Understanding the nature of economic activity is critical to understanding the world today. It is quite amazing that nations which are known for rampant inflation and other financial crises, also have very low levels of government spending and high rates of taxation. Whereas many economists claim that these high taxes and expenditures by a country are what lead to economic recessions and depressions, those who follow the political machinations behind the scenes say that it is the lack of spending, rather than the tax hikes, which are the culprits.
More than just being a source of income and a way to fund governments, economic activity is also an important driver of world trade and the flow of international capital. In fact, it is the volume and quality of economic activity that determine international trade and the level of growth that all economies experience. A nation which has low levels of economic activity is considered to have high levels of economic recessions and depressions.
Growth in economies is primarily determined by economic activity. The volume of trading that takes place internationally is what determines the growth rate of a country's economy. A country which has little economic activity is not likely to grow substantially, while a nation which is highly developed and highly open to trade, can experience a higher level of economic development and therefore higher rates of economic growth.
The nature of world trade means that it is the fluctuations in currency rates that determine the levels of competitiveness in different economies. Economic policies vary greatly between nations. One might have an extremely protectionist policy, while another nation might have very flexible exchange rates. The latter may be due to fears about their domestic market potential, while the former is usually due to fears of the strength of the international financial system, particularly as it relates to the US dollar.
There are two major international monetary systems in the world today. These are the Federal Reserve Bank of the United States and the Bank of International Monetary Fund (BIMF). International monetary policy is often referred to as a form of currency policy. This means that decisions regarding the rate of interest, foreign investment, and intervention in the internal affairs of other nations are made through the use of a variety of currencies.
It is estimated that the value of foreign currency flows between economies of the world every year is in the multi-billions dollar range. As world trade and investment increase the value of each unit of currency relative to other units of currency is also expected to increase. The nature of international monetary systems means that they can be susceptible . . . . . . to shocks to the extent that the shock may affect foreign investments, export markets, and the value of the United States dollar. An unexpected shock to the world economy may lead to a rapid increase in inflation, a reduction in exports, and increased unemployment levels and may contribute to political instability in particular countries.