The United States has been a major driver and facilitator of globalization. Beyond some of the obvious factors related to the U.S. economy being the largest in the world and its companies being some of the most globalized, the U.S. dollar has played a major role in the development of a globalized economy. The U.S. dollar is the world's reserve currency, which means that it is the most accepted currency for international trade. It also means that other countries central banks and large institutional investors hold large reserves of U.S. dollars. This gives the United States a unique advantage in terms of its ability to finance deficits, borrow money, and maintain a general position of power in the global economy. When other countries need to buy or sell goods and services in U.S. dollars, they must first convert their own currency into dollars. This creates demand for dollars, which increases the value of the dollar. The fact that the U.S. dollar is used so widely also gives the United States a great deal of influence over global economic conditions. Thus, the impact of globalization on the United States can be said to be both extremely significant and far-reaching.
The importance of the existence of a world reserve currency cannot be overstated. It helps to facilitate tremendous amounts of international trade and investment by reducing the risk of currency fluctuations, providing a level of stability to the global economy, and making it easier for various companies and countries to conduct transactions. With that being said, there are also some that have suggested the U.S. dollar has played a significant role in the devaluing of other currencies, making it more difficult for those countries to compete in the global economy. The U.S. dollar has been the world reserve currency since the mid-20th century. Before that, the British pound held the role.
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In terms of impact on the United States and how globalization has affected its economy, globalization is thought by many to have been a mixed bag. On the one hand, it has led to increased economic growth, more affordable goods for American consumers, and more opportunities for multinational corporations to expand their operations onto foreign soil. American multinational corporations are companies that have expanded their operations and subsidiaries outside of the U.S. and into multiple countries. Multinational corporations benefit from globalization because:
- They can take advantage of lower costs in other countries (such as labor costs).
- They can access new markets, and hedge against risks in their home country.
- They also account for an exceptionally large portion of the overall U.S. economy.
On the other hand, globalization has led to losses in certain sectors as businesses move operations abroad and outsource labor, increased competition from foreign companies, and increased pressure on wages as companies seek to find the cheapest labor possible. While there is no definitive answer as to whether globalization has been good or bad for the United States, it is clear that it has had both positive and negative effects.
How Does Globalization Affect GDP?
It is also important to note how globalization affects a country's Gross Domestic Product (GDP). GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, usually annually. It includes all of the country's private and public consumption, government outlays, investments, and exports fewer imports that occur within a defined period of time. Globalization can have a direct impact on GDP. When a country becomes more open to trade and investment with the rest of the world, its GDP generally increases. This is because the country has access to a larger market for its goods and services and can also take advantage of foreign technologies and cheaper inputs. In addition, foreign direct investment (FDI) can lead to an infusion of capital into the country, which can help to finance new businesses and expand existing ones.
One of the main drawbacks of globalization on GDP is that it can lead to a decline in certain sectors as businesses move operations abroad or outsource labor. This can lead to unemployment and underemployment, which can lead to a decrease in consumption and a decrease in GDP. If a country is not able to adapt to the changing global economy, it may find itself at a disadvantage and its GDP may suffer as a result.
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The term economic globalization refers to the financial integration of economies and international trade across the world. This includes the increased mobility of capital, goods, services, labor, and technology. Factors ranging from technological advancements in communication and transportation, increasingly globalized politics, the interconnected and interdependent dynamics of modern money, and higher levels of education all contribute to economic globalization. The United States has also been an important force in promoting globalization. One of the main reasons for this is the role of the U.S. dollar as the world's reserve currency. The term world reserve currency refers to a currency that is the most widely used currency in international trade and that is held by central banks and other major financial institutions in large quantities as a way to back their assets and liabilities. This increased demand for the U.S. dollar helps increase its value among currencies as well as provide power and dominance to the U.S. economy.
Globalization has resulted in a large variety of effects on the U.S. economy. These effects have ranged from the outsourcing of jobs from specific industries to the reduction in the costs of goods and services due to increased competition and a strong dollar. Another significant effect of globalization has been the growth in multinational corporations. A multinational corporation is a company that has expanded its operations across national borders. In the United States, multinational corporations have become increasingly common and account for a significantly large percentage of the economy and Gross Domestic Product (GDP). GDP is a measure of a country's economic output and is one of the most closely watched indicators of economic activity. Globalization can have important impacts on GDP, both positive and negative. When countries open their economies to foreign trade and investment, GDP typically increases. In some cases, however, globalization can lead to job losses and a decline in certain sectors as businesses relocate operations abroad or outsource labor.
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Video Transcript
What Is Economic Globalization?
Economic globalization, in general, is the integration of economies of countries throughout the world. This integration also includes and is not limited to countries' political, cultural, educational, and perhaps religious views. For this discussion, however, we'll focus on the economic impact of globalization.
Globalization has expanded the means by which countries conduct commerce and interact with the rest of the world. The rapid advancement of technology, communication, and transportation has expanded and allowed for broader relationships. As a result of the Internet and various modes of transportation, countries are able to interact and to transact commerce with each other more quickly and efficiently. With just a couple of keystrokes, we can transact business in other countries in a matter of seconds, thereby influencing economies and the participation in globalization.
Often the term globalization has been confused with internationalization. Internationalization means agreements between nations such as international trade, treaties, and alliances. With internationalization, nations traded among themselves using their own capital, resources, and currency. On the other hand, globalization is the integration of nations under one system.
Globalization and the U.S. Economy
The U.S. economy has played a major role in globalization due to the petro-dollar (the U.S. dollar) being the world's reserve currency for well over 70 years. It has been very advantageous for the U.S. financial market compared to other foreign economies, which have to buy, sell, and transact business using the U.S. dollar.
The U.S. dollar as the world's currency has allowed for substantial negotiation power for U.S. corporations, which have given rise to multinational corporations. Trade, negotiations, and relationships were established based on the use of the U.S. dollar through collaborations by force or by threat. While this created more buying power and value for the U.S. dollar, it lessened the value of other countries' currencies, which resulted in poverty-stricken economies, especially in developing regions.
For example, if X country grew bananas in abundance and wanted to sell their bananas to Z country, they would have to purchase and sell with U.S. dollars. A currency's value is increased based on its use and demand for it. Therefore, as these countries were urged in various ways to use the U.S. dollar in their transactions, the value of their countries' currencies declined as a result. The cycle of poverty was continued because the buying power of the countries was lessened by the expensive U.S. dollar.
How the U.S. Economy is Affected
All countries' economies are impacted by globalization. However, let's examine some of the effects of globalization on the U.S economy. While there are numerous effects, we'll discuss only three of them here.
The first of the three effects of globalization on the U.S. economy was the growth of multi-national corporations. Corporations were able to merge into other countries and reaped the many advantages and perks, such as increased bottom lines, cheaper labor, and relaxed regulations. For example, Company A moves its distribution center to another country. Company A paid much higher wages in the United States because of the minimum wage requirement and the level of education of the employees, and paid higher taxes due to the codes and statutes. As a result of the move onto foreign soil, Company A now pays lower wages, less taxes, and benefits from relaxed regulations, all of which increases its bottom line.
The second effect of globalization on the U.S. economy was the positive and negative impact of the labor force. For example, Company A decides to relocate its distribution center to another country, resulting in the loss of jobs for those employees who choose not to relocate. Although these employees find other jobs, they may experience a reduction in wages and/or benefits. When Company A relocated, this resulted in 500 employees losing their positions and current wage status. Only 10% of these employees were able to find new jobs to match their previous wage status. Many of them took lower wages and therefore could be underemployed or unemployed. Some of these individuals found other opportunities to enhance their skills and engaged in suitable employment.
The third effect of globalization on the U.S. economy is the influx of international companies coming into the United States. This increases the U.S. economy through the performance and productivity of new business, and the labor force acquires new enhanced skill sets. Company A moves its distribution center onto foreign soil. New agreements, trades, and negotiations allow for foreign companies to build businesses in the United States. The U.S. economy is now stimulated with increased revenue and production.
Lesson Summary
There are various views and perspectives on globalization. These views and perspectives change greatly due to who is impacted, either positively or negatively. We discussed the meaning of globalization and the relationship of the U.S. dollar with respect to globalization. The U.S. economy has benefited greatly from globalization, due to the dominance of the U.S. dollar once being the world's reserve currency. Although there are many effects of globalization, we focused on three main effects. They are the labor force, the emergence of multi-national corporations, and the merging of new businesses with the U.S. economy.
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