Understanding the Global Economy: Sectors, Globalization, and Economic Integration
1. The Economy
People have needs, and it is necessary to produce goods and provide services to satisfy them:
Products and goods are objects. They can be:
Consumer goods, which are consumed right away.
Intermediate goods, which are used to produce other goods.
Services are activities carried out by people.
Economic activity is to produce, buy, or sell a product or service. Economics is the study of the production and distribution of goods and services to satisfy human needs.
1.2 Who Carries Out Economic Activities?
Economic agents are elements that carry out economic activities:
People are the consumers. They buy goods and services to satisfy their needs.
Businesses produce and sell goods and services. They need to generate a profit to survive.
Public service includes the State. The State taxes consumers and businesses to finance services and build necessary infrastructure.
1.3 What Are the Stages of the Economic Process?
There are three stages in the economic process:
Production: Activities to produce goods or services.
Commercialization: Activities related to the sale of goods or services.
Consumption: When goods and services are bought to satisfy a need.
1.4 What Factors Affect Economic Activity?
Factors are the elements necessary to produce goods and services:
Raw materials: Resources taken from nature that are used or transformed to satisfy our needs.
Human resources: The workers that perform the intellectual and physical activities necessary to produce goods and services.
Technological capital: The combination of knowledge and techniques used in economic activities.
Financial capital: The money used to pay for raw materials, human resources, and technological capital. Also, the buildings and infrastructure used to carry out economic activities.
2. The Sectors of the Economy
We can divide economic activity into different sectors according to the work involved:
The primary sector includes activities related to natural resources: agriculture, fishing, forestry, and mining. It provides us with food and raw materials.
The secondary sector includes industries that transform raw materials into intermediate or consumer products. It includes energy and construction.
The tertiary sector includes all activities that don’t produce physical products. It provides services such as healthcare, education, retail, marketing, transport, and banking.
The quaternary sector has appeared as a result of the growth of the service sector. It includes finance, information, technology, telecommunications, R&D, and management.
2.1 The Economic Sectors Around the World
The size of each of the economic sectors in a country determines its type of economy.
In less developed countries, the primary sector is more important, and the active population mainly works in agriculture.
In developed countries, the tertiary sector is the most important, and there is an industrial infrastructure.
5.1 The Dimensions of Globalization
Globalization has several dimensions:
Economic:
Trade: Each country specializes in particular economic activities and imports other goods from other countries; as a consequence, trade increases.
Standardization: Products have become standardized and can be manufactured anywhere.
Finance: The free movement of capital makes it possible to invest in any country.
Cultural: The spread of cultural elements (cinema, music, fashion, and food) as a result of development in communications. Western culture is consumed globally.
Political: The creation of transnational organizations such as the G8 and the World Trade Organization (WTO), which make political, social, and economic decisions that affect the entire world.
5.2 The Causes of Globalization
Technology has made globalization possible due to advances in transport and communications:
Improved transport networks allow for the easy movement of goods and people:
Transport is cheap and allows products made in Asia to be sold in Europe or North America at competitive prices.
People travel more often and over longer distances, too, usually by plane. Some airports have become important global connection points.
Improvements in communications facilitate the flow of information and the movement of industrial and financial capital.
5.3 Multinationals
Multinationals are large companies located in more than one country. They have a head office that makes strategic decisions and subsidiaries that carry out these decisions.
The head offices of multinational companies are located in developed countries. In fact, about 45% of the biggest companies are located in the United States.
Subsidiaries can be located in developed countries but are especially in Asia due to the abundance of cheaper labor and growing markets.
5.4 Offshoring
Offshoring is when companies leave developed countries and relocate part of their operations to developing countries.
Companies do this to increase their profits because, in developing countries, wages are lower, raw materials are cheaper, and there are lower taxes and less restrictive environmental regulations.
Consequences:
Negative: Increased unemployment in developed countries and pollution in developing countries.
Positive: Increased employment in developing countries, lower production costs and lower prices, and an increase in consumption.
5.5 Economic Integration
To promote globalization, trade blocs have been created. Trade blocs are agreements between countries to reduce or eliminate barriers to trade. Blocs can:
Eliminate duties on goods imported and exported within the bloc.
Introduce a monetary union; member countries share a common currency.
The members of a trade bloc have less freedom to regulate their own economies. In some cases, countries sacrifice social well-being to attract foreign investment.