World Economy: Definition & History

Instructor: Brianna Whiting
In this lesson we will explore the concept, history, and consequences of a world economy. We will learn why a healthy world economy is important and discuss major events that created the current world economy. The lesson will then conclude with a summary and a quiz.

A First Look at the World Economy

Let's imagine for a minute that you are the owner of a large company that creates computer hardware. Each day you see that your machines are working efficiently and that your employees are satisfactorily doing their job. You also look at your sales numbers to see that you are meeting the demand of your domestic consumers. However, one morning while reading an article online, you realize that German manufacturers are not meeting demands in your line of work. A major computer hardware production company has failed there, and, as a result, German companies are scrambling to avoid having a shortage of computers and computer parts for sale. You read that Germany has begun to import products from other countries in order to meet this demand. After researching how much of your product might be in demand as well as how much exporting your product might cost, you decide to ramp up supply and create a partnership with relevant German clients. Congratulations, you have just become an active part of the world economy.

Economy Defined

In order to understand what the world economy is, you must first understand what an economy is. An economy is all the activity that is related to producing and consuming goods and services in a specific area. For example, the city of Chicago has a unique economy. This economy takes into account all of the goods created in the city. These goods are tangible items such as computer screens that are created in a factory, and they are intangible products such as new software and new websites that are created by individuals and companies in Chicago. The Chicago economy also takes into account companies that provide services in Chicago, such as restaurants and city tours. All of the business conducted in the city adds up, and citizens of Chicago find they are either in a good economy or a bad economy. A good economy means that, as a whole, the businesses in Chicago are making a profit--they are growing and making money. A bad economy means that, generally speaking, companies in Chicago are not doing well--they are struggling to find customers and perhaps laying people off or cutting wages in response.

The same principle applies to a country. The United States' economy is good or bad based on the performance of businesses throughout the country. Each country on earth has an economy and, as you might predict, those businesses and economies interact. The result of that interaction is called the world economy.

The World Economy

The term world economy refers to all of the economic activity within each country and between countries around the world. It makes sense that as the population of the world has increased, and as technologies such a air travel and the Internet have made communication between people throughout the world easier, that the world economy has grown. It has also become more important and more complex. When one country does well, other countries see a boost in their economies. Conversely, when one country does poorly, other countries can suffer. 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 is able to meet the demands of its consumers.

This concept of being tied together in order to have free trade, cheaper foreign markets and free trade is known as globalization. Globalization has allowed for trading between countries with less restrictions. And thus, business can sell their products all over the world and consumers can have a plethora of products from various countries to choose from.

Timeline of the World Economy

So, when did the world economy begin? How has it evolved? What has contributed to what we know as the world economy of today? The following timeline will shed some light on these questions:

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