis.

So what exactly is the global economy, how does it function, and how does it affect our lives? Here we take a closer look to help you
understand the complexities of the force that governs the modern world!

Let us learn new things…

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 comprises several characteristics, such as:

 Globalisation: Globalization describes a process by which national and regional economies, societies, and cultures have become integrated through
the global network of trade, communication, immigration, and transportation. These developments led to the advent of the global economy. Due to
the global economy and globalization, domestic economies have become cohesive, leading to an improvement in their performances.
 International trade: International trade is considered to be an impact of globalisation. It refers to the exchange of goods and services between
different countries, and it has also helped countries to specialize in products which they have a comparative advantage in. This is an economic theory
that refers to an economy's ability to produce goods and services at a lower opportunity cost than its trade partners.
 International finance: Money can be transferred at a faster rate between countries compared to goods, services, and people; making international
finance one of the primary features of a global economy. International finance consists of topics like currency exchange rates and monetary policy.
 Global investment: This refers to an investment strategy that is not constrained by geographical boundaries. Global investment mainly takes place
via foreign direct investment (FDI).
 Why is the global economy important?

We can understand the importance of the global economy by looking at it in relation to emerging markets:

 Economic importance at a micro and macro level: The increase in the world’s population has led to emerging markets growing economically,
making them one of the primary engines of world economic growth. The growth and resilience shown by emerging markets is a good sign for
the world economy. Before delving into the next point, you need to understand the concept of microeconomics. It refers to the study of the behaviour
of households, individuals, and firms with respect to the allocation of resources and decision-making. In simpler terms, this branch of economics
studies how people make decisions, what factors affect their decisions, and how these decisions affect the price, demand, and supply of goods in the
market. Therefore, from the perspective of microeconomics, some of the largest firms with high market value and a few of the richest individuals in
the world hail from these emerging markets, which has helped in the higher distribution of income in these countries. However, many of these
emerging countries are still plagued by poverty, and work still needs to be done to work towards eradicating it.
 Long-term world economic outlook: According to financial and economic projections based on demographic trends and capital productivity
models, the GDP in emerging market economies in 2019 are likely to keep increasing at a positive rate. According to an emerging markets economic
forecast for 2019 conducted by Focus Economics, the economy is set to increase by 7.5% in India, 6.6% in Philippines, 6.3% in China, 5.3% in
Indonesia, 5.1% in Egypt, 4.9% in Malaysia, 3.8% in Peru and 3.7% in Morocco.

Who controls the global economy?

Many people think that the global economy is controlled by governments of the largest economies in the world, but this a common
misconception. Although governments do hold power over countries’ economies, it is the big banks and large corporations that control and
essentially fund these governments. This means that the global economy is dominated by large financial institutions. According to world economic
news, US banks participate in many traditional government businesses like power production, oil refining and distribution, and also the operating of
public assets such as airports and train stations. This was proven when certain members of the US Congress sent a letter to the Federal Reserve
Chairman Ben Bernanke. Here’s an excerpt from the letter:

“Here are a few examples. Morgan Stanley imported 4 million barrels of oil and petroleum products into the United States in June, 2012.
Goldman Sachs stores aluminium in vast warehouses in Detroit as well as serving as a commodities derivatives dealer. This “bank” is also expanding
into the ownership and operation of airports, toll roads, and ports. JP Morgan markets electricity in California.

In other words, Goldman Sachs, JP Morgan and Morgan Stanley are no longer just banks – they have effectively become oil companies, port and
airport operators, commodities dealers, and electric utilities as well.”

How does the global economy work?

The functioning of the global economy can be explained through one word —transactions. International transactions taking place between top
economies in the world help in the continuance of the global economy. These transactions mainly comprise trade taking place between different
countries. International trade includes the exchange of a variety of products between countries. It ranges all the way from fruits and foods, to natural
oil and weapons. Such transactions have a number of benefits including:
 Providing a foundation for worldwide economic growth, with the international economy set to grow by 4% in 2019 (source: World Trade
Organisation);
 Encouraging competitiveness between countries in various markets;
 Raising productivity and efficiency across countries;
 Helping in the development of 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?

Nearly every country in the world is in some way affected by things that happen in what may seem at times, like unrelated countries - due to
the influence of the global economy. A good example of this is the economic impact that the Brexit vote will have other countries, not only in
Europe, but across the globe. Brexit was referendum decision for the United Kingdom to withdraw from the European Union (EU).

The main cause of these effects is economics — based on the production and exchange of goods and services. Restrictions on the import and export
of goods and services can potentially hamper the economic stability of countries who choose to impose too many.

The purpose of international trade is similar to that of trading within a country. However, international trade differs from domestic trade in two
aspects:

 The currencies of at least two countries are involved in international trade, so they must be exchanged before goods and services can be exported or
imported;
 Occasionally, countries enforce barriers on the international trade of certain goods or services which can disrupt the relations between two countries.

Countries usually specialize in those products that they can produce efficiently, which helps in reducing overall manufacturing costs. Then,
countries trade these products with other countries, whose product specialization is something else altogether. Having greater specialization helps
countries take advantage of economies of scale. Economies of scale refer to the proportionate saving in costs gained by an increased level of
production. Manufacturers in these countries can focus all their efforts on building factories for specialized production, instead of spending additional
money on the production of various types of goods.

Occasionally countries add barriers to international trade. Some of these barriers include 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.

Task 1

Based on what you have read earlier, fill up the table below with the advantages and disadvantages of the Global Economy from your own
perspective of the topic.
 What are the benefits of global economy?

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

 Free trade: Free trade is an excellent method for countries to exchange goods and services. It also allows countries to specialize 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. If a country is
going through a phase of high unemployment, workers can look for jobs in other countries. This also helps in reducing geographical inequality.
 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: Due to the presence of global economy, it has become easier for countries to attract short-term and long-term investment.
Investments in developing countries go a long way in improving their economies.

Downsides
 Not everything about globalization is beneficial. Any change has winners and losers, and the people living in communities that had
been dependent on jobs outsourced elsewhere often suffer. Effectively, this means that workers in the developed world must compete with lower-cost
markets for jobs; unions and workers may be unable to defend against the threat of corporations that offer the alternative between lower pay or losing
jobs to a supplier in a less expensive labor market.
The situation is more complex in the developing world, where economies are undergoing rapid change. Indeed, the working conditions of
people at some points in the supply chain are deplorable. The garment industry in Bangladesh, for instance, employs an estimated four million
people, but the average worker earns less in a month than a U.S. worker earns in a day. In 2013, a textile factory building collapsed, killing more than
1,100 workers. Critics also suggest that employment opportunities for children in poor countries may increase negative impacts of child labor and
lure children of poor families away from school. In general, critics blame the pressures of globalization for encouraging an environment that exploits
workers in countries that do not offer sufficient protections.

Studies also suggest that globalization may contribute to income disparity and inequality between the more educated and less educated members of a
society. This means that unskilled workers may be affected by declining wages, which are under constant pressure from globalization.

Factors affecting global economy

According to the latest economic news, here are some of the key factors that influence and affect how well the global economy works:

 Natural resources;

- Natural resources represent the base of our living and the entire economic activity. Their depletion is a major challenge for the economic development
of both developed and developing economies. Their efficient use is an indispensable requirement and must be the aim of the public policies designed by
the authorities worldwide.

 Infrastructure;

- Investments in energy, telecommunications, and transport networks directly impact growth, as all types of infrastructure represent an essential input in
any production of goods and services.

 Population;

- Low population growth in high-income countries is likely to create social and economic problems while high population growth in low-income
countries may slow their development. International migration could help to adjust these imbalances but is opposed by many. Drawing on economic
analyses of inequality, it appears that lower population growth and limited migration may contribute to increased national and global economic
inequality.

 Labor;

- Labor productivity is the output that each employed person creates per unit of his or her time. The easiest way to understand labor productivity is to
imagine a Canadian worker who can make 10 loaves of bread in an hour versus a U.S. worker who in the same hour can make only two loaves of bread.
In this fictional example, the Canadians are more productive. Being more productive essentially means you can do more in the same amount of time.
This in turn frees up resources to be used elsewhere.

 Human capital;

-The knowledge, skills, and creativity of a company's human capital is a key driver of productivity. Developing human capital allows an economy to
increase production and spur growth.

 Technology;

-Technology is having profound effects on labor markets. Automation and digital advances are shifting labor demand away from routine low- to middle-
level skills to higher-level and more sophisticated analytical, technical, and managerial skills. On the supply side, however, equipping workers with skills
that complement the new technologies has lagged, hindering the broader diffusion of innovation within economies. Education and training have been
losing the race with technology.

 Law.

-International law plays an essential role in promoting economic development by promoting global trade and investment. International trade agreements,
such as the WTO, help reduce trade barriers and promote economic growth. International law also provides a framework for resolving disputes between
nations, reducing risks for investors.

Assessment

Task 2

Instruction; Give what is being asked in each item.

1. Meaning of Global economy?

6-8. Benefits of Global economy.

9-10. Give at least 2 Factors that affect the Global Economy and elaborate it based on what you have understand.

References:

https://www.edology.com/blog/accounting-finance/how-does-global-economy-work/

https://education.nationalgeographic.org/resource/effects-economic-globalization/

Prepared by : Abegail D. Oliva

BEED 1-17 Night