Global Economy

Globalization from a Macroeconomic Perspective

 What is Macroeconomics?
• Macroeconomics is the branch of economics that examines the
workings and problems of the economy as a whole.
• A central concern of macroeconomics is how the economy as a
whole grows and changes over time.
• Macroeconomics is a field of economics that studies broader
economic trends.
 Macro Economic Factors
• A macroeconomic factor can include something that affects the
course or direction of a given large-scale economy while also
coming with potentially great global consequences.
• These include factors such as inflation, economic growth rates,
price levels, Gross Domestic Product (GDP), national income,
and changes in levels of unemployment.
 Macro Economic Factors
• Inflation
• Inflation is a progressive increase in the average cost of goods and services in
the economy over time.
• Economic Growth Rate
• The economic growth rate is the percent change in the cost of the output of
goods and services in a country across a specific period of time, relative to a
previous period.
 Macro Economic Factors
• Price Level
• A price level is the variation of existing prices for economically produced
goods and services. In broader terms, the level of prices refers to the costs of
a good, service, or security.
• Gross Domestic Product (GDP)
• The gross domestic product (GDP) is a quantitative measure of the market
value of all finished goods and services produced over a given time period.
 Macro Economic Factors
• National Income
• National income is the aggregate amount of money generated within a
nation.
• Unemployment Level
• The level or rate of unemployment is the unemployed share of the
labor force in a given country, calculated and stated as a percentage.
 Types of Macroeconomic Factors

Macroeconomi
c Factors

Positive Negative Neutral

 Types of Macroeconomic Factors

• Positive macroeconomic factors are comprised of events that ultimately

stimulate economic stability and expansion within a country or a group of
countries.
• Any development leading to a rise in demand for goods or services (e.g., a
decrease in price) is considered a positive macroeconomic factor. As the
demand for products and services grows, domestic and foreign suppliers of
the products will inevitably benefit from increased revenues resulting
from increased customer traffic. Higher profits will, in effect, grow stock
prices on a larger scale.
 Types of Macroeconomic Factors
• Negative
• Negative macroeconomic factors include events that may threaten the national or
global economy.
• Concerns of political uncertainty induced by the involvement of a nation in civil
or global conflict are likely to worsen economic unrest due to the redistribution
of resources or damage to property, assets, and livelihoods.
• Negative macroeconomic factors also include global pandemics (e.g., Covid-19)
or natural disasters, such as hurricanes, earthquakes, flooding, wildfires, etc.
 Types of Macroeconomic Factors
• Neutral
• Some economic changes are neither positive nor negative. Instead, the exact
consequences are assessed based on the purpose of the action, such as the
control of trade across regional or national borders.
• The nature of a particular action, such as the implementation or
discontinuance of a trade embargo, would come with a variety of
consequences that are dependent on the country being impacted and the
objectives behind the action taken.
Importance of Macroeconomic Factors
• Economic experts and researchers frequently refer to
macroeconomic factor trends as they try to find ways to clarify
economic policy objectives and strive to achieve economic
prosperity. They also attempt to forecast future rates of
employment, inflation, and other main macroeconomic factors.
Such forecasts affect the decisions taken by states, individuals,
and businesses.
 Globalisation and Macro economics
• By “globalisation” economists specifically mean the increasing
trade liberalization between nations and the rising degree of
openness of national economies which have occurred in the last
decades.
• In many economies, benefits from specialization and trade
advantages have arisen as a result of this process.
 Globalisation and Macro economics
• Due to different factor endowments and production possibilities, national
economies produce a variety of goods at different relative costs. The
exchange of these goods can be beneficial to both of the participating
economies (trade advantage).
• Furthermore, economies can also specialise in the production of the goods
for which they have a comparative production advantage (specialisation
advantage). Both effects lead to a higher level of overall welfare.
• However, there are winners and losers when it comes to globalisation.
Globalisation and economic growth
 Globalisation and economic growth
• The goal of globalization is to boost economies around the world by
making markets more efficient. The hope is that increased global
trade will lead to more competition, which will spread wealth more
equally. Those who are in favor also claim that trade across borders
will help limit military conflicts.
• However, there are downsides to boosting trade between countries.
Some critics point to globalization as a factor in rising nationalism
and income inequality, among other issues.
 Globalisation and economic growth
• The net effect of globalization on economic growth remains puzzling and
ambiguous. Existing empirical studies have not indicated the positive or negative
impact of globalization. However. there is an agreement that for emerging market
economies (EMEs), integration with the global economy has a powerful effect on
economic growth and productivity.
• Recently, researchers have claimed that the growth effects of globalization
depend on the economic structure of the countries during the process of
globalization.
 Globalisation and economic growth
• The impact of globalization on economic growth of countries also could
be changed by the set of complementary policies such as improvement in
human capital and financial system. In fact, globalization by itself does
not increase or decrease economic growth.
• The effect of complementary policies is very important as it helps
countries to be successful in globalization process.
 Globalisation and trade
• The world has witnessed increased trade with globalisation.
• In addition to the growth-driven effect on trade since 1985, trade liberalization
and the opening of many economies have led to a structural change. In so doing,
they overlay and strengthen each other. This is why the growth rate of world
trade is, as a rule, higher than the growth rate of world production
• However, it is important to note that world trade shows more volatility than
production. World trade falls more than production in crises, but also recovers
more quickly and is able to grow at a disproportionately high rate in boom-times.
 Globalisation and GDP
• Based on world bank data for 141 countries, unadjusted for differences in
prices and population, world GDP has increased from US$11.77 billion in
1985 to US$68.83 billion in 2015, which is an increase of 585% or an
average annual growth rate (unadjusted for inflation) of 6.06%.
• However, there are cconsiderable differences across countries and
territories. While all countries experienced an increase in nominal GDP,
the 10 slowest growing experienced a sharp decline in their share of world
GDP from 1985–89 to 2011–15, ranging between 34% and 63%
 Globalisation and GDP
• In contrast, the 10 fastest growing countries experienced an
increase in their share of world GDP between 154 and 5,261%.
Even excluding countries and territories with less than one
million population (Equatorial Guinea, Macau and the
Maldives), there are still seven countries that increased their
GDP by more than ten times between 1985–89 and 2011–15.
• China's GDP increased 30 times
 Globalisation and income
• There seems to be a consensus among many analysts and observers that
globalisation and income inequality have at least some type of
relationship. However, despite a wave of research, the magnitude of the
relationship between globalisation and inequality remains unclear.
• The empirical evidence is ambiguous about the impact of globalisation on
income inequality.
 Globalisation and income
• One of the most fundamental and robust trends since the 1980s
has been the rise in within-country income inequality, which
has been observed in both advanced and developing countries
(e.g., Alvaredo, Chancel, Piketty, Saez, & Zucman, 2018;
OECD, 2015). Several explanations have been put forward to
explain this and one of these explanations concerns economic
globalisation
 Globalisation and income
• It is evident that globalisation reflected by trade and financial integration boosts
economic growth. However, as this economic growth is not distributed evenly,
globalisation might also be expected to create income inequality.
• Even though the empirical studies are still struggling to determine the winners
and losers from globalisation, it can be inferred that nations with similar
economic structures, especially with higher education levels, would benefit the
most from further trade and financial integration. Likewise, it is anticipated that
industries with intensive capital and technology should benefit more than would
labour-intensive industries.
 Globalisation and Inflation
• Global inflationary cycles appear to correspond to an intensification of
globalisation, which tends to propagate common shocks via commodities,
financial and trade channels. Since the early 2000s, global inflation increased
from 4.7% in 2000 to 6.3% in 2008; however, this rate fell to 2.7% in 2009 due
to the GFC and subsequent recession. It was not until 2011, when global inflation
peaked at 5.0%, that it started declining at a gradual pace, reaching 2.8% in
2016.2
• Similar inflationary cycles appear in both advanced economies and EMEs during
these periods showing that it is linked to globalisation
 Globalisation and Inflation
• Policy debates and empirical studies suggest that trade integration is the
basic channel for the potential effects of globalisation on inflation
dynamics. Trade integration, especially when accompanied by policy
incentives, plays an essential role in bolstering competition, with both
direct and indirect effects on inflation. The direct effect is to contain costs,
by curbing workers’ compensation and reducing real import prices. The
indirect effects work through generating more pressure for innovation,
leading to higher productivity.
 Globalisation and Unemployment
• Over the past decades, foreign trade and the cross-border movement of
technology, labor, and capital have been massive and irresistible.
During the same period, in the advanced industrial countries, the
demand for more-skilled workers has increased at the expense of less-
skilled workers, and the income gap between the two groups has
grown. There is no doubt that globalization has coincided with higher
unemployment among the less skilled and with widening income
inequality.
 Conclusion
• While there are general agreement on the effect of globalisation on certain
macroeconomic factors, opinions of researchers vary on others.
• Also the extent of the effect varies from one economy to the other because
of the policies and dynamics at play.
• It is therefore important that the effects of globalisation are studied at
country and regional level for one to fully grasps how it affects macro
economic factors.