The year 2019 was fairly good. The world economy was doing great, everyone was happy, and business was not bad. However, the following year, things changed. Coronavirus came, claimed many lives, and sent the world’s economy crashing. Fast-forward to two years later; we have endured covid-19 and a few variants–but why is the world economy still crashing?
Contrary to what some people think, the world economy isn’t collapsing. In fact, after the memorable collapse in 2020, the world started recovering. As a result, it is projected that the world economy will grow by 4% in 2022 and 3.5% in 2023.
Is the world economy collapsing? Is the world economy still reeling from the coronavirus pandemic? Why is the world economy collapsing? If you care so much about the world economy and wish to know about its health status, continue reading.
Why Is the World Economy Collapsing?
Let’s take a good look at what an economy is before we embark on this interesting journey where you get to understand the world economy.
To understand what the world economy is, you must understand what an economy is. So what is an economy?
An economy is an overall activity related to producing and consuming goods and services in a particular area. For instance, the city of New York has a unique economy. This economy takes into consideration all of the goods created in the city. These goods are physical items like kitchen appliances that are made in a factory, and they are intangible products like new software and website that are made by people and companies in New York. The New York economy also considers companies that provide services in the state, like Hotels, Repair shops, etc.
All of the business carried out in New York adds up, and residents of the state find they are either in a good economy or a bad one. A good economy means that, in general, the businesses in New York are making a profit. They are growing and making cool cash. On the other hand, a bad economy means that, as a whole, companies in New York aren’t doing well; they are struggling to attract customers and perhaps laying workers off or slashing wages in reaction.
The same principle applies to a country. For example, the U.S economy is good or bad according to the performance of businesses throughout the country. Each country has an economy, and, as you might assume, those businesses and economies depend on each other to thrive. The result of that interaction is regarded as the world economy.
World Economy Explained:
Having explained what an economy is, let’s look at what the world economy means.
The term world economy refers to all the economic activity within each country and between countries worldwide. It makes sense that as the world population has risen and technologies like air travel and the internet have made communication between people throughout the world easier, the world economy has grown. It has also become more vital and complicated.
It has also become more critical and more complex. When one country does well, other countries see a boost in their economies. Conversely, when one country does poorly, other countries experience the consequences. The countries of the world are now interdependent. Basically, this means that we all have an interest in working together. As a business owner, you have an interest in making sure that Germany can meet the demands of
Factors affecting the world economy:
Based on the recent economic news, here are some of the critical factors that affect how well the economy thrives:
- Natural resources
- Human capital
Problems with one or more of these factors may lead to an economic collapse, depending on the severity.
Effects of World Economy:
Almost all countries worldwide are in some way affected by things that happen in what may appear at times, like unrelated countries, due to the influence of the world economy. A good example of this is the economic impact that the Brexit vote will have on other countries in Europe and worldwide. Brexit was a referendum decision for the U.K to pull out from the European Union (EU).
The primary cause of these effects is economics, based on the production and exchange of goods and services. Therefore, restrictions on the import and export of goods and services can potentially hinder the economic stability of countries that decide to impose too many.
The purpose of international trade is identical to that of trading within a country. But, international differs from domestic trade in two aspects:
The currencies of at least two countries are involved in international trade, so they must be exchanged before goods and services can be exported or imported. Occasionally, countries enforce barriers on the international trade of some goods and services, hindering the relations between two countries.
Countries often focus on those products that they can produce efficiently, which helps in lowering overall manufacturing costs. Then, countries trade these products with other countries, whose product specialization is something else entirely. Having greater specialization helps countries take advantage of economies of scale.
Economies of scale are the proportionate saving in costs gained by an increased production level. Manufacturers in these countries can concentrate all their efforts on building factories for specialized production instead of spending extra money on producing different types of goods.
Sometimes countries add obstacles to international trade. Some of these obstacles are trade tariffs (taxes on imports) and trade quotas (restrictions on the number of products that can be imported into a country). Trade obstacles often affect the economies of the trading countries, and in the future, it will become hard to keep employing such barriers.
Benefits of the global economy:
There are many benefits of a global or world economy. Here are some of them:
Free trade: Free trade is a good way for countries to exchange goods and services. It also allows countries to specialize in producing those goods in which they have a comparative edge.
Movement of labor: Increased migration of the labor force is beneficial for the recipient country, including the workers. If a country is experiencing a spell of high unemployment, workers can search for jobs in other countries. This also helps in lowering geographical inequality.
Increase economies of scale: The specialization of goods production in most countries has resulted in beneficial economic factors like lower average costs and lower prices for customers.
Increased investment: Thanks to the presence of the world economy, it has become easier for countries to attract short-term and long-term investments. Investments in developing countries are essential in boosting their economies.
How does the world economy work?
Having understood what the world economy is, you might be thinking, “How does this economy work?” here is a brief answer.
You see, the functioning of the world economy can be explained via one word, transactions. International transactions occurring between robust economies in the world help boost the global economy. These transactions mainly consist of trade happening between different countries. It ranges from raw materials, technology, weapons, etc. Such transactions have several benefits, such as:
- Encouraging competitiveness between countries in various markets
- Boosting productivity and efficiency across countries
- Helping in the development of underdeveloped countries by allowing them to import capital goods (machinery and industrial raw materials) and export primary goods (natural resources and raw materials).
What is Economic Collapse?
Many of us have heard of the term “economic collapse” from several sources, ranging from the TV, Newspapers, or the internet. However, only a few understand the in-depth of an economic collapse. If you aren’t among the few people who do, this little explanation might help you out.
So what is an economic collapse?
An economic collapse is the failure of a national, regional, or territorial economy that usually occurs during a crisis. An economic collapse happens at the inception of a severe version of an economic contraction, depression, or recession and can remain for several years depending on the seriousness of the circumstances. An economic collapse or failure can occur fast due to an unforeseen event, or it may be followed by multiple events or signs pointing to weakness in the economy.
Economic Collapse: Overview
An economic collapse is an astonishing event that isn’t necessarily among the standard economic cycle. It can happen at any point in the cycle, resulting in contraction and recessionary phases. The economic theory outlines multiple phases that an economy can experience. A complete economic cycle includes movement from trough to expansion, accompanied by a peak and a contraction leading back towards the trough. Although an economic collapse should be more likely in an economy that is already contracting, unforeseen events or trends in the global economy can overrule any point in the cycle to trigger an economic collapse.
Unlike contractions and recessions, there is no standard guideline for an economic failure. Instead, the term economic collapse is a tag that economists and government executives may apply, and it may be applied several months later after the original event. Governments also tend to speak regarding economic collapse when creating large-scale stimulus during market panics. The hazards of economic failure are raised to make a case for intervention in the economy.
Reacting to Economic Collapse:
Although economies can and still go through economic collapse, there is a solid incentive for national governments to try to prevent or lessen the severity of an economic collapse via fiscal and monetary measures. For instance, banks may close to restrict withdrawals, new capital controls may be enforced, billions could be injected into the economy via the banking system, and the whole currencies may be revalued or even replaced. Despite government attempts, some economic failures lead to the complete overthrow of the government, both liable for and reacting to the collapse.
After an economic collapse, there are almost always many legislative changes targeted at preventing a future reoccurrence. These changes are usually informed by a post-collapse inspection designed to identify the key factors leading to the failure and integrate controls in new legislation to reduce those risks in the future.
As time goes by, the zeal for these financial control can reduce, resulting in the regulation of risky market behavior being relaxed as the memory of the economic collapse disappears.
Global Economy is Collapsing – why?
Before we talk about why the Global Economy is plummeting, let’s take a look at some insightful data which represents the world GDP growth rate since 2000.
World GDP Growth Rate – Historical Data:
|Year||GDP Growth (%)||Annual Change|
The statistics above show that the world economy shrank in 2020 by -3.60%, a 5.93% decline from 2019. Of course, we all know what caused the collapse, and it was nothing other than the coronavirus pandemic which forced many businesses worldwide to pause.
The shock impact of the pandemic hit the industry like a giant cannonball, sending the economy in a nosedive. The result led to a massive reduction in demand for products, including falling prices and income. China’s economy was the only major economy to grow in 2020, as it registered a growth of 2.3%.
However, that was about two years ago. What about now? Why is the world economy collapsing? As far as I can tell and judging from the statistics, the world economy isn’t collapsing; it is recovering from what people call the worst world recession since World War II.
After crashing in 2020 due to the pandemic, there was a global expansion of 3.3% in 2021, the highest growth rate in over four decades. Also, the world economy is expected to grow by 4 percent in 2022 and 3.5 % in 2023. So no, the world economy isn’t collapsing but growing or recovering.