Hi there, this week we've looked at the discussions surrounding the concept of globalization. We've examined the main international components of the world economy. We've looked at international trade, foreign direct investment and financial markets. In this last lecture, we're going to bring all of these together and relate them to GDP, and then we're going to pose the question "what exactly are the implications of this for society?". Now in trying to piece together the world economy, we're faced with one big problem. All the components are being calculated in different ways and for different purposes, and so it's almost impossible to put them together in any consistent and any accurate way, but just to say that we can't say anything accurately doesn't mean that we can't say anything at all. So let's start with a baseline number. Let's take GDP, which for all its shortcomings is still the best measure we have for the output of goods and services in a society. In 2012, the world GDP in current dollars was $72.2 trillion and the value of world trade in that year was $18.2 trillion, and here we confront our first problem. In calculating GDP, the only part of a transaction that counted was the value added. In foreign trade statistics, the whole value is added every time, so there is a degree of double counting in this number. Next then we can turn to foreign direct investment, and here at least the recorded statistics present no problems, and the value of FDI 2012 was $1.45 trillion. So that basically deals with the real economy in its global dimension. Now we turn our attention to the financial sector. Let's start with equities, stocks and shares. We have a figure for end year total valuation of $52.5 trillion. Now trading volume of about the same amount, $50 trillion, but foreign ownership is not likely to be large. So let's say 10 percent and that would give us an international trading figure of $5 trillion. When we turn to bonds, we have a figure for the end year value of assets internationally held, which was $22.8 trillion, and we assume that the behavior mirrors that of equities that we could take a trading volume of about 20 trillion in a given year. For derivatives now, we had a total turnover of the nominal value for 2013 of $1,886 trillion, but we noted that only a small down payment ever change hands. So how small is small? Well, the Bank of International Settlements is trying to establish a minimum ratio of around 3 percent, lower for some transaction higher for others. If we take this as a ratio, we get a trading figure of $56.6 trillion, but note if it does go wrong, then the investor can get stung for the whole amount, and finally we arrive at foreign exchange transactions where we put on a value of $1855 trillion, but much of that so we are told shouldn't count since it involves the swapping of currency, but it does involve the transfer of real assets, real assets with real values. Real assets with real values and real values that can and do change. So I don't think we should be quite so cavalier and say it doesn't really matter if a dollar is a Euro. Now these numbers are mind bogglingly huge. Remember that a trillion is one followed by no less than 12 naughts, but it's still money. So let's try and put it in an easier context. Most common way to do this is to relate it all to GDP. So for example, people would say, not only do say that foreign trade is equivalent to 25 percent of world GDP. Foreign direct investment then be equivalent to 2 percent of world GDP. Now a rough estimate for the International Trade in equities would be 7 percent of GDP. International bond trade would be equivalent to 28 percent of GDP, and there are very nice and very kind adjustment in derivative trade would still be 78 percent of GDP. So, so far the value of transactions in the financial sector already exceeds the total value added to the world economy in one year, and now we need to add currency transaction, which by itself are whole 25 times bigger than GDP. Did I just say that 25 times bigger? And again the numbers are just becoming meaningless. It's money we're talking about. So let's start all over again. Imagine that our GDP as a globe, is in fact the planet Earth, and on top of that we start layering our globalization components in $100 bills. OK, let's run quickly through the numbers again. Let's start with foreign direct investment, $1.45 trillion. $100 bills, the pile would reach 1,584 kilometers into space. We'd be at the upper end of low Earth orbit and already we will have passed the international space station below us. Add foreign trade, $18.2 trillion. This would reach almost 20,000 kilometers into space. We put a distance at which GPS satellites are parked and then we have the financial sector, take that added up, $5 trillion for equities, $20 trillion for bonds, and the $55 trillion changing hands for derivatives, and we've reached 93,000 kilometers into space. By now we're about one-third of our way to the moon. We haven't even had foreign exchange transactions yet, $1,855 trillion. I hope by now the pile of notes stretches 2 million kilometers into space. We can easily get to the moon and back, probably get to the moon and back twice over and still have a small fortune left. If we simply carried on, we'd be on our way to Mars. In fact, if we've done this entire exercise in $1 bills, we'd be at Mars already and be on our way to the next planet. So around the core of a globalized real world buying and selling real goods and services and investing in real businesses, we have a much larger world of financial markets involving infinitely larger sums of transactions. But where do we find these numbers in the GDP statistics? Well, GDP calculations deal only with the value added to the stock of wealth generated then by an economy. So all of these financial transactions appear in the labor costs and profits generated by the financial services industry. In developed economies with large financial service sectors like the U.K., this can account for up to 10 percent of GDP. In America, the United States, the figure is a more modest 7 percent of GDP, and these numbers also include all the insurance, mortgage, and banking services that we consume domestically. So we have a situation where transactions exceeding in multiples of what we would deal within the real world that make a modest contribution to a relatively small sector in relatively rich countries. Huge volumes though small margins but entailing massive financial risks that affect us all. Well, I started this series of videos with a reading from John Maynard Keynes and I'd like to end with one. This time I want to read from Susan Strange "Casino Capitalism." Susan and I spent a bit of time together at the European University Institute. A fascinating person who came from journalism into the economics game and actually writes well. In her book "Casino Capitalism," which was published in 1986, only two years after globalization began its penetration of economic literature, she wrote the following: "The Western financial system is rapidly coming to resemble nothing as much as a vast casino. Every day games are played in this casino that involve sums of money so large they cannot be imagined. At night, the games go on on the other side of the world. In towering office blocks that dominate all the great cities of the world, rooms are full of chain-smoking young men all playing these games. Their eyes are fixed on computer screens flickering with changing prices. They play by intercontinental telephone or by tapping electronic machines or with computer algorithms today. They are just like the gamblers in casinos watching the clicking spin of a silver ball on the roulette wheel and putting their chips on red or black, odd numbers or even numbers." And then she goes on to say, "These bankers and dealers seem to be a very different kind of men working in a very different kind of world from the world of finance and the typical bankers that older people remember, like me. Bankers used to be thought of as staid and sober men, grave-faced and dressed in conservative black pinstripe suits, jealous of their reputation for caution and for the careful guardianship of their customers' money. Something rather radical and serious has happened to the international financial system to make it so much like a gambling hall." What that change has been, she said I'm writing in 1986 and how it came about are not clear. Well, it might not be clear, but one big thing has happened. It has huge consequences for us today and we've gone through the effect of that with the most recent financial crisis and underlying this is a loss of trust.
