The nations of the world grow more closely connected each year. Goods and services are shipped and sold all around the globe. Understanding these economic connections is an increasingly important component in understanding the overall stability of the world. When studying the overall global economy, statistics are one of the most valuable tools available.
But which numbers matter the most when discussing the present state of the world’s financial health? What numbers help us make accurate predictions regarding future economic growth? How do we know the numbers we’re using are true and accurate?
This complete guide presents an informative overview of global economic statistics and their use in a world which is increasingly interconnected economically.
The Importance of Understanding the Global Economy
You’ve probably heard the word “globalization” used a lot recently. While the term has a lot of political and cultural connotations, globalization is primarily an economic issue. Globalization involves the international transfer of capital and investment between countries.
Picture the last item you purchased. Do you know where the product was created? Even if you purchased the product in a local store, chances are good the product was made in a faraway location – likely in a completely different country.
Nations of the world are tied together economically to a greater degree than ever before. This is due to increased development of information technology. Communicating around the world is no longer expensive or time-consuming. Instead, internet access allows for instant messaging and real-time interaction.
The Historical Development of the Global Economy
The term “globalization” is so commonly debated in the modern political and cultural landscape that one might think the concept is a recent and unexpected phenomenon. But that’s not the case. Basically, international trade has been occurring since approximately the 15th century.
Globalization began with Western European colonial expansion. As explorers discovered new countries and societies, they also discovered an abundance of raw materials. These materials were shipped back to European capitals, where they were turned into various goods.
The second phase of globalization started when Europe began developing infrastructure in Africa and the Americas. Unfortunately, the intentions behind development were not to improve the lives of the people living in these less developed parts of the world. Instead, the only goal of these improvements was to make the extraction of raw materials cheaper and easier.
Today, the global economy exists in the Modern Age of globalization, which began in 1945. While the center of world power has shifted from Europe to the U.S., massive economic imbalance still exists. The study of global economic statistics is heavily influenced by global economic inequality statistics.
The Benefits and Pitfalls of Globalization
Is globalization good or bad? Well, the answer is a bit complicated and depends heavily on one’s individual perspective. There are definite winners and losers in an increasingly interconnected global system.
Proponents argue globalization is the best, and perhaps only, solution to worldwide global poverty. A massive influx of jobs into the developing world provides a necessary economic boost. Low skilled, poorly educated people are able to earn wages in factory and assembly positions.
But those jobs are often the result of outsourcing from Western societies, which is often considered the biggest problem with globalization. Critics point to numerous relocations of factories and plants from developed countries into countries with a much cheaper labor force.
Global economic growth statistics must be considered in total. When one area of the developing world receives an economic boost from a new factory, is an area of the developed world then also being hit by a factory closure?
Critics also point out that the work conditions in much of the developing world are harsh and dangerous. Areas with a cheap labor force also tend to have lenient safety and health standards for employees. Are these new economic opportunities actually helping impoverished areas or are the workers simply being exploited?
To understand the answer, we have to look at a variety of statistics. Aside from the general economic growth of the area, we must also consider statistics related to on-site injury and death. Plus, we must consider the overall life satisfaction of the people living in these areas.
For instance, if a new factory pays the workers enough that they’re able to help boost the local economy, while also providing safe and comfortable working conditions, then we can generally say the area is improving.
But if workers aren’t paid a living wage, and working conditions are dangerous, then globalization is probably exploiting impoverished areas more than helping them.
The Importance of a Country’s GDP
When considering global economy statistics, one of the most important numbers is a country’s Gross Domestic Product. The GDP is the total value of all goods and services produced by a country within one year. This number reveals a lot of information about a country’s overall economic health.
Economists use a country’s GDP to help develop statistics about a country’s total annual spending or equivalent earnings. Governments use the GDP to help shape public policy and determine public spending. But with so many important decisions being made based on the GDP, how is this number calculated and are these calculations even accurate?
The practice of calculating a country’s GDP began in the late 16th century. Britain and France figured out that if they were able to estimate the total income earned each year, they could then determine how to best raise tax revenue. But these estimates weren’t very accurate.
Better estimates were able to be created by the 20th century. Accounting methods had improved substantially. Plus, world war pushed governments around the world to better understand their national economic situation.
Most developed countries have been able to create reasonably accurate estimates of their GDP since the 1930s. Interestingly, the Depression and other economic hardships spurred countries to create more accurate records of their overall financial health.
Also worth noting is that the first true GDP for the U.S. was actually created by a Russian emigrant. Simon Kuznets delivered a GDP estimate to the United States Congress in 1934. More than simply a fun trivia fact, Kuznets illustrates how even national economics involve people from all over the world.
Believe it or not, most governments didn’t consider national economic management to really be their responsibility. Only during WWII did governments begin to take a serious look at national economic measurements. Government statistical offices began to produce annual GDP estimates.
While taking nothing away from Kuznets’ impressive accomplishment, the idea of an individual single-handedly calculating a country’s GDP seems rather unreliable today, to say the least. So how is a country’s GDP calculated in the modern age?
Calculating a Country’s Gross Domestic Product
There are three ways to calculate a GDP. All are theoretically equally accurate. The first way involves adding up all the money spent each year. The second way adds up all the money earned annually. Finally, the third requires calculating all the value added each year.
All methods can be combined to create a single GDP. That’s how Britain does it. But other countries separate the numbers. The U.S. uses the spending approach to determine GDP. They then use the income approach to determine the Gross Domestic Income (GDI).
Gathering Accurate Data
Statistics are only as good as the data used to create them. Most Western governments draw data from surveys sent to manufacturers, builders, retailers and other drivers of commerce. In most cases, estimates are created and then revised as necessary.
The GDP isn’t a perfect measure of a country’s economy. But by comparing GDPs throughout history and between countries, we can form a pretty solid understanding of the growth of the world economy over time.
Final Thoughts on the Global Economy and Statistics
Global economics statistics help create an accurate picture of the overall global economy. But stats only tell part of the story. When considering the effects of increased globalization, we must always consider the human cost. Who is being helped? Who is being harmed?
Statistics are an important tool as governments, businesses and people face the fast-paced growth of the global economy.