The issue of global economics can often seem purely theoretical, an academic concept which applies only to far-flung countries and large monetary systems – neither of which have much impact on our daily lives. But global economic processes affect you more than you might think.

The global economy influences practically every aspect of our individual financial lives, from the prices of products found at the local store to the growth of our retirement account. While global economic analysis can seem intimidating at first, the basics are actually pretty simple. Let’s take a look at what you need to know about global economics:

What is the Global Economy?

The global economy is the total amount of goods and services exchanged internationally. Economic activity between various countries is often tightly tied together. What happens within one country economically can have a dramatic impact on its neighbors, trading partners and others.

This influence can be positive or negative. For instance, the global economy was famously hit hard in 2008. Failure in specific markets such as housing led to worldwide financial instability and a global economic crisis.         

The global economy is tied into the political relationships between nations as well as the geography and ecology of the Earth itself. What nations trade with other nations? What goods and services do the people within each nation want and need? Although the world’s economic behavior is a large subject, the heart of the global economy is simply people investing, buying houses and engaging in otherwise commonplace economic behavior.

What is Globalization?

Globalization is the increased inter-dependence of people, governments and companies on international trade and investments. Technology is rapidly increasing the pace of globalization by allowing for faster communication and delivery of goods and services across both borders and cultures.

The increasing impact of globalization is creating broad new categories of economic winners and losers. For instance, low-skilled workers in the Western world often run a risk of job loss due to outsourcing and automation. Yet others are finding economic success due to technology and industries which didn’t exist even five years ago.

Is Globalization Controversial?

For many, globalization can result in job loss. For many more, globalization creates a fear of potential job loss in the future. Naturally, globalization has become a hot-button political issue around the world.

Globalization proponents believe increased trade and global integration will help increase the standard of living worldwide. Opponents say globalization results in income inequality, environmental damage and a rise in health problems among workers.

Political discussion of globalization is so frequent and often fiery that one can be forgiven for thinking this is a new issue. However, issues related to globalization have been around since the 15th century. By using history as a guide, we can form a more complete understanding of international trade’s potential impact on a nation’s economics, politics, culture and environment.    

The History of Global Economics

The technology surrounding global trade is new and growing fast. But these same basic issues have faced nations and people for over 500 years. The history of global economics is commonly divided into three phases: Globalization I, Globalization II and Globalization III. These phases are also called the Age of Exploration, Age of Imperialism and the Modern World.

Globalization I

Globalization 1 began in the 15th century and continued into the late 19th century. By the end of this phase, formal political empires had been created in Europe. These European countries expanded around the world, colonizing much of what they discovered.

Globalization phase one was driven by three major pursuits from European nations. First, a search for precious metals occurred throughout Central and South America. Also, plantations were created all over the world. Finally, the slave trade from West Africa into the Americas began.

This vast system of resource extraction provided the economic capital necessary to start industrialization in Europe. Of course, this only occurred at a huge cost to the populations of Africa and the Americans. Plus, the economic systems of Asia were also dramatically changed. This first period of Globalization created a worldwide system of uneven economic growth and development.   

Globalization II

The second phase of Globalization lasted from about 1870 to 1945. An international division of labor began to form. Industrialized European countries sold manufactured goods to the colonies. At the same time, these colonies produced and exported raw materials to Europe. This process is called path dependence.

Increased trade led to increased development within these colonies. Europeans invested heavily in railroads, colonial administration and other infrastructure. After all, these infrastructure benefits increased the bottom line of the European-based manufacturers. While development did provide some benefits to the colonized areas, overall economic disparity increased worldwide.

Specifically, Globalization II caused significant capital deepening throughout Europe. While European world capitals grew in size and scope, few countries outside of Europe became industrialized. Many countries who specialized in primary production still face development problems today.

Globalization III

Also known as the Modern World phase, Globalization III began in 1945 and continues today. De-colonization occurred throughout the world. The center of world power shifted away from Europe and towards the U.S. Former colonies became known as the “third world.”

Additionally, new institutions formed specifically to deal with global economics. The I.M.F and the World Bank were created. Additionally, integrated trading blocks developed including the European Union, NAFTA and Asean.

The current issues related to globalization have only intensified. The gap between rich and poor countries has increased over time.  As technology allows globalization to expand at a rate faster than ever before, nations and leaders must look to history as a guide for the future.

Issues Related to Globalization

The income gap between poor and rich countries has more than doubled since the 1970s. Income at the top level is as concentrated as during the Roaring Twenties. At the same time, most wages have stagnated.

Global economy news often deals with more than numbers. This growing income inequality often has a high human cost. Low-skilled workers in the Western world see an increasing number of jobs outsourced to developing countries.

At the same time, the workers in the developing countries are often paid low wages and must endure harsh working conditions. Critics of increased global trade point to the growing number of low-wage industrial workers who produce goods for those living in industrialized, wealthy parts of the world.      

Increased global reach by large corporations also runs the risk of minimizing local cultures. As Western products and images reach new markets, smaller, local competitors can be pushed out of their regional markets.    

Response to Global Economic Concerns

As technology connects the world, international trade will continue to impact practically every nation. Policies will need to be created and actions taken in order to prevent harm to people and even entire societies.

There are three main responses to the increased connectivity of the world’s economic systems. Each response considers different levels of benefits and responsibilities.

First, some people believe poor countries are responsible for their own issues related to global economic imbalance. Poverty is the result of poor education, poor work ethic and poor leadership within the nation.

This theory doesn’t offer many practical solutions. Less developed countries are often unable to provide the education and support necessary to turn a predominantly low-skilled workforce into a high-skilled one.

The second view of global inequity is that globalization is essentially the best solution for worldwide poverty. Free trade and free markets are the ideal situations. Barriers to the movement of goods, capital and even people should be eliminated as much as possible.

This view often runs into political and cultural opposition. Few if any nations want to allow unrestricted immigration across their borders. A host of potential problems could occur including terrorism and other dangers.

Finally, the third response to the growing global economy is a realization of the fact that the situation mainly benefits Western interests and corporations. Income inequality will grow greater for billions of people, especially those in less developed nations.

This view argues for increased regulations of international trade. Existing global markets must be regulated and modified. Globalization needs to be curbed, regulated or modified.  

Global Economics: Final Thoughts

Global economics involves the financial health of the entire world. So naturally the subject is complicated. As you continue to explore the subject of global economics, remember to look outside of the numbers.

The heart of the global economy is people. Some of whom have benefitted greatly from an influx of new employment and sales opportunities. Others who have seen economic devastation as long-held jobs disappear from their communities.

Global economics is the engine which drives major decisions for every nation and large business in the world. Understanding the basics of global economics can help you gain insight into everything from world politics to your retirement account to the prices at your local grocery store and more.

The challenges of the interconnected global economy aren’t going away. But understanding these issues is the first step towards creating a future of success and fairness worldwide.

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