The world has undergone drastic changes in the past few years. The events in one country ultimately affect other countries. The economic activities of all countries in the globe are intertwined together. This was evident in the 2008 economic recession. Despite the recession having begun in the U.S., the world’s largest economy, virtually all countries around the globe felt the effects of the recession. Various companies have expanded their economies beyond their borders. The world is experiencing unprecedented globalization of production, finance, markets, communications, and labor. This is the global economy. Global competition has various advantages and disadvantages. As American companies relocate to other countries, where there is low cost of production, such as China and India, they deny Americans thousands of jobs. However, relocation enables the companies improve their competitiveness and increase their profitability. In return, these companies pay huge taxes that help to support other sectors of the economy.
The global economy did not develop overnight. Its development has been gradual. Technological advancements are the main factors that have fueled the development of the global economy. Technological advancements in transport and communication are the most significant factors that have spurred the development of the global economy. The development of the internet has also played a greater part in the development of the global economy. Most activities in the global economy rely heavily on the internet. The internet enables real-time sharing of information between people in distant location. It has helped break the barrier of place in communication. The internet will continue to affect how various countries conduct their economic activities significantly.
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History of the Global Economy
The global economy is rooted in capitalism. Going underground of the British economy significantly affected the development of the global economy. The fall of the British economy necessitated the country to look for external sources of energy and raw materials. It led to the gradual substitution of minerals with manufacturing plants. This played a significant role in opening up vast sources of raw materials and energy, freeing the economy from the resource constraints of organic plat-based economy. Availability of cheap and more abundant energy helped in reduction of costs of transportation. This facilitated the transportation of goods over long distances, thus, increasing international trade. It was at this stage that international division of labor begun. Plant-based economies benefited tremendously through value addition of various products. Plant based economies necessitated technological advancements that would enable plants to function effectively. Countries that pioneered these technologies improved their military might significantly.
Development of the mineral-based economy was in three phases. During the first phase of the development of the global economy, few countries – Core countries – engaged in value addition activities. These countries had technology, capital, science, and manufacturers who enabled them to engage in various value addition activities. These countries included Britain, United States, France, and Germany. On the other hand, many countries – Periphery countries – did not take part in value addition an activity due to several constraints (Rice 44). These countries included nearly all of Asia and Africa. These countries lost their sovereignty, as they were forced to open up their economies to the few countries that engaged in value addition activities. However, Periphery countries experienced very little benefit in improvement of their living standards due to the opening up of their economies to the Core countries.
In the second phase of the development of the mineral-based global economy, there was decentralization of power from the Core to the Periphery. This process reduced the concentration of manufacturers in the Core countries (Fischer 66). This resulted in unprecedented economic growth of the Periphery countries. In the third phase, there was recentralization of power to the Core countries (Fischer 66). This led to rapid economic growth of the Core countries at the expense of economic development in the Core countries
However, the present global economy is not primarily mineral-based. Economic development is slowly shifting towards knowledge and service-based economy. Technological advancements help drive the economy of various countries. Countries that have the highest amount of technological advancements are guaranteed of high economic growth. In addition, the contemporary global economy has experience significant advancements in the service sector. There has been rapid growth of the financial sector of the economy. The financial sector accounts for a significant percentage of economic growth in most advanced economies. However, overreliance on the financial sectors exposes the economy to the wastes of the financial sector. However, modern global economy is not fully detached from reliance in minerals. The global economy relies heavily on energy. Oil is the principal source of energy. Thus, changes in the price of this mineral affect the global economy significantly.
Effects of Boom Year on the U.S. Economy
Boom year is a period characterized by unprecedented economy growth. During this period, the economy is thriving in all sectors. During boom years, people have a large amount of disposable income. Increase in consumer spending helps fuel the economic growth. However, economic boom usually lasts for only a few years. After the end of boom years, countries face various problems necessitating them to formulate strategies that would enable them adjust to the problems.
Boom years increase the amount of money that Americans have. This leads to an increase of money that Americans are willing to spend. This makes Americans willing to spend more money on foreign products. This, in turn, leads to an increase of imports. In most instances, increase in imports is larger than increase in exports due to the economic boom. This increases the trade deficit of the U.S. In fact, economic boom between 1996 led to a surge in the U.S. trade deficit. During this period, the average growth of the U.S. GDP was 4.2 percent, as opposed to -0.2 percent in Japan and 2.5 percent in the Euro area – the main U.S. trading partners. However, if the growth rate of the U.S. was slower compared to the Euro area and Japan, the trade deficit would have been smaller (Papaioannou and Yi 1). Increase in the trade deficit exposes the U.S. to a myriad of problems.
Proliferation of cheap imports harms American companies not to benefit fully from the economic boom. Economic boom leads to over production in various domestic companies. Overcapacity and over production, lead to reduced profitability of various manufacturing companies (Brenner par. 1). This leads to stagnation in the growth of these companies. Economic boom leads to an increase in market activity. This makes corporations build excess capacity during the financial market run up. This leads to a significant increase in the paper wealth of corporations. Increase in paper wealth makes corporations make numerous additions in their plant and equipment. However, these equipments have low return of investment. This makes companies have excess production. However, companies are unable to sell their products at prices that would enable them get adequate profits to cater for increased investments (Brenner par. 5). This makes manufacturing companies prone to several problems. These include decline in their investment, rise in debts and increased bankruptcies. This necessitates companies to take measures that would ensure that they will continue being profitable even after the end of the economic boom
Comparison between China and the U.S. in the Global Economy
The U.S. and China are two of the major countries that significantly affect the global economy. The U.S. has the world’s largest economy, whereas China’s economy is the second largest economy. The U.S. has maintained its position as the global economic super power for many decades. However, China emerged as an economic superpower very recently. This has been a result of consistent sound economic policies. Sound economic policies have enabled China to maintain an average growth rate of 10 percent for 30 years.
Strong growth of the Chinese economy promises to help the world recover from the economic recession. Economic recession resulted in an increase in the debt load of various countries. The U.S. is one of the countries that have the highest debts. The U.S. has debts that total $15 trillion. Debts hold back the U.S. economy. Other factors that hold back the U.S. economy are investment slowdown and a weak property market. China holds the largest amount of the U.S. debt load. The growth of the Chinese economy is expected to continue in the near future.
As the Chinese economy continues to grow, its contribution to the world economy would continue to grow. According to the World Bank, China’s contribution to the global GDP increased from 4.6 percent in 2003 to 14.5 percent in 2009. The U.S.’ contribution to the global economy is approximately 28 percent. China’s GDP is currently approximately $7 trillion. China’s fast economic growth accounts for a great percentage of the global GDP growth. On the other hand, the U.S. has a GDP of approximately $15 trillion (Reiss and Farole 60). However, despite its high GDP, the GDP growth of the U.S. is slower than that of China. Thus, the U.S. plays a smaller role compared to China in fueling the global GDP growth. It is projected that by 2020, China will account for approximately 25 percent of the global economy.
Chinese thriving manufacturing business helps drive the economy. Various American companies prefer to outsource to China due to the cheap cost of labor in China. Thus, American companies export raw materials to China, where Chinese manufacturing plants use the raw materials to make various products. China is the major manufacturer of various electronic products for various American electronic companies. China also manufactures textiles, which form a sizeable percentage of its exports. In addition, China has various manufacturing plants that produce various electronic and other products (Welch et al. 519). Thus, China does not solely depend on international companies that outsource to the country. The low value of the yen helps keep the value of Chinese exports low. This increases the competitiveness of Chinese exports. This is the main reason that makes China control the value of the yen, despite complaints from other countries such as the U.S.
The U.S has a diversified economy. The country does not rely on only one sector for its growth. Technology and service industry contribute greatly to the economy. The U.S. has various technological companies that manufacture high-end devices. The U.S. also has a thriving financial sector. The U.S. financial sector makes billions of dollars in profits annually. These make the U.S. to serve economy (Reuter 1). In addition, there are various U.S. multinationals, which have operations in various countries. These companies repatriate their profits to the U.S. These profits from these companies help in driving the U.S. economy. The U.S. has the largest consumer market in the world. This market helps fuel American companies. Thus, it is pertinent to say that the U.S. economy is knowledge and service-based economy. In addition, the country has various manufacturing companies that help fuel the country economic growth.
The global economy has undergone drastic changes to reach its state. Technological advancements are one of the main factors that have fueled the development of the global economy. Capitalism fuels the global economy. China is the only major world economy that is not capitalistic. Capitalism will continue being the major force behind the growth of the global economy. However, it remains to be seen whether China will become a capitalistic economy in the future.