We explain what the global economy is, its characteristics, advantages and disadvantages. Also, what types of foreign trade policy exist.
What is the global economy?
The global economy or world economy It is the set of economic processes and dynamics of all States and non-state organizations on the planet which interact with each other through foreign trade. That is, the global economy is based on the exchange of goods and services between different countries, in a similar way to how the national economy is based on the exchange between the economic actors of the same country.
The existence of a global economy is relatively recent in historical terms, and often It is considered a cause and a consequence of the complex process of globalization that has occurred since the mid-20th century. This is because, although in ancient times nations traded with their neighbors, they did not do so as they do now, over great distances and in such large quantities.
This has also allowed the emergence of international laws and treaties, which regulate exchange between nations, and multilateral organizations that are responsible for mediating and resolving trade conflicts. Likewise, the need for international economic rules of the game has a notable impact on international politics since it forces nations to organize and at the same time generates new sources of conflict.
See also: Economic globalization
Features of the global economy
The global economy is characterized by the following:
- It covers all the dynamics and operations of production and marketing of goods and services that occur internationally.
- Understand two fundamental types of operations: export in which a country sells its products abroad; and import in which a country buys its products from abroad.
- Merchandise and finances flow in every direction freely and quickly. Transactions can be made in different currencies and through national or international banking operators.
- Global trade operations are given in accordance with laws, treaties and provisions of mutual agreement between the parties, and sometimes under the tutelage of the World Trade Organization (WTO), created in 1995.
- Often Companies from a country can operate abroad, thus becoming international companies or multinationals, generally in search of cheaper labor. This new type of international actors is typical of a globalized economy.
- Telecommunications and internet They play an essential role in global economic exchange, since allow actors from different geographies to reach agreements and carry out purchase and sale operations.
Advantages and disadvantages of a global economy
A global economy implies great virtues and also important challenges, which can be summarized as follows:
| Advantages of the global economy | Disadvantages of the global economy |
|---|---|
| It allows a greater supply of goods and services from different countries, and therefore greater competition. | Competition for markets occurs in broader terms and is not always equitable, which produces new reasons for political conflict. |
| It offers companies more profitable and convenient scenarios, with cheaper labor and lower tax rates. | Business locations in countries with weaker legislation can increase unemployment in their countries of origin and at the same time foster an unresponsible work culture in their destination countries. |
| It allows nations to specialize their production to access emerging markets and increase their income. | Many countries end up immersed in a relationship of economic dependence on stronger nations. |
| It promotes economic interdependence between countries, which could strengthen international peace. | Market instabilities and financial crises no longer concern a single nation or region, but are quickly spreading throughout the world. |
| It allows commercial and financial transactions in distant markets, as well as access to jobs in other countries. | Large financial institutions exercise notorious dominance over the global economy, which weakens the role of States. |
Importance of the global economy
The concept of global economy is particularly relevant in the context of the 21st century, within the framework of the process of globalization and technological and financial integration of nations. Through a global perspective of the economy, phenomena that lose significance on a local scale can be better understood, since Economic movements in one geographical point of the world have repercussions in their own way on the rest of the planet.
On the other hand, the global economy entails notable advantages and disadvantages, whose impact on humanity's way of life is becoming increasingly noticeable: for example, changes in the method of work, in the demographic flow and in the circulation of money can only be understood through a global perspective
Types of foreign trade policy
A country's foreign trade policy is the way it chooses to relate to the global economy, and is manifested in a set of measures and provisions that can be grouped into three main trends:
- Free trade. It consists of placing the least amount of obstacles and restrictions on trade with foreigners, so that import and export operations are as fluid as possible. Normally this position has the virtue of promoting economic activity and attracting investment, but it leaves local industries helpless in the face of competition with stronger international players.
- Protectionism. It consists of introducing tariff barriers, quotas and restrictions on imports (and eventually exports) to regulate from the State the way in which transactions with foreigners occur, and thus shield the local economy. This policy fosters an artificially favorable environment for local industries, but at a significant cost to the State. Furthermore, it makes international trade operations less attractive.
- Moderate or mixed policies. They consist of a combination of free trade and protectionism measures, adjusted to the specific panorama of a country. This intermediate position pursues a competitive but fair international economic exchange that does not sacrifice the well-being of local initiatives. This, however, does not always imply taking the same measures.
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References
- “Globalization of the economy” on Wikipedia.
- “What is the world economy?” at the Maranathá Higher Studies Center (Mexico).
- “How does the global economy work?” in Edology.
- “Economic globalization: Trends, Risks and Risk Prevention” at the United Nations (UN).
