The world economy is such a large and multi-faceted structure. Even the most experienced economists don’t understand everything there is to know. In the fast-paced world of digitized information, things are chopping and changing quicker than ever. The way individual economies interact with and impact one another has evolved dramatically.
If you’re new to economics, trying to get your head around the global economy is a daunting prospect. But once you understand the basics, more and more things will start to fall into place. There are many false assumptions made about the study of economics. Contrary to popular belief, it is not all about dull graphs and numbers; it’s all about people.
In his 1890 book, Principles of Economics, Alfred Marshall defined economics as ‘A study of man in the ordinary business of life. It inquires how he gets his income. It examines that part of individual and social action.
That which is most closely connected with the attainment and with the use of the material requisites of wellbeing.’ Marshall emphasizes that economics is a study of men (and women) and the choices they make in their day-to-day lives.
The world (or global) economy is comprised of individual and national economies. It is generally measured and expressed in terms of money. This article examines the critical definitions to grasp economics. It also studies a brief history of the world economy and how it has changed over the 20th Century. Then on into the first two decades of the 21st.
The world economy: some important definitions
Having the right base level of understanding in economics is incredibly useful. It can be used for engaging critically with other issues, including politics and business, and problem-solving skills too.
Getting your head around the key definitions is a great place to start. It gives you the knowledge you need to read news articles and literature on economics.
In basic terms, this is how a country makes use of the resources available to it.
The study of how individuals make small scale choices regarding their consumer behavior and business operation (i.e., how they spend money and market their goods).
The study of economics in general for an entire country (i.e., the overall wealth and factors that cause unemployment).
The fuel in the capitalist machine, capital, is money and assets that are used within the economy.
The current price that a service or product could fetch in a particular marketplace.
Gross Domestic Product is calculated by adding together the market value of a country’s output, including all exported services and goods.
The general rise of product and service prices measured continuously by economists.
Stats that are used to assess how healthy a country’s economy is (including GDP, inflation, and employment).
For a comprehensive guide to essential definitions, check out The Economist’s A-Z list of terms.
A brief history of the world economy
It’s a challenge to be brief when attempting to cover the entire story of economics. But we’ve done our best to provide an overview of its rich history. Beginning with the earliest forms of an economic system and ending with the 21st Century.
When human beings first evolved, we attained resources through the hunter-gatherer lifestyle. We hunted for food (meat) and gathered berries and plants, migrating seasonally according to where the food was. During this time, food was exchanged for other food (e.g., meat was swapped for berries), and the basics of economics were established.
The need to move around meant that no further economic advancement was possible – not until the First Agricultural Revolution (the Neolithic Revolution). This occurred approximately 12,000 years ago when people realized the power of planting seeds and growing their food on farms.
Farming on one fixed plot of land meant people could stay in one place permanently, and set up small communities.
The origins of trade
The time that had once been spent on hunting and gathering could now be put towards creative activities, such as building and making tools. Products and services were now traded for food, bringing a new economic element onto the scene.
The emergence of money is believed to have happened around 5000 BC as a more efficient universal alternative to the direct exchange of products.
The Second Agricultural Revolution (also called the British Agricultural Revolution) occurred between the mid-17th Century and the early 19th Century.
It involved a dramatic leap forward with science and technological advancements helping to create more food – more than we needed. Small communities grew into cities. Having more food than was required to sustain the inhabitants, the surplus could be traded to other places in exchange for money.
The global economy emerges
The Industrial Revolution started in Britain and spread across the globe in the 18th and 19th Centuries. It meant machines were now doing the work of people. Steam-powered vehicles made it possible to transport goods and services around the world. This created a global economy for the first time.
The Information Age, which we are currently living in, has made it possible to spread ideas and information all around the world. The information has become increasingly commodified.
As the world has become more connected and technologically equipped, more and more opportunities to trade, have arisen. Let’s now take a closer look at the more recent history of the global economy. And look at the changes that have occurred from the beginning of the 20th Century up to today.
The world economy – 1900 to today
The 20th Century saw a great many shifts in the way we lived our lives and marked the most significant growth in the world economy to date (the global GDP per capita increased by 500% over the Century).
The period between 1900 and 2000 was one of the most tumultuous times in the history of the global economy. It was punctuated by many catastrophic and world-changing events: World War I and II.
This saw the introduction of technological warfare and The Great Depression, during which the global GDP fell by an enormous 15%, decolonization. The Cold War; the oil price shocks of the 1970s and the International Debt Crisis, to name just a few.
And throughout all of this, the rise of the Information Age was well and truly upon us. Technological advances in the post-war world gave us advanced communications technology. This included television and the internet, as well as economy-related advancements such as shipping containers.
The 20th Century can be examined most effectively by studying the economics of the period. According to ‘The Shape of Twentieth Century Economic History’ by J. Bradford DeLong, this era is defined by its economic shifts, of which there were many.
Even though we are richer than ever as a result of the boom in global GDP, we are not necessarily any happier or safer. Bradford DeLong says, ‘the twentieth-century tyrannies were more brutal and more barbaric than in any previous century. Astonishingly, these tyrannies had their origins in economic discontents and found their expressions in economic ideologies’.
He brings to light that increased government brutality is an attempt to keep a grip on economic structures. Through seeking the optimum economic system, lives are being sacrificed, with the core capitalist ideology. The promise of material possessions and financial security – becoming the justification for all manner of atrocities.
Understanding economics can, therefore, give us the key to understanding people and solving problems. This happened both on a small scale (for example, within an independent business), and a larger size (such as within an international trade organization).
Different types of economy
There are several economical types to consider when learning the ropes of economics. We’ve touched on the concepts of microeconomics and macroeconomics earlier – these are the two major branches of economics study. Read on for a more in-depth look at what these two terms mean.
Microeconomics – ‘micros’ is the Greek word for ‘small’ – considers the behavior of independent actors in the economy. This is such as one person, one household group, one business, or one industry. It asks questions like:
- If the price of rail travel rises, how is consumer demand affected?
- If people’s income increases, how will this change the demand for meat products?
Macroeconomics – from the Greek word ‘macros,’ meaning ‘big’ – looks at the bigger picture by considering the economy as a whole, examining such phenomena as:
- Unemployment rates
- Changes to product demand and availability
- Inflation and deflation rates
- GDP (national income)
Examples of questions asked in macroeconomics include:
- What factors cause the economy to grow?
- What is the result of an increase in the supply of money?
- How will GDP change as a result of interest rates?
Both areas of study are entangled, and you can seldom answer a question about macroeconomics without first understanding of microeconomics and vice versa.
A quick look at the current economic climate
We couldn’t examine the global economy without having a delve into the current economic climate – there’s a lot to say. If you want a professional opinion on the subject, we recommend visiting The Economist and checking out some of their latest articles.
Globalization defines the 21st Century and has thrown up many issues that are unique to this period in time. We cannot apply mindsets and ideologies from the 19th and 20th Centuries to fix problems that are specific to the 21st.
One of the most important things that have become globalized is knowledge. In previous eras, emerging economies could not grow without access to information — also, ideas and culture, as well as new capital and trade.
The traditional linear framework of development has been beneficial and thriving in the past, and helped us get through eras like the Industrial Revolution. Today, however, trends towards complex inter-connectedness, mean that we need a new framework to deal with the current resulting issues.
The decline of the US’s economic power
America is a leader in international politics: it owns the dollar, has the most advanced army in the world, has powerful allies, is home to arguably the best universities in the world – and yet America’s economy is still very much in a state of uneasy recovery.
The US may have an enormous GDP of close to $20 trillion, the size and reach of China’s economy has soared so dramatically over the past two decades that its money from exported products reached more than $2.3 billion in 2017. They are the largest exporter in the world, and their exports account for 18.5% of their GDP, with no sign of slowing down their rate of growth.
In an increasingly connected world where more and more countries are becoming entwined with the global economy, it’s essential that we, as individuals, try to understand the basics to build a future where economies are stable and ethical. This will help us learn from past disasters and enable us to approach development differently, to create a brighter future.
The economy is not merely a dry area of study involving graphs and math (well, not all of it!); it’s about people – how we behave and interact with one another, and how we respond to significant changes in our lives.
While we can never accurately predict how the economy will change in the future, one thing we can be sure of is that change is inevitable. We must continue to prepare for it and welcome it when it arrives, as both individuals and groups.
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