Essay on Macroeconomic Indicators of Globalization

Introduction

The world is increasingly becoming a global village where interaction is being enhanced through technological advancement. The impact of technology has been felt in every aspect of life as these advancements have affected how day to day activities are lived out. One of the aspects in which the impact of technology and other societal advancements have significantly been affected is the business scene. Businesses, through the use of technology, have been able to scale upwards and expand into new geographical markets. As a result, globalization has become a central subject of scholarly research. This report shall, therefore, seek to evaluate the impact of globalization on macroeconomic conditions of various countries of different economic status. The report shall evaluate various macroeconomic indicators in the United States, China, India, and Australia in an effort to determine the impact globalization has on these indicators. The various macroeconomic indicators to be used will include Gross Domestic Product (GDP), GDP per capita, and GDP growth rate, foreign trade as a percentage of GDP and labor market statistics such as unemployment. Using these macroeconomic indicators will facilitate quantitative analysis of the impact of globalization on economic conditions.

The rationale for the study

With the intensifying international competition, especially between developed countries such as the United States and China, there is an increased need for finding ways to distinctly advantage one’s country. Globalization has presented itself as a means towards achieving this goal as it allows the firms in a country to grow into new geographical markets. This economic expansion is a driver of macroeconomic growth as it increases revenue collection by the government as well as an increase in overall production. Carrying out this study, therefore, allows for the quantitative evaluation of the impact of globalization on the economics of various countries and strategize on what economic policies need to be implemented so as to improve globalization.

Literature review

Nilson (2010) defines globalization as the process which governs the integration of various societies and economies. He presents a country’s globalization rate indicator as one of the most pivotal factors that affect their economic development. High globalization indicators are positive influences on a country’s economy as it shows that their economy is well integrated with other countries in the region as well as globally. There are, however, different types of globalization, and how each one is implemented determines its influence on the economy of a country. Ruettimann and Bruno (nd) posit that globalization can be classified into two main categories: physical or material globalization that refers to specialties and commodities and the financial or immaterial globalization that refers to convenience and standards. They further present that globalization, as pertains to these two classifications, is implemented differently. Material globalization allows products to be produced within one plant and distributed throughout the entire world; however, immaterial globalization requires the production of products within a market for itself. The second type of globalization is mostly used by multinational corporations, which can use different means of entering markets such as foreign direct investment and franchising and licensing.

The rise in globalization has been facilitated by rapid advancements in communication and transportation technology. These technological advancements have made global interaction much more accessible, and this, in turn, has facilitated the growth of international trade, culture, and sharing of ideas. Despite globalization primarily being an economic process, diplomacy and conflict are also pivotal elements of globalization as it requires interaction between different cultures, beliefs, and ideologies. There is also a distinct difference between business globalization and economic globalization. The former refers to the diminution of barriers to international trade, such as taxes and tariffs, while economic globalization is the process through which international economic integration is promoted and nurtured. Economic globalization is mainly aimed at creating an international marketplace, which requires the homogenization of consumer tastes, preferences, and producer prices (Riley & Kennedy, 2005).

Erixon (2018) postulates that globalization has had significant benefits to both consumers and businesses. He uses the Western economy to highlight these advantages. The research finds that globalization was immensely advantageous to Western countries as it allowed the rapid spread of new technologies that made production more effective and efficient. The spread of technology also provided new economic opportunities to labor in developing and developed economies, thereby not only benefitting countries such as the USA and Britain which have had massive economic power for long, but also emerging economies such as India. Globalization also created a much higher premium on human capital, thereby allowing firms to employ labor with the specific expertise required.

Samimi and Jenatabadi (2014) carried out a study to evaluate the impact of globalization on economic growth and what factors determine the specific impact that globalization has on a country’s economy. Their findings were that the liberalization of any country’s economy and the promotion of free trade ultimately has a positive impact on their economy. However, countries with higher skilled and educated workers as well as better developed financial systems benefit more from globalization. This is consistent with Erixon’s findings that posited that western countries had gained the most benefits from globalization. Samimi and Jenatabadi also concluded that high and middle income earning countries benefit more from globalization when compared to low income earning countries.

Nonetheless, globalization does present a number of inherent risks, as highlighted in the study by Samimi and Jenatabadi (2014). The most significant drawback of globalization is that it supports and exacerbates global economic inequality. Evidence pointing to this includes the growing divide between rural and urban populations in countries such as Brazil, India, and China, which are increasingly globalizing their operations. Rising inequality introduces social and political tensions as well as financial instability, all of which constrain economic growth. Globalization also contributes to inflation as there is an increased demand for products such as energy and essential commodities such as food. As a result, there is a steep increase in the prices of such goods and services. Inflation disproportionately disadvantages poor communities who are unable to afford these essential commodities.The international integration of economies as a result of globalization also presents a massive risk to countries in the wake of economic crises. This risk is presented as the complex integration of economies means that shocks to one economy will reverberate in all other interconnected economies. This effect was in full display during the 2007-2008 economic crisis that burgeoned in the United States but inadvertently affected the world economy.

Despite the numerous drawbacks and challenges towards the achievement of full liberalization of international trade and globalization, there is a consensus on the benefits of globalization and the crucial role it plays in improving the overall economy of both developed and developing nations. Therefore, a critical analysis of current trends in globalization will enable the formulation of more efficient and effective globalization strategies that will seek to address some of its drawbacks, such as the promotion of inequality.

Research Methodology

This research shall analyze the economies of two developed and two developing nations to evaluate the impact of globalization on the economy. By evaluating developed and developing economies, the research can build upon the foundation laid by other scholars who posit that globalization has a different impact on these two types of economies. The research shall utilize secondary data, thereby saving time on the collection of data and allowing the study to focus more on the analysis of the data and what findings and conclusions can be drawn from it. The developing economies chosen to be included in the analysis are Australia and the United States, while the developing nations selected are India and China. The main criteria used for differentiating developed and developing countries is the GDP per capita. Developed countries have a GDP per capita that is higher than $12,000 (USD). The report shall use various macroeconomic indicators to evaluate the impact of globalization on these countries’ economies. Macroeconomic indicators reflect the economic circumstances of a country and therefore, can be used to accurately depict the impact of various policies and strategies. Economic stakeholders such as the government, analysts, and traders use macroeconomic indicators to assess current and future economic conditions for informed decision making.

Australia

Australia is the best-performing economy in Australasia, with a GDP worth approximately $1.45 trillion in 2019. Their GDP represents an estimated 1.2% of the global economy, therefore, making them an economically significant nation. Their current GDP per capita is almost $57,000, thereby qualifying them as a developed economy. Australia’s economy has been open to international trade with this section of its economy, representing 43.1% of their GDP in 2018. The country is also rated as the fifth freest economy globally, making trade freedom in Australia one of the highest in the world. Globalization is, therefore, a pivotal element of the country’s economy. Australia has therefore sought to establish trade relations with several countries, both within and outside the Asia-Pacific region, as they seek to increase globalization and integrate their national economy with the global economy. Their main trade partners are the United States, India, China, South Korea, Japan, Thailand, and Germany; however, their most instrumental trade partner is China, whose economy has a significant impact on Australia’s.

Globalization in Australia was at its peak between 2010 and 2011 due to the terms of trade boom. The terms of trade boom happened as a result of an increase in the price of Australian commodity exports, such as natural resources. As commodity exports represent a significant share of Australia’s exports, an increase in their prices caused the ratio of the export prices to import prices to increase considerably.

Figure 1: (Reserve Bank of Australia, 2017)

The terms of trade boom represented increased globalization of the Australian economy as they could now trade more with other countries and in favorable trade terms. Globalization in Australia during this period resulted in an increase in investment in mining. As most of the exports driving globalization in Australia were commodity exports, there was an increased interest in the mining industry with a view to capitalizing on the increased price of minerals. The mining sector in Australia accounted for approximately 1.5% of their national GDP in the fifty years prior to the trading boom. However, after the trading boom, investment in mining increased from approximately $20 billion to $130 billion and accounted for 9% of their national GDP.

Globalization in Australia’s economy also resulted in a higher demand for human capital and a subsequent rise in wages. As a result, the country’s unemployment rate dropped between 2009 and 2013 (Trading Economics), and there was an increase in consumer spending as a result of the increase in wages. During this period, there was also increased government revenue as the increased investment and production led to increased royalty and tax receipts by state, territory, and the federal government. The increased investment in the mining industry and higher incomes led to an increase in overall demand within the economy and ultimately resulting in high inflationary pressure.

The United States

The US is considered to be the world’s most developed economy, and much of its economic success is a result of the globalization of its economy and businesses. Much of modern-day globalization has been driven by multinational corporations in the United States and other European countries. Economic globalization in the United States has consistently risen from 1970 to the present day, with their average on the economic globalization index being 54.95 with a maximum of 68.13 in 2017 and a minimum of 39 in 1970.

Figure 2: (Agbafe, 2018)

As the model for international globalization, the United States has participated in globalization of production as well as consumption and immaterial globalization, which refers to financial globalization. Globalization in the United States has had several advantages such as increasing consumer choice in goods and services as well as lowering the price of these products. The lowering in prices can be attributed to the globalization of production, which refers to the outsourcing of production to countries with lower labor wages and lower costs of raw materials. Multinational corporations in the United States, such as Apple and Nike, have outsourced production to countries such as China and Indonesia, where wage prices and the prices of raw materials are much lower. These cost savings allow them to produce goods at a lower price for the United States market, thereby encouraging the consumption of these products and gaining large profits for these corporations.

Globalization in the United States has significantly increased productivity, and this has increased capital transfer as well as making it more efficient. The New York Stock Exchange is the largest capital market in the world and lists several companies located in different countries throughout the world. Such smooth capital transfer as allowed by globalization enables the United States to become an investment hub and gives them significant control over the world economy. This flow of investment to the United States has enabled some of its industries, such as the healthcare sector, to become world leaders; the United States controlled approximately 45% of the global healthcare industry.

China

China is quickly growing into a developed nation as the country has the highest GDP in the world. The development of China’s economy is primarily attributed to government reforms that placed globalization of their economy at the forefront of driving economic growth. Globalization in China has contributed to increasing the international flow of people, goods, and capital. China’s insistence on promoting international trade and globalization has led to the development of the Belt and Road Initiative. This initiative seeks to improve infrastructural development and investment in more than 70 countries to facilitate further globalization (Wang, 2019). China’s economy, over the past few years, has been built upon export as a core element of their GDP. However, as their GDP has grown over the years, alongside their GDP per capita, consumption demand within the country has grown due to higher wages. The increase in consumption demand has, therefore, led to exports becoming a less significant portion of the GDP and internal consumption driving economic growth.

Figure 3: (Wang, 2019)

India

India is also one of the world’s most sought after investment destinations as the country increasingly globalizes its economy. The liberalization of India’s economy in 1991 allowed for the country to trade more freely and with fewer barriers with the rest of the world, therefore signaling the beginning of widespread globalization.

Figure 4: (World Bank, 2020)

Nayar (2006) posits that globalization in India has accelerated economic growth and facilitated industrial growth. It has also promoted competition in India’s commercial space as Indian firms have to compete with global corporations for market share. Indian firms have also been able to expand into the international market, and as a result of lower-wage prices in India, products from Indian firms are much cheaper than international alternatives, consequently improving their competitiveness. However, prior to the 2008 economic crisis, India’s economy was not as integrated with the international economy when compared to similar developing countries such as China and Russia, and as a result, India’s economy was less destabilized. The minimal impact of the global financial crisis on India’s economy shows that globalization should be controlled so as to minimize the international influence on a country’s economy (Mukherjee).

Discussion and analysis

From the four countries highlighted above, it is evident that various indicators can be used to evaluate globalization and its extent in an individual country’s economy. As globalization refers to the international integration of economies, foreign trade is one of the most significant indicators of economic globalization. China is the world’s largest exporter, with its exports accounting for 12.8% of global exports. The United States follows China as the second-largest exporter, with its exports accounting for 8.6% of global exports.

Globalization is inherently pegged on foreign trade as the movement of goods and services from one country to another country links their economies and allows these countries to foster mutually beneficial trade agreements.

Another critical element of globalization is the expansion of business enterprises into other countries around the world. The globalization of enterprises has facilitated the creation of international brands that are recognizable throughout the world. Such international brands include Coca Cola, Mercedes, Sony, and several other companies. The United States is at the forefront of enterprise globalization as it has successfully exported American culture into the world, and it has also exported American brands. In this aspect, globalization has led to a specialization in production where countries mainly direct their capital and raw materials into the production of goods and services that they have a comparative advantage in. This has facilitated the flow of goods and services internationally as countries engage in the efficient production of what they can in large amounts and import what they cannot efficiently produce.

Other indicators of globalization, as evidenced by the countries mentioned above, are the flow of capital and technology. Immaterial globalization has resulted in the international integration of financial systems, thereby making capital transfer more accessible and more efficient. The Australian stock exchange market, for example, has been the best performing equities market globally over the past 120 years; it has also experienced the second lowest market volatility globally (LiveWire, 2020). The capital market in the United States, on the other hand, is the most advanced and utilized globally. This shows that capital flow is imperative in ensuring globalization; this is especially true in a developing world where investors are increasingly seeking to assets such as stocks and bonds for investment as opposed to material investment such as real estate.

Conclusion

Globalization is evidently central to the development of an international economy in which goods and services move freely between different countries. Globalization is important to both developed and developing nations as it allows for the liberalization of the country’s economy. Liberalization of the economy subsequently leads to more employment as well as an increase in competition, which increases innovation and improves efficiency in production. Countries should, therefore, strive to consistently promote the integration of the national economy into the global economy through increased trade, capital flow, and foreign investment. Countries should use various globalization indicators such as globalization of investment, trade, and technology to govern their globalization policies. It is the government’s duty to ensure that their countries are able to reap the benefits of globalization while protecting them from the dangers of international economic integration, as witnessed in the financial crisis of 2008. As globalization increases and international integration becomes widespread, countries can develop global value chains that aim at improving the efficiency of production and distribution of goods and services.

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