Economic Power

What makes a country economically powerful? The concept of a state's economic power and the power it can hold due to its geographical size is similar, as both are interrelated. However, it is important to understand how the two aspects of a country differ, particularly when talking about the superpowers of the world. Let's take a look at these differences and some examples of countries who have economic power.

Economic Power Economic Power

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Table of contents

    Definition of economic power

    Economic power is the ability of a country to influence the global or regional economy.

    Economic power is usually a result of its economic size. It is also the basis of economic growth. Economic power is related to the country’s purchasing power. The purchasing power is determined by the strength of the country’s currency. The American dollar is currently considered the most powerful currency to the level that other countries hold it for emergency backup in their central banks. There was a global economic depression when the value of the American dollar crashed during the Great Depression in the 1920s.

    Economic size is the size of a country’s economy.

    The economy is driven by a productive workforce with disposable income, which produces a market to encourage TNCs to reside in the country. The higher the number of businesses that contribute to the economic activity of the country, the stronger the economic concentration and the cheaper the goods and services available to the population are. This is because the company can increase its scale of product and become more efficient while still earning profit.

    Concentration of economic power is the collection of power by one organisation. Here, we consider this as the infiltration of superpowers to influence other nations, but you may find a majority of articles will focus on market power which is when business corporations overcome competition and dominate a market.

    Case study: Economic power of India

    The concentration of economic power in India is caused by the accumulation of resources by large industrial houses following the country’s independence and subsequent vacancies in ownership positions resulting from the exit of the British. 'Large industrial houses' is the Indian term for business groups that span many industries, usually in related processes. For example, the Tata group is one of the largest multinational companies in India and owns subsidiaries in automobiles, steel, fashion, hotels, and e-commerce.

    In the 1960s, the Mahalanobis Committee found that the rapidly growing economy was supported by (public-private) partnerships with financial institutions and commercial banks but was more heavily influenced by the large industrial houses. The concentration of economic power in India by these industrial houses comes from the monopolisation of the market. So, what does this mean?

    When you monopolise a market, you essentially dominate it. For example, if the people of a town can only access one clothing store, that means it (the clothing store) acts as a monopoly because the people of the town can't get their clothes from anywhere else. Monopolies tend to be bad for the economy because they prevent diversity in the market and can create high prices for consumers. In 1964, the Monopoly Enquiry Commission suggested that the monopolisation of the market in India was the result of lax laws and corrupt licensing means.

    Antitrust laws (laws aimed at preventing businesses from becoming monopolies) try to regulate businesses in India to ensure a level playing field and effective competition in the market. These laws came into effect as part of what is called the Competition Act 2002. The Act aims to prevent vertical or horizontal agreements, abuse of dominant positions, and combinations such as acquisitions, mergers, amalgamations, and joint ventures that have no potential benefit to consumers or improvements in production and distribution of services. Let's break down what a few of these things mean:

    Vertical and horizontal agreements refer to agreements made between different parts of the supply chain, e.g. production through to manufacturing through to seller (vertical), and people operating within the same market e.g. competitors (horizontal). These agreements can cause a monopoly to form as one business can essentially 'take over' a lot of the market.

    Mergers and acquisitions are ways for a business to expand by either merging with another company to make one big company or by acquiring another company (buying another company) to make one big company. The merging and acquiring of business can result in monopolisation because it can potentially result in the creation of massive companies that own a disproportionate amount of the market share, making it difficult for smaller companies to compete.

    So essentially, the antitrust laws introduced by India as part of the Competition Act 2002 try to prevent businesses from becoming monopolies by introducing restrictions on how much they can expand, both vertically and horizontally.

    How is economic power measured?

    There are different methods to measure a country’s economic power, with Gross National Product (GNP) and Gross Domestic Product (GDP), as the most commonly used. Both are measures of economic productivity. GDP is the most widely used as it is the most direct measure but is not the most representative measure.

    Measuring Economic Power: Gross Domestic Product (GDP)

    • Gross = total.

    • Domestic Product = productive outputs that are exported.

    • The term productive output represents the efficient use of resource input into total economic outputs.

    • For example, paper is a productive output of a timber factory.

    Measuring Economic Power: Gross National Product (GNP)

    • Gross = total.

    • National Product = total income of the country’s residents over a specific time frame.

    • The GDP of the Philippines is 100x larger than its GNP because the economy contains a large number of foreign-owned factories.

    • The income of timber factories is part of the GDP as it is produced within domestic borders but is not part of GNP as the majority of the income is not received by local residents but by the international paper production company.

    Economic power can be assessed by comparing the GNP and GDP of a country as a measure of how much money is flowing out of the country and not retained in the local economy.

    Economic Power City of London, one of the world's largest financial centres StudySmarterFig. 1 - The City of London is one of the largest financial centres in the world.

    Examples of economic power

    The largest economies in the world are the European Union, the United States, and China. The data look at GDP, the exchange rate from one euro, and population to produce purchasing power parity (PPP). PPP compares the amount of local currency that buys the same volume of goods and services in the country as one euro does in the EU.

    The EU has 27 member states.

    Grouped together, the EU is responsible for 15% of the world’s trade in goods. The largest traders are China, the EU, and the United States (in order).

    The world's most economically powerful countries

    The European Union

    United States

    China

    United Kingdom

    Share in world GDP in 20211

    14.8%

    15.7%

    18.6%

    2.3%

    GDP in 20216

    $17.2 T

    $23.3 T

    $17.7 T

    $3.1 T

    Unemployment in 20217

    6.1%

    3.6$

    4.8%

    3.6%

    Labour force by occupation (2)

    Agriculture 5%

    Industry 21.9%

    Services 73.1%

    Agriculture 1%

    Industry 19%

    Services 80%

    Agriculture 27%

    Industry 29%

    Services 44%

    Agriculture 1.5%

    Industry 18.8%

    Services 79.9%

    How do countries gain economic power?

    Countries can gain economic power by improving their income. The laws of supply and demand suggest common niches to break through the market are the manufacturing of high-tech equipment (think Japan 1970s), cheap labour for consumer products (China 2000s), and lots of oil (Iran 1970s).

    Factors that contribute to economic power

    • Natural resources.

    • Capital goods.

    • Human resources.

    • Technology.

    Who has economic power?

    Economic superpower: a country with influence over the global economy. This influence is known as economic dominance.

    Economic superpowers have economic dominance. Dominance is not only held by governments of countries, TNCs are beginning to show vast wealth and power. Through trade and investments, corporations are able to exert influence on the governments, showing that economic power and size may not be the most important measure of dominance. Such exertion of influence includes impacting tax structures, trade deals, and even direct aid programmes. A further example demonstrating that economic power and size may not be the most important factor is that the top 10 richest countries do not match up to the top 20 richest entities.

    Entities in this case mean large, wealthy corporations, organisations, or even religions.

    Revenues represented on the richest entities list could be a better representation of economic power. This is because revenues suggest the movement of money before outgoings have taken place. The local economy relies on the movement of money to pay for wages and resources to propel further spending for goods and services by the local population. The richest countries also are the largest consumer markets.

    The importance of economic power

    Purchasing power is the ability of the nation’s currency to buy products and services.

    Economic power is important to superpowers because money can be used to buy or invest in other forms of power to grow the superpower potential of a country. Purchasing power drives a country’s economy. A larger purchasing power can buy cheaper goods and afford high-tech equipment to expand its industries for exports further. Currently, the US Dollar is the most powerful currency. Other governments consider it a safe currency with minimal risk when investing. Some nations borrow in US dollars as there is less trust in their currencies for example during the Venezuela hyperinflation in 2016. This is despite the fact that the United States does not sell many material exports.

    Foreign direct investments (FDIs) are sources of money coming from foreign investors including other governments. The United States gained $221B in 2019 from foreign direct investment which continues to fuel the economy. The large number of American start-ups and TNCs attract this investment. It also spends a large amount in other countries. The United States has helped Japan transform from post-war depression into a tech kingdom by the provision of management, technology, and equipment into automobile manufacturing during the 1970s. Likewise, the One Belt One Road Project by China is a larger scale FDI project to aid recipient countries in building new infrastructure and creating local higher-skilled jobs. The financing country benefits by expanding its reach into international markets in the hope of dividends and other political sways. This is an essential part of smart power in international relations.

    Economic Size Chart showing FDI by country for the years between 1985 and 2018 StudySmarterFIg. 2 - FDI by country from 1985 to 2018.

    What is the weakness of focusing on economic power?

    The middle-income trap is the improvement in wages for quality of life for a lower-skill manufacturing-based economy that struggles to move onto higher-value tertiary sectors such as high-tech goods and consulting services.

    The development of economic power is difficult and often plateaus. Many developed countries have fallen into the middle-income trap. An example of this is the current turbulence of China’s economy. The China Ever Grande Group debt crisis and resulting international financial panic, ongoing supply chain delays due to the COVID-19 pandemic, and a critical electricity crunch has affected its main industry of manufacturing. This is a mixture of internal and external factors affecting economic stability. Other examples of internal factors include hyperinflation, civil unrest, and natural disasters.

    Economic Power - Key takeaways

    • Economic size and power are important to understand how wealthy a country is and how strong its economy is.
      • Economic size is the size of a country's economy.
      • Economic power is the ability of a country to influence the global or regional economy.
    • The economy is driven by a productive workforce with disposable income, which produces a market to encourage TNCs to reside in the country.
    • A country's economic power is measured by:
      • Gross National Product (GNP): the total value of goods and services that a country produces regardless of geographic borders.
      • Gross Domestic Product (GDP): the total value of goods and services produced within the geographic borders of a country.
    • The largest economies in the world are the European Union, the United States, and China. They are economic superpowers and they influence the global economy.
    • A country can increase its economic power by improving its income. This can be done through:
      • Natural resources.

      • Capital goods.

      • Human resources.

      • Technology.

    • Economic power is important to superpowers because money can be used to buy or invest in other forms of power to grow the superpower potential of a country.

    • Economic superpowers can fall into the middle-income trap where the country is technically very wealthy, but its people are not. This can affect economic stability.


    References

    1. Eurostat, Purchasing power parities in Europe and the world, 2020, https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Purchasing_power_parities_in_Europe_and_the_world.
    2. Global Justice Now
    3. World Population Review, Richest countries in the world 2022
    4. Fig. 1: The City of London is one of the largest financial centres in the world (https://en.wikipedia.org/wiki/File:City_of_London_skyline_from_London_City_Hall_-_Sept_2015_-_Crop_Aligned.jpg) by User:Colin (https://commons.wikimedia.org/wiki/User:Colin) and Kim Hansen (https://commons.wikimedia.org/wiki/User:Slaunger) Licensed by CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0/deed.en)
    5. Fig. 2: FDI by country from 1985 to 2018 (https://commons.wikimedia.org/wiki/File:Foreign_Direct_Investment_by_Country.png) by Wikideas 1 (https://commons.wikimedia.org/wiki/User:Wikideas1) Licensed by CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)
    6. The World Bank, GDP (current US$), World Bank national accounts data, and OECD National Accounts data files, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD
    7. The World Bank, Unemployment, total (% of total labor force) (modeled ILO estimate), 2023, https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS
    Frequently Asked Questions about Economic Power

    What does economic power mean?

    Economic power is the ability of a country to influence the global or regional economy.

    Why is economic power important?

    Economic power is important because it can be used to buy or invest in other forms of power (e.g. military; soft power; resources) to grow the superpower potential of a country.

    What is economic power in international relations?

    In international relations, economic power

    is the ability of a country to influence the global or regional economy.

    Why is economic power the most crucial determinant?

    Economic power is the most crucial determinant because it can be used to buy or invest in other forms of power (e.g. military; soft power; resources) to determine the overall superpower potential of a country.

    Who is the world's leading economic power?

    Currently, the US is the world's leading economic power. However, China's economic power is growing rapidly and is a potential threat to the US.

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