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 a 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 have been 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's GDP in current
dollars, stood at $72.7 trillion.
Now 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 and 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 $52.5 trillion,
and a trading volume of about
the same amount, 50 trillion.
But foreign ownership is not likely
to be large, so let's say 10%, 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.
Now if we assume that the behavior
mirrors that of equities,
then 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 changed hands.
So how small is small?
Well the Bank of International Settlements
is trying to establish a minimum ratio of
around 3%, lower for
some transactions, 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 $1,855 trillion.
But much of that,
so we're 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 1
followed by no less than 12 noughts.
But it's still money so lets try and
put it in an easier context.
The most common way to do this
is to relate it all to GDP.
So for example people would say, well,
they do say, that foreign trade is
equivalent to 25% of world GDP.
Foreign direct investment then would
be equivalent to 2% of world GDP.
Now a rough estimate for the international
trade inequities would be 7% of GDP.
International bond trade would
be equivalent to 28% GDP.
And our very nice and
very kind adjustment in derivative
trade would still be 78% 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 transactions,
which by itself are a 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 is a globe,
is in fact, the planet Earth.
And on top of that we start layering our
globalization components in $100 bills.
Okay let's run quickly
through the numbers again.
Let's start with foreign direct
investment, 1.45 trillion.
In $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.
And this would reach almost
20,000 kilometers into space.
We'd be at the distance at which
GPS satellites are parked.
And then we have the financial sector.
Let's add add it up then.
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.
And by now, we're about one-third
of our way to the moon.
And we haven't even had foreign exchange
transactions yet, 1,855 trillion.
Well by now the pile of notes stretches
2 million kilometers into space.
We can easily get to the moon and back.
In fact we can get to the moon and
back twice over and
still have a small fortune left.
If we simply carried on we
would be on our way to Mars.
In fact, if we'd 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 UK,
this can account for up to 10% of GDP.
In America, the United States,
the figure is a more modest 7% 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 with in the real world, that make
a modest contribution to a relatively
small sector in relatively rich countries.
Huge volumes for 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 spend a bit of time together
at the European University Institute.
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 can not 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 a 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 pin-striped 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 in writing in 1986, and
how it came about, I'm 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.