World Economy Alex Ionescu (918)
World economy: capitalist, a multistate economic system, begun in 1500s along with
colonialism. Its constantly transformed by a combination of technological and geopolitical
forces.
World economy consists of:
Fundamental elements (subjects)
States
International organizations
Transnational corporations
Complementary elements (relationships)
World market
International division of labor
World economic order
World economy is a system:
An interdependent sum of national economies
The main components are national economies
As a system, world economy is in a dynamic and relative equilibrium
The components of the world economy are diverse
Market relations unify these divers components
It is an unique, but diverse world economy
The diversity is given by the gaps existing in the world economy
International economic system (world economy): Institutions and relations of global
capitalism includes globalization of capital, international trade, flows of information, technology,
labor
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At any given time, the world economy is dominated by one or more core states,
Institutions of the international economic system (world economy):
World Bank - Provides loans, advice, and research
International Monetary Fund - Maintains financial stability and monetary cooperation
World Trade Organization - Enforces trade rules
Transnational Corporations (TNCs) / multinational corporations (MNCs)
Headquarters in a developed country, other activities worldwide
Are the primary agents of international trade, mostly within and among themselves
Governments accommodate MNCs (tax codes, deregulation)
Are larger than some national economies of world countries. The relative size of an MNC
is important to small countries whose economies are often drastically affected by the
decision that a (foreign) global corporation makes.
World Development Problems
Uneven development: very rich countries, extremely poor countries
Problems of the poor: Clean water, Adequate nutrition, Basic health care, and so on
Critical issues: Constraints of energy supplies threaten economic expansion
Environmental Constraints:
Wasteful consumer culture in developed world
Environmental challenges in LDCs
Sustainability
Distribution
Disparities in Wealth and Well-being
World economy generates tremendous variation in well-being: Africa, Asia, Latin
America are the poorest
Disparities within developed countries
An independent State:
Has space or territory which has internationally recognized boundaries
Has people who live there on an ongoing basis.
Has economic activity and an organized economy. A country regulates foreign and
domestic trade and issues money.
Has the power of social engineering, such as education.
Has a transportation system for moving goods and people.
Has a government which provides public services and police power.
Has sovereignty. No other State should have power over the country's territory.
Has external recognition. A country has been "voted into the club" by other countries.
State powers
State of law nobody is above the law
Totalitarian state
Legislative power the Parliament
Executive power the Government
Juridical power the Supreme Court of Justice
State functions
Minimal state minimum of attributions (defense)
Welfare state protection
Potential of a country
Natural potential
Economic potential
Absolute economic potential: GDP. GNP (GNI ), GDP PPP
Relative economic potential: GDP/capita
Inequality: Lorenz curve, Gini index, World Bank 20%
Level of development: HDI
State intervention: state intervention occurs as a form of protection against the workings of
the market: public goods, management of externalities, macroeconomic stability (protection of
competition, unemployment), distribution and redistribution of incomes (taxes, poverty)
Instruments of intervention
Property
Plans
Economic policies
Monetary policy is the process by which the government, central bank, or monetary
authority manages the supply of money, or trading in foreign exchange markets.(a correlation
between money and goods and services);
different targets: low level of inflation, unemployment, economic growth.
Monetary policy is generally referred to as either being an expansionary policy, or a
contraction policy.
Expansionary policy increases the total supply of money in the economy. It is
traditionally used to combat unemployment in a recession by lowering interest rates.
Contraction policy decreases the total money supply. It has the goal of raising interest
rates to combat inflation (or cool an otherwise overheated economy).
Instruments:
Interest rate
Reserve requirements
Fiscal and budgetary policies: the actions of a government in setting the level of public
expenditure and how that expenditure is funded. Fiscal policy is used by governments to
influence the level of aggregate demand in the economy, in an effort to achieve economic
objectives of price stability, full employment and economic growth.
Types of Fiscal Policy:
Expansionary fiscal policy - an increase in government purchases of goods and services,
a decrease in net taxes, or some combination of the two for the purpose of increasing
aggregate demand and expanding real output.
Contraction fiscal policy - a decrease in government purchases of goods and services, an
increase in net taxes, or some combination of the two for the purpose of decreasing
aggregate demand and thus controlling inflation.
Neutral fiscal policy - Modest fiscal policy. Generally not a common stance to take as
there is no intention of affecting economic activity - this is rare, especially today
Government spending or government expenditure consists of government purchases,
including transfer payments, which can be financed by seigniorage (the benefit from printing
money), taxes (a financial charge or other levy imposed on an individual or a legal entity by a
state or a functional equivalent of a state), or government borrowing (if it is from the population,
it results in a fiscal deficit).
Trade policy: a government policy controlling foreign trade
Free trade policy
Protectionist trade policy.
Protectionism is the economic policy of restraining trade between nations, through methods
such as high tariffs on imported goods, restrictive government regulations designed to discourage
imports, and anti-dumping laws in an attempt to protect domestic industries in a particular nation
from foreign take-over or competition.
Instruments: tariffs, non-tariff barriers: import quotas, export subsidies, national
procurement, voluntary export restraints, national procurement, red-tape barriers
The exchange rate ( FX rate) between two currencies specifies how much one currency is
worth in terms of the other. The spot exchange rate refers to the current exchange rate. The
forward exchange rate refers to an exchange rate that is quoted and traded today but for
delivery and payment on a specific future date.
An exchange rate quotation is given by stating the number of units of a "price currency"
that can be bought in terms of 1 unit currency (also called base currency).
direct quotation: 1 foreign currency unit = x home currency units
indirect quotation: 1 home currency unit = x foreign currency units
The exchange rate regime is the way a country manages its currency in respect to
foreign currencies and the foreign exchange market. The basic types are:
Floating exchange rate, where the market dictates the movements of the exchange rate.
They are the most common exchange rate regime today. However, since central banks
frequently intervene to avoid excessive appreciation/depreciation, these regimes are often
called managed float or a dirty float;
Pegged float,here the central bank keeps the rate from deviating too far from a target
band or value. Here, the currency is pegged to some band or value, either fixed or
periodically adjusted. Pegged floats are:
Crawling bands: the rate is allowed to fluctuate in a band around a central value, which is
adjusted periodically. This is done at a preannounced rate or in a controlled way
following economic indicators.
Crawling pegs: Here, the rate itself is fixed, and adjusted as above.
Pegged with horizontal bands: The currency is allowed to fluctuate in a fixed band
(bigger than 1%) around a central rate
Pegged/Fixed exchange rate, which ties the currency to another currency, mostly more
widespread currencies such as the U.S. dollar or the euro. In case of a separate currency,
also known as a currency board arrangement, the domestic currency is backed one to one
by foreign reserves. A pegged currency with very small bands (< 1%) and countries that
have adopted another country's currency and abandoned its own also fall under this
category.
The foreign exchange market exists wherever one currency is traded for another. It is by far
the largest financial market in the world, and includes trading between large banks, central
banks, currency speculators, multinational corporations, governments, and other financial
markets and institutions. The average daily trade in the global forex and related markets currently
is over US$ 3 trillion.
The balance of payments (BOP) is the method countries use to monitor all international
monetary transactions at a specific period of time. Usually, the BOP is calculated every quarter
and every calendar year. All trades conducted by both the private and public sectors are
accounted for in the BOP in order to determine how much money is going in and out of a
country. If a country has received money, this is known as a credit, and, if a country has paid or
given money, the transaction is counted as a debit. Theoretically, the BOP should be zero,
meaning that assets (credits) and liabilities (debits) should balance. But in practice this is rarely
the case and, thus, the BOP can tell the observer if a country has a deficit or a surplus and from
which part of the economy the discrepancies are stemming.
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Balance of payments may be used as an indicator of economic and political stability. For
example, if a country has a consistently positive BOP, this could mean that there is
significant foreign investment within that country. It may also mean that the country does
not export much of its currency.
The BOP includes: the trade balance, foreign investments and investments by foreigners.
The BOP is divided into two main categories:
The current account,
The capital account.
Within these two categories are sub-divisions, each of which accounts for a different type of
international monetary transaction.
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Different institutions (IMF, OECD, the United Nations System of National
Accounts (SNA)) use different approaches.
Balance of trade - the difference between a country's imports and its exports. It is the largest
component of a country's balance of payments.
Debit items include imports, foreign aid, domestic spending abroad and domestic
investments abroad.
Credit items include exports, foreign spending in the domestic economy and foreign
investments in the domestic economy.
If a country has a balance of trade deficit, it imports more than it exports, and if it has a
balance of trade surplus, it exports more than it imports.
The current account is used to mark the inflow and outflow of goods and services into a
country. Earnings on investments, both public and private, are also put into the current account.
Within the current account are credits and debits on the trade of merchandise, which
includes goods such as raw materials and manufactured goods that are bought, sold or
given away (possibly in the form of aid).
Services refer to receipts from tourism, transportation (like the levy that must be paid in
Egypt when a ship passes through the Suez Canal), engineering, business service fees
(from lawyers or management consulting, for example), and royalties from patents and
copyrights.
Receipts from income-generating assets such as stocks (in the form of dividends) are also
recorded in the current account.
Unilateral transfers are credits that are mostly worker's remittances, which are salaries
sent back into the home country of a national working abroad, as well as foreign aid that
is directly received.
The capital account is where all international capital transfers are recorded. This refers to
the acquisition or disposal of non-financial assets (for example, a physical asset such as land) and
non-produced assets, which are needed for production but have not been produced, like a mine
used for the extraction of diamonds . It is broken down into the monetary flows branching from
debt forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a
country, the transfer of ownership on fixed assets (assets such as equipment used in the
production process to generate income), the transfer of funds received to the sale or acquisition
of fixed assets, gift and inheritance taxes, death levies, and, finally, uninsured damage to fixed
assets.
Rich countries: Russia, Brazil, Canada, USA, South Africa, Equatorial Guinean, Saudi
Arabia
Poor countries: Japan, Costa Rica, Malta
Large population countries: China, India
Low population countries: Kuwait, Norway
Geographical position access to main commercial routes
Island Countries, inland countries
Countries on the main routes (China, Turkey) - "If you are coastal, you serve the world; if
you are landlocked, you serve your neighbors (Collier, 2007)
The main activities/sectors/industries in the economy:
Primary/extraction sector; agriculture, agribusiness, fishing, forestry and all mining and
quarrying industries.
Secondary/manufacturing sector - Involves the transformation of raw or intermediate
materials into goods. (manufacturing )
Tertiary /services sector: Involves the provision of services to consumers and businesses
Quaternary/research sector: a knowledge-based part of the economy which typically
includes services such as information generation and sharing, information technology
consultation, education, research and development, financial planning, and other
knowledge-based services
Quinary sector: health, culture, non-profit sector.
The terms First, the Second, and the Third World is a model of the geopolitical world from
the time of the cold war:
"First World" refers to so called developed, capitalist, industrial countries, a bloc of
countries aligned with the United States after World War II
"Second World" refers to the former communist-socialist, industrial states, (formerly the
Eastern bloc, the territory and sphere of influence of the Union of Soviet Socialists
Republic) today: Russia, Eastern Europe, CSI as well as China.
"Third World" are all the other countries, today often used to roughly describe the
developing countries .
The term "Fourth World" first came into use in 1974 with the publication of Shuswap
Chief George Manuel's: The fourth world : the term refers to nations (cultural entities,
ethnic groups) of indigenous peoples living within or across state boundaries (nation
states).
First phase: Traditional civilizations
Workforce quotas: Primary sector: 70%, Secondary sector: 20%, Tertiary sector: 10%
This phase represents a society which is scientifically not yet very developed, with a
neeligible use of machinery ( European countries in the early Middle Ages, or that of a
modern-day less developed country)
Second phase: Transitional period
Workforce quotas: Primary sector: 20%, Secondary sector: 50%, Tertiary sector: 30%
More machinery is deployed in the primary sector, which reduces the number of workers
needed ( industrialization). The tertiary sector begins to develop, as do the financial
sector and the power of the state.
Third phase: Tertiary civilization
Workforce quotas: Primary sector: 10%, Secondary sector: 20%, Tertiary sector: 70%.
The situation now corresponds to modern-day industrial societies and the society of the
future, the service or post-industrial society. Today the tertiary sector has grown to such
an enormous size that it is sometimes further divided into an information-based
quaternary sector, and even a quinary sector based on non-profit services.
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Labor productivity is defined as GDP per hour worked
Multi-factor productivity is measured as the difference between output (GDP
change) and input change (a weighted average of the rate of change of labor and
capital input with the respective cost shares)
No consensus on what development means:
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Economic dimension: level of the GDP/GNI PPP per capita, productivity, economic
structure, etc.
Social dimension: education, life expectancy, infant mortality, poverty level, etc.
Political dimension: freedom of speech, respect of human rights, freedom of religion, etc.
Environmental dimension: the quality of the environment
Gender dimension: gender distribution of wealth, gender discrimination, etc.
Kofi Annan defined a developed country as follows: "A developed country is one that
allows all its citizens to enjoy a free and healthy life in a safe environment."
The United Nations Statistics Division notes that the designations "developed" and
"developing" are intended for statistical convenience and do not necessarily express a
judgment about the stage reached by a particular country or area in the development
process.
The World Banks main criterion for classifying economies is gross national income
(GNI) per capita (gross national income, converted to U.S. dollars using the World Bank Atlas
method, divided by the midyear population / the sum of value added by all resident producers
plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of
primary income (compensation of employees and property income) from abroad.
Income group (2011):
Low income, $,1025 or less;
Lower middle income, $1,026 - $4,035;
Upper middle income, $4,036 - $12,475;
High income, $12,476 or more.
New terms introduced to classify countries:
BRIC(S)
Brazil, Russia, India, China, South Africa (2010)
The economic potential of Brazil, Russia, India, and China is such that they could
become among the four most dominant economies by the year 2050.
Emerging markets/countries
countries that are restructuring their economies along market-oriented lines and offer a
wealth of opportunities in trade, technology transfers, and foreign direct investment. Each
of them is important as an individual market and the combined effect of the group as a
whole will change the face of global economics and politics.
the five biggest emerging markets are China, India, Indonesia, Brazil and Russia (WB).
Other lists consider as emerging markets countries as Mexico, Argentina, South Africa,
Poland, Turkey, and South Korea, Romania
Now, is proposed the use of the term EAGLE to cover the worlds Emerging and GrowthLeading Economies. The member states of this exclusive EAGLEs club are: China, India,
Russia, Brazil, South Coreea, Indonezia, Mexico, Turkey, Egypt, Taiwan
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Combined, the ten EAGLEs are expected to account for 50% of all global growth in the
next 10 years.
New Industrialized Countries usually share some other common features, including:
Increased social freedoms and civil rights.
Strong political leaders
A switch from agricultural to industrial economies, especially in the manufacturing
sector.
An increasingly open-market economy, allowing free trade with other nations in the
world.
The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was
established in 1999 to bring together systemically important industrialized and developing
economies to discuss key issues in the global economy. It was created as a response both to
the financial crises of the late 1990s and to a growing recognition that key emerging-market
countries were not adequately included in the core of global economic discussion and
governance.
The Next Eleven (or N-11) are eleven countriesBangladesh, Egypt, Indonesia, Iran,
Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, and Vietnamidentified by
Goldman Sachs investment bank as having a high potential of becoming the world's largest
economies in the 21st century along with the BRICs. The bank chose these states, all with
promising outlooks for investment and future growth, on December 12, 2005.
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Now, Goldman Sachs is proposing an alternative to the term emerging markets,
respective growth markets
