The Global Economy and Globalization

For more than a century the global economy has become more integrated and interdependent. This process has accelerated since World War II. The term “globalization” is often used to describe this process of economic integration. Core elements of globalization are international trade, foreign direct investment, and cross-border financial flows. Over time globalization has been fueled by new technologies, transnational corporations, national governments, and multilateral organizations such as the United Nations, World Bank, International Monetary Fund, and World Trade Organization. The costs and benefits of globalization are hotly debated. Proponents credit globalization for the rising prosperity seen around the world. Critics believe globalization widens income gaps and threatens people's quality of life.


The concept of a global economy dates back thousands of years. Ancient civilizations in Egypt, China, Greece, Rome, and elsewhere conducted cross-border business activity by land and sea. Thus, these societies participated in a global economy. The world known to the ancients was much smaller, however. The lack of certain technologies limited these civilizations' ability to produce and exchange products or communicate with distant peoples. More recently new technologies have helped stitch the fabric of the global economy more tightly than ever before. Successive waves of globalization have encouraged crossborder movements of goods and services, labor, technology, real capital, and financial capital to create today's integrated and interdependent global economy.

Global Economy Basics

The global economy is the international network of individuals, businesses, governments, and multilateral organizations that make decisions about the production, consumption, and distribution of goods and services. Capitalism, an economic system that relies on decentralized private sector decision making, guides the use of most resources in today's global economy. Global capitalism has created unprecedented prosperity in some countries, especially in the world's 35 advanced economies. The benefits of global capitalism have eluded others, especially people in the world's least developed countries (LDCs).

The International Monetary Fund (IMF) reported that the world's real gross domestic product (GDP) more than doubled from 2002 ($32.3 trillion) to 2012 ($71.7 trillion).[1] Global GDP measures the value of all final goods and services produced in the world economy. Today much of the business and financial activity in the global economy is related to international trade, foreign direct investment, and cross-border financial investments. Several key components of the global economy are shown in Table 12.1.[2]

A number of multilateral organizations, governments, and businesses actively support today's highly integrated global economy. Among the key supporters of global integration are international financial institutions (IFIs) such as the World Bank and the regional development banks. Other supporters are the IMF, the World Trade Organization (WTO), and the family of specialized agencies, programs, and funds associated with United Nations System. These multilateral organizations help establish and enforce common rules to facilitate international trade, investment, and other cross-border exchanges. Similarly, national governments and groups of governments such as the Organization for Economic Cooperation and Development (OECD) support the liberalization of trade and investment, coordinate foreign aid, and otherwise encourage economic cooperation. Transnational corporations (TNCs) and a wide variety of import and export firms rely on cross-border transactions and global supply chains to earn profits. Thousands of nongovernmental organizations (NGOs) and civil society organizations (CSOs) scrutinize the business practices and participate in multilateral organizations. In a sense, NGOs and CSOs are the conscience of the global economy.

New technologies also support cross-border business activity and global integration. During the 1800s the application of steam power to railroads and ships sped the transport

Table 12.1 The Global Economy at a Glance, 2012

Source: International Monetary Fund, World Trade Organization, United Nations Conference on Trade and Development, Bank for International Settlements (2010 data for forex trading).

The bullet train system is part of Japan

The bullet train system is part of Japan's sophisticated economic infrastructure. (Corel)

of resources, goods, real capital, and people to distant locations. Early communications systems, such as the telegraph and telephone, also prompted cross-border transactions. Today innovative information and communications technologies (ICTs) create a more integrated world that is linked by computers, the Internet, communications satellites, cell phones, and so on. ICTs permit people to store, process, and transmit enormous quantities of information. Similarly, transportation technologies such as supersonic airlines, super tankers, high-speed rail transport, and motor vehicles advance the economic connectivity of peoples in ways unimagined just a few decades ago.

  • [1] International Monetary Fund (IMF), “Table A1: Summary of World Output,” World Economic Outlook: April 2013 (Washington, DC: IMF, 2013), 149; IMF, “Table 1: Summary of World Output,” World Economic Outlook: April 2004 (Washington, DC: IMF, 2004), 187
  • [2] IMF, “Table A1,” World Economic Outlook: October 2013, 149; World Trade Organization (WTO), “Appendix Table 3: Merchandise Trade: Leading Exporters and Importers, 2012,” “Appendix Table 5: Leading Exporters and Importers in World Trade in Commercial Services, 2012,” Press Release, April 10, 2013, 21, 23; United Nations Conference on Trade and Development (UNCTAD), “Annex Table 1: FDI Flows, by Region and Economy, 2007–2012,” World Investment Report: 2013 (New York: United Nations, 2013), 213; Bank for International Settlements, “Table 1: Global Foreign Exchange Market Turnover by Instrument,” Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in 2010, November 2012 (Annex Tables).
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