In a time of needed recovery in many countries around the world from the recent economic downturn, many begin to wonder how this recovery can happen. What is that actually drives an economy and pushes it towards growth and success? What factors need to be focused on to stimulate this recovery quickly? Individual economies have experienced downturns in the recent years, but as an interconnected global economy, the financial crisis was not enough to stop growth. To propel the global economy forward, factors such as physical capital, labor, productivity, and investment need to be prioritized.
What is the State of the Global Economy?
The economies of the world are constantly becoming more integrated through trade and investment into one global economy that has grown rapidly over time. In 1970, the world produced about 12 trillion dollars worth of goods and services and 2010; world production reached 41 trillion dollars. In four decades, global GDP has increased almost four times. The pace of the global economy’s growth is gradual and consistent. Individual nations may experience extreme economic boosts and downturns, but the overall global economy continues a slow uphill movement. Even after a significant global financial crisis like 2009, there was a dip for that year but global GDP had fully recovered by the next year and even exceeded pre-crisis levels by the year after that
What are the Sources of Economic Growth for the Global Economy?
As the global economy expands, there are important factors contributing to this growth such as physical capital, labor, productivity, and investment. Physical capital is the machinery, equipment, technology, and land necessary to the production process and when companies increase investment in this capital, it contributes to the growth of their production. Labor is another factor that can contribute to economic growth. By increasing the number of people in jobs, the economy expands. This can happen through population growth or greater labor force participate rate, such as the increase of women into the workforce. Productivity is the amount of output produced based on how well the employees and machinery is put to use. If there are more machines, more people working, and if they are put to optimal use, there will be economic growth.
The most important key to driving the global economy to long-term growth is investment. As every country has different resources and varying availability to excess wealth for investing, venture capital firms are a beneficial way to connect money from those who have the ability to support emerging business and development with those who need funding to succeed and contribute to the overall economic growth of their country. Investments can be in any sector or industry including manufacturing, services, technology, agriculture, etc. Foreign investments and venture capital funding into another country majorly benefit its economy. The investment of these foreign companies generates jobs for local employment. The inflow of capital and foreign currency can be used to purchase imports and build up foreign exchange reserves. Foreign companies could also introduce new technology to another country and teach them how to use it, raising productivity and helping to increase wages. As large foreign companies who would be interested in investing internationally are usually managed, they can pass on this managerial assistance and business development strategy to the businesses in which they invest. Also, when foreign companies invest they develop new relationships with that country and establish new channels for an exchange of products between that country and their own. All of these factors help to contribute to that economy’s long-term growth and as every country’s economy is so tied with one another in this globalized world, one economy’s growth can contribute to the growth of all. When U.S. economy is growing, U.S. consumers buy more products from other countries and invest more in those countries until their economies also increase.