Economic Globalization and Factors of Production

Economic Globalization

Economic relations between different places on the planet are more intense than ever. This economic globalization has four main features:

  • Increased International Trade: International trade has grown tremendously, largely due to cheaper transportation costs.
  • New Production Organization: Production is now divided between several countries, with multinational companies controlling much of global production and trade.
  • Intense International Financial Flows: Financial transactions are increasingly intense and often speculative, with money moving quickly through buying and selling assets.
  • Growing Trade Agreements: Trade agreements between countries are becoming more numerous, leading to freer trade of many products in some regions.

Globalization would not have been possible without the communications revolution, especially the internet.

Participants in Economic Activity

  • Families: Families are involved in production by consuming goods and services. They also provide labor to companies in exchange for wages.
  • Companies: Companies produce goods and services to generate profit. They require labor from families and purchase products and services from other companies.
  • The State: The state plays several key economic roles:
    • Establishes rules governing economic activity.
    • Encourages private sector activity through grants.
    • Creates and supports companies in distressed sectors.
    • Provides public services by consuming goods and services.
    • Collects taxes to finance its activities.

Factors of Production

Producing goods and services requires labor, natural resources, capital, technology, and knowledge. These are the factors of production.

  • Labor: Human activity is essential for producing goods and services. Most workers are employed by companies or the state for a salary, while others are self-employed.

    Labor laws regulate work in each country. Employers and employees negotiate specific working conditions within this legal framework, formalized in a contract.

    Often, employer and employee interests diverge. In many developed countries, especially in Europe, labor laws are established through complex negotiations between the state, employers, and employees.

  • Natural Resources: The production process utilizes various resources provided by nature. Some are renewable, while others are not. Companies must manage natural resources responsibly.
  • Capital: Capital encompasses three categories:
    • Physical Capital: Includes elements like buildings, machinery, and tools.
    • Human Capital: Refers to the education, skills, and experience of workers. Higher qualifications and experience lead to greater productivity.
    • Financial Capital: Represents the money required to establish and operate a company.
  • Technology: Encompasses the procedures used to produce goods and services. There are different levels of technology:
    • Manual Production: Relies on human strength and hand tools.
    • Mechanized Production: Utilizes machinery for power, but workers still operate tools.
    • Technified Production: Machines control both power and tools, with employees primarily programming and monitoring them.

    Technology is crucial for economic growth today. Companies with more resources and profits tend to invest more in new technologies. The type of economic activity influences the technology used.

  • Knowledge and Know-How: Human knowledge is a vital economic factor. A strong education system and research centers are essential for training well-prepared individuals capable of generating new ideas.

    Know-how refers to the practical skills needed for a specific activity.