When you purchase a small item at a local store, the money might go further than you imagine. Economic systems today are more interconnected than ever before. Any small, local purchase can actually play a significant role in larger economic processes.
Looking to better understanding global financial markets and their impact on the world? Our introductory guide is here to help:
What is a Market Economy?
Let’s start with the basic economic systems found within a country. This provides a useful foundation for understanding how nations interact with each other through trade and other financial issues.
The world is guided by economic systems which determine the prices of goods and services. Some nations use a centrally planned economy. This is when the government is responsible for most of a country’s economic activity.
A Market Economy takes a different approach. There is minimal or no government interference or central planning regarding a nation’s economic activity. Instead, economic decisions and pricing of goods and services are decided by the combined activity of the country’s citizens and businesses.
The theory of a Market Economy was developed in the early 20th century by economists such as Adam Smith, David Ricardo, Jean-Baptist Say and more. On a purely theoretical level, a Market Economy operates best with no protectionism and government.
Of course, that type of market isn’t really possible in many real-world situations. Most national economies in developed nations combine elements of a free market with some governmental oversight. The main purpose of any government interference is to provide stability and prevent corruption.
Determining the right amount of government interference can be tricky. Some countries operate under Marxism-Leninism derived theories which call for centralized government planning combined with coordinated economic theory. Major proponents of this approach include Cuba, China and North Korea.
Of course, these countries are hardly held up as models of economic stability and freedom. A high degree of government interference into a country’s economic systems often results in corrupt and inept leadership. Plus, capitalist countries will usually impose trade sanctions and other barriers to full global trade.
What is the Global Market Economy?
The global market economy deals with international transactions of goods and services. Basically, all economies of the world eventually merge at a high enough level as nations trade and invest with one another. Domestic prices worldwide are directly influenced by international prices, as international supply and demand determine the value of a commodity.
As long as separate nations have existed, goods and services have been traded between them. International trade started around the 15th century as Western Europe began colonizing the Americas and Africa. Manufacturers in European cities would create products from raw materials harvested by the colonies.
Of course, this initial system was based on fundamental inequality between the developed nations of Europe and the developing nations elsewhere. Unfortunately, as international trade grew, so did income inequality between nations.
While issues of globalization have always needed to be addressed by states and leaders, technological advancements have driven the issue into overdrive. The ability to communicate instantly with any person or entity around the globe has significantly increased the speed at which globalization is occurring.
Stock markets around the world are more connected than ever before. For instance, a 2016 Indian stock market crash had effects on the NASDAQ, Dow Jones and most other major stock markets around the world. Global equity is connecting formerly individual markets in never-before-seen ways.
Globalization: Good or Bad?
The interconnectedness of global markets isn’t just an economic issue. The concept of “globalization” is increasingly related to the ideas of cultural and political identity.
A global market economy provides consumers with broad access to a wide variety of products. Alongside these goods and services, consumers are also increasingly exposed to cultures from around the globe.
On the plus side, some people and nations can benefit from globalization. Increased access to a worldwide customer base means an increase in product demand, which leads to increased job opportunities for workers in the developing world. Proponents say an interconnected global market economy can help combat rising economic inequality.
But the issue is far from settled. Opponents of a global market economy say increased globalization can lead to decreased employment in the developed world. This has been especially pronounced in low-skilled, high-paying jobs such as factory and assembly work.
As production markets expand worldwide, restrictions on the movement of goods and services tend to decrease. Generally, tariffs are becoming more phased out over time. However, the movement of labor doesn’t have the same freedom as the movement of goods. This is due to immigration laws as well as geographic and cultural issues.
Critics argue this leads to the biggest issue within the global market: Increased employment in nations with low-cost labor can lead to increased unemployment in developed nations. Companies will often outsource assembly, customer service and other relatively low-skilled work.
Typically, countries and areas with universally low living wages also have high degrees of poverty, illiteracy and unemployment. In some areas, globalization can lead to additional income inequality. The top producers, such as the owners of a factory or heads of a corporation, can benefit from globalization while the lower-level employees do not.
Additional Issues Impacted by Global Markets
Intellectual Property Rights are also in a state of flux due to increased global trade. Generally, property rights are started to receive more recognition worldwide. However, pirated and counterfeit goods are still a major issue companies are trying to prevent and consumers should try to avoid.
On the other hand, global markets have benefitted in other areas. Crude oil markets have made a large impact on overall global markets. Recently crude reached $70 a barrel which resulted in a trade deficit in several countries such as India.
Marketing in a Global Economy
Many large Western companies have a lot of value to bring to a new market. Established corporations have experience, resources and leadership. Using economies of scale and scope, they can manufacture a lot of product quickly to fill a previously untapped market.
Global markets have made it relatively easy for a company to enter a new market in a new country. But access isn’t the only requirement for success. A product or service has to be simple enough for potential customers to understand.
Marketing needs differ locally, nationally and internationally. One campaign won’t work for all areas and cultures. Instead, the marketing message must be refined.
Also called international marketing, the product introduced to a new audience can be a physical export, a franchise, joint venture with local partners or complete direct product entry.
International marketing is more important than ever before. Not only will the right type of marketing help expand brand awareness in the new country, but the wrong type of marketing can be a P.R. disaster.
Direct translation of existing marketing materials isn’t always the best course of action. A history of mistranslated product slogans can serve as (admittedly hilarious) warning signs for companies who try to simply convert their existing marketing into a foreign language.
“Pepsi Brings You Back to Life!” sounds perfectly normal to a native English speaker. But translate the phrase to Chinese and you wind up with “Pepsi Brings You Back from the Grave.” Needless to say, this rather ghoulish slogan didn’t exactly win over large segments of the market.
Successful marketing in a global economy requires local knowledge of customer behavior, customs and habits. Many businesses will team up with local experts when developing a strategy for moving into a new area.
Global Market Economy Final Thought
When you’re shopping in your local department store, you probably don’t pay much attention to where the products originated. But, at least economically speaking, the world is growing smaller each day. Nations are growing increasingly intertwined economically.
This interconnectedness brings a host of challenges related to income inequality, job opportunities and growth. While there are no easy answers, understanding the main issues is a great first step towards global economic literacy.