The Global Economic System: How Liquidity Shocks Affect Financial Institutions and Lead to Economic Crises by George Chacko, Carolyn L. Evans, Hans Gunawan and Anders L. Sjoman(2011)

This book examines the different global financial systems; in particular the focus is on liquidity. It not only looks at the way these institutions work but also what causes them to fail. If you want to know how a financial crisis really impacts an economy this will be an indispensable text. It does not cover all the aspects of global economics, but it does provide an insightful look at the liquidity crisis in an international context.

The Travels of a T-Shirt in the Global Economy: An Economist Examines the Markets, Power, and Politics of World Trade by Pietra Rivoli (2009)

This book only focuses on a tiny aspect of the economy – the life of a t-shirt. By looking at just this one product though, the writers are able to delve into many aspects of the global economy. It is a truly fascinating read and you are sure to pick up plenty of new information. This book shows how the different parts of the global economy fit in with each other. It does all this with just a simple t-shirt as a starting point.

The Economics of Global Turbulence by Robert Brenner(2006)

This book offers a unique look at the current global economy. The views reached in the text won’t be shared by everyone, but the arguments provided by the author are compelling and backed with evidence. This is an easy book to read and many readers will find that it is hard to put down.

Managing in a Global Economy: Demystifying International Macroeconomics by John E. Marthinsen (2007)

Although this book is written specifically for MBA students it is suitable for almost anyone with an interest in international macroeconomics. The author does a good job of explaining this topic in simple terms and with plenty of real world examples. By the time the reader has finished a few chapters they should feel that they understand the global economy a lot better. It is also good book to have in your library for reference purposes.

The Complete Idiot’s Guide to Global Economics by Craig Hovey and Gregory Rehmke (2008)

I’m not a huge fan of the Complete Idiot’s Guide series but this book on Global economics is one of the better ones. It covers all the main topics in enough depth to allow the reader to get a good idea about the main issues. This is probably more useful as an introduction from which to explore issues further with more reading. If you just want a basic understanding of global economics it will be perfect.

There are both similarities and differences between NAFTA and the European Union. The main similarity is that both of these agreements involve a single approach to trade between the countries. The way that the agreements differ is that most of the European Union now has a single currency.

How NAFTA Works

The North America Free Trade Agreement has been in place since 1994. It was a controversial idea, but the plan was that such a move would not only promote prosperity but also bring the countries closer together. Since the time of its introduction there has been an additional two agreements added to it; the North American Agreement for Economic Cooperation (NAAEC) and the North American Agreement for Labor Cooperation (NAALC). All these different agreements share the same basic motive which is to make it easier for business to flourish within North America.

Before NAFTA there were many complaints about the rate of tariffs between different countries in North America. This made moving products from one country to another less attractive because there would be less profit to be made. By removing many of these tariffs it encouraged businesses to sell their goods and services across the whole of North America. This is good news because it greatly increases the number of potential customers that any business will have.

The Impact of NAFTA

Even those people who were initially critical of the North America Free Trade Agreement have needed to admit that it has been successful. The increase in trade between the US and Mexico has risen dramatically in recent years as a result of this legislation. By removing high costs associated with moving products between countries a lot of businesses have been able to expand their operations. It is great for the consumer because it means that they now have access to a lot more products that are available at reasonable prices. As part of the NAFTA agreement it is now necessary to provide labels on ship goods that appear in English, Spanish, and French. This makes it a lot easier for those people dealing with the goods who don’t have English as their first language.

As well of the great successes of NAFTA there have also been some less welcome results. The rise in the number of illegal immigrants coming to the US from Mexico has been blamed on this legislation. This sudden influx of undocumented workers has led to raising concerns in some parts of the US. It has become a highly politicized topic and emotions can run high about what should be done about it.

What is Dependency Theory?

This theory is comprised of three main ideas:

• Wealthy nations are able to control poorer nations and make them dependent. This is done using a variety of means such as political and economic interventions.
• The wealthier nations also use the media, education systems, and international sporting events to maintain their control over the poorer nations.
• The rich nations benefits from the resources of the poorer nations so that they can enjoy a much higher standard of living.
• If a poorer nation makes any attempt to resist against the power of the rich nations they may have to face military force or economic sanctions.

This theory argues that the rich nations are only able to enjoy their privileged position because of their ability to keep other nations down. Although the days of colonial powers is said to be over this theory views that things remain essentially the same. The poor countries are still forced to hand over their wealth to the richer countries. The World Bank and International Monetary Fund are viewed as the main forces used to keep some nations down.

Free Market Economy versus Dependency Theory

One of the main claims of those who support a free market economy is that this system is fair. The market forces are viewed as working to keep everything in check and to lead to a situation where everyone can benefit. Dependency theory argues against this because it views the current situation as being one where only some countries can benefit. Free market economy theorists are all for free trade between companies, but this leaves the door open for exploitation – according to dependency theorists.

Although this theory tends to be used to describe the situation between different countries it can also be used to describe the situation within one country. This is because you will usually find within any country there are rich urban areas and poorer rural areas. It could be argued that those living in the rich parts of the country get to benefit from the resources of those who are less privileged.

Criticisms of Dependency Theory

This theory seems to have been particularly popular during the 1960s, but it has since lost some of its attraction. The success of countries such as India seems to argue against the idea of dependency. As such countries move from underdevelopment to becoming serious economic heavyweights it can be used to argue against the theory. There is also claims that attempts to apply development theory to economic policy has led to disastrous economic consequences. There still remains quite a lot of support for this theory but not as much as there once was.

What is Socialism?

Socialism starts with the assumption that if an economy is not somehow controlled it will lead to a situation where the rich get richer and the poor will have much less opportunities in life. Socialism does not believe that market forces by themselves are fair, but rather view them as only benefiting the rich and powerful. Socialist philosophy argues that the resources in a country should be owned by the government or the public and that they should be controlled by cooperation between humans rather than any type of market force. The ideas of socialism grew out of the unfairness that many saw in society in previous centuries; where the rich had everything and the poor struggled to get through each day.

Another crucial difference between socialism and capitalism is in regards to wealth. Capitalists believe the individual should work for their own wealth and get to enjoy what they work for. In a socialist economy though, the aim is to work to make society richer and then this is divided among all the members of that society. In a socialist society it is usually the government that decides who get what, but the emphasis is on each individual working for the benefit of the group rather than themselves.

What is Capitalism?

The fundamental basis of capitalism is that it is competition that makes a society rich and ensures fairness. This drive to succeed creates market forces and it is this that decides how goods are distributed and who gets to receive the larger slice of the cake. Supporters of this philosophy believe that it is crucial that the individual be able to create wealth for themselves as this is what drives competition. It is also generally believed that any attempt to interfere with market forces is a bad thing. In a capitalist society the individual will own different resources and the only real role of the government is to ensure that people play using the agreed upon rules.

Supply and demand is what capitalists believe encourages fairness in this type of system.  This will not only determine the price of goods and services but also the price of labor – the wages that people get for their work. It is argued that if the supply and demand are not interfered with they will create the fairest situation.

It is unlikely that the debate between socialist and capitalist supporters will end any time soon. Both sides can provide a compelling argument and this is why people can be so passionate about their beliefs in this regard.

The Process of Determining Currency Exchange Rates

A full understanding of how currency rates are determined is a complex issue that would be way beyond the scope of one small article on the subject. It is possible though, to provide a very basic introduction to the subject.

The simplest way of looking at exchange rates would be to discuss purchasing power parity. Imagine that a loaf of bread cost $2 in the United States and €1 in Europe. As far as purchasing power parity is concerned €1 is worth $2 and $1 is worth 50 European cents. This is a very simple explanation and the currency exchange rate involves much tougher calculation that this.

On a day to day basis the value of a currency is usually determined by the demand and supply of that currency.  If the demand is greater than what is supplied then the price of a currency will tend to rise. If many people are selling and nobody wants to buy then this would cause a fall in the value of the currency.

There are a number of reasons why the demand for a currency can go up or down.  One of these reasons is the need for a currency for transaction purposes. For example, if I live in Holland and you live in America I will need US dollars to buy your products. There are millions of transactions like this occurring around the world and the demand for different currencies will depend on how much is needed for transactions. Another reason why the demand for a currency can rise or fall is speculation; investors will buy or sell currency in the belief that the value of it will later rise or fall.  The reason why currency rates are constantly changing then is closely connected to supply and demand.

History of the World Bank

The World Bank was created in 1944 at a meeting known as the Bretton Woods Conference; in attendance were some of the most powerful nations at the time including the UK and the US. The bank was created to provide low interest loans for poor countries who are trying to develop or to reconstruct after natural or man-made disasters.

The first country to benefit from loan was France, but they first needed to remove the communists who had been elected into the French cabinet. After 1947 many more European countries received loans from the bank.  Since the late 1960s the bank has been mainly focused on providing loans to the less developed parts of the world. During the 1980’s it came under a lot of criticism for encouraging poorer countries to meet economic criteria at the expense of health and social care. In order to combat criticism there are now NGO’s and environmentalists who work for the World Bank.

Current Goals of the World Bank

There are currently 184 countries who are involved in the World Bank and it has its head office in Washington. All the countries involved do have a say though and are responsible for funding the institution. The main focus of the organization at the moment is on achieving the millennium goals. These goals are directed towards reducing child mortality, reducing poverty, and helping countries deal with diseases such as HIV/AIDS.

Criticism of the World Bank

The World Bank has frequently been accused of causing more harm than good. The biggest criticism seems to be concerned with their emphasis on pushing countries to become part of a free market. The argument is that trying to do this too quickly can cause too much upheaval in the short term. Others argue that the ‘one size fits all’ approach of the World Bank is the wrong way to deal with world poverty. Another important criticism is that the members of the World Bank will always put their own interests first.

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You can find more engaging infographics concerning economics.

Data source: 2007 CIA World Fact Book

Data source: 2008 CIA World Fact Book

Data source: International Monetary Fund