What is a Global Economy?

Definition: A global economy is an economic interdependence established between the most influential countries that drives the worldwide economic environment. It is also the aggregate economic output, movement and influence of all countries.

What Does Global Economy Mean?

The global economy can be defined as each individual country’s economy added together but that is not the only way to portrait how the world economy works. The 20th largest economies account for 80% of the world’s economic output and the five biggest economies are big enough to impact the whole world with their developments. If one of these five economies suffer from a natural disaster or any event that causes an economic downturn it will have sequels on the global economy due to the interconnections caused by international trade.

On the other hand, global financial markets are also ruled by the biggest economies since they possess a big load of resources that can be used to finance other country’s endeavors and projects. These highly influential countries understand the leverage they possess by having these huge economic systems and they often employed them to push political agendas.

Example

The United States financial structure and stability is based on trust. For many years, the country has shown a perfect financial record when it comes to debt payments. For this reason, the U.S.’s debt is graded AAA, this means the country can get the lowest interest rates on all its financial instruments. Recently, issues like large budget deficits and a negative trade balance have created doubts about the long term stability of the country’s finances.

The global economy is worried about any possible loss of the U.S. financial instruments. This will cause an increase in its financial costs, which will create even bigger budget deficits. This, in turn, will create the need to perform budget costs that will have a global impact, since a 1% budget cost on the U.S. budget can have considerable effects worldwide. This is an example of how the global economy works, where one country’s decisions might have a big impact in the overall worldwide economy.