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Hi there, this week we've looked at

Â the discussions surrounding the concept of globalization.

Â We've examined the main international components of the world economy.

Â We've looked at international trade,

Â foreign direct investment and financial markets.

Â In this last lecture, we're going to bring all of these together and relate them to GDP,

Â and then we're going to pose the question "what

Â exactly are the implications of this for society?".

Â Now in trying to piece together the world economy,

Â we're faced with one big problem.

Â All the components are being calculated in different ways and for different purposes,

Â and so it's almost impossible to put them

Â together in any consistent and any accurate way,

Â but just to say that we can't say anything

Â accurately doesn't mean that we can't say anything at all.

Â So let's start with a baseline number.

Â Let's take GDP, which for all its shortcomings is still

Â the best measure we have for the output of goods and services in a society.

Â In 2012, the world GDP in current dollars was $72.2

Â trillion and the value of world trade in that year was $18.2 trillion,

Â and here we confront our first problem.

Â In calculating GDP, the only part of a transaction that counted was the value added.

Â In foreign trade statistics,

Â the whole value is added every time,

Â so there is a degree of double counting in this number.

Â Next then we can turn to foreign direct investment,

Â and here at least the recorded statistics present no problems,

Â and the value of FDI 2012 was $1.45 trillion.

Â So that basically deals with the real economy in its global dimension.

Â Now we turn our attention to the financial sector.

Â Let's start with equities, stocks and shares.

Â We have a figure for end year total valuation of $52.5 trillion.

Â Now trading volume of about the same amount,

Â $50 trillion, but foreign ownership is not likely to be large.

Â So let's say 10 percent

Â and that would give us an international trading figure of $5 trillion.

Â When we turn to bonds,

Â we have a figure for the end year value of assets internationally held,

Â which was $22.8 trillion,

Â and we assume that the behavior mirrors that of equities that we

Â could take a trading volume of about 20 trillion in a given year.

Â For derivatives now, we had a total turnover of the nominal value for

Â 2013 of $1,886 trillion,

Â but we noted that only a small down payment ever change hands.

Â So how small is small?

Â Well, the Bank of International Settlements is trying to

Â establish a minimum ratio of around 3 percent,

Â lower for some transaction higher for others.

Â If we take this as a ratio,

Â we get a trading figure of $56.6 trillion,

Â but note if it does go wrong,

Â then the investor can get stung for the whole amount,

Â and finally we arrive at foreign exchange transactions where we

Â put on a value of $1855 trillion,

Â but much of that so we are told shouldn't

Â count since it involves the swapping of currency,

Â but it does involve the transfer of real assets,

Â real assets with real values.

Â Real assets with real values and real values that can and do change.

Â So I don't think we should be quite so cavalier and

Â say it doesn't really matter if a dollar is a Euro.

Â Now these numbers are mind bogglingly huge.

Â Remember that a trillion is one followed by no less than 12 naughts,

Â but it's still money.

Â So let's try and put it in an easier context.

Â Most common way to do this is to relate it all to GDP.

Â So for example, people would say,

Â not only do say that foreign trade is equivalent to 25 percent of world GDP.

Â Foreign direct investment then be equivalent to 2 percent of world GDP.

Â Now a rough estimate for the International Trade in equities would be 7 percent of GDP.

Â International bond trade would be equivalent to 28 percent of GDP,

Â and there are very nice and very kind adjustment in

Â derivative trade would still be 78 percent of GDP.

Â So, so far the value of transactions in the financial sector

Â already exceeds the total value added to the world economy in one year,

Â and now we need to add currency transaction,

Â which by itself are whole 25 times bigger than GDP.

Â Did I just say that 25 times bigger?

Â And again the numbers are just becoming meaningless.

Â It's money we're talking about.

Â So let's start all over again.

Â Imagine that our GDP as a globe,

Â is in fact the planet Earth,

Â and on top of that we start layering our globalization components in $100 bills.

Â OK, let's run quickly through the numbers again.

Â Let's start with foreign direct investment, $1.45 trillion.

Â $100 bills, the pile would reach 1,584 kilometers into space.

Â We'd be at the upper end of low Earth orbit and already we

Â will have passed the international space station below us.

Â Add foreign trade, $18.2 trillion.

Â This would reach almost 20,000 kilometers into space.

Â We put a distance at which GPS satellites are

Â parked and then we have the financial sector,

Â take that added up,

Â $5 trillion for equities,

Â $20 trillion for bonds,

Â and the $55 trillion changing hands for derivatives,

Â and we've reached 93,000 kilometers into space.

Â By now we're about one-third of our way to the moon.

Â We haven't even had foreign exchange transactions yet, $1,855 trillion.

Â I hope by now the pile of notes stretches 2 million kilometers into space.

Â We can easily get to the moon and back,

Â probably get to the moon and back twice over and still have a small fortune left.

Â If we simply carried on, we'd be on our way to Mars.

Â In fact, if we've done this entire exercise in $1 bills,

Â we'd be at Mars already and be on our way to the next planet.

Â So around the core of

Â a globalized real world buying and

Â selling real goods and services and investing in real businesses,

Â we have a much larger world of financial markets

Â involving infinitely larger sums of transactions.

Â But where do we find these numbers in the GDP statistics?

Â Well, GDP calculations deal only with the value

Â added to the stock of wealth generated then by an economy.

Â So all of these financial transactions appear in the labor costs

Â and profits generated by the financial services industry.

Â In developed economies with large financial service sectors like the U.K.,

Â this can account for up to 10 percent of GDP.

Â In America, the United States,

Â the figure is a more modest 7 percent of GDP,

Â and these numbers also include all the insurance,

Â mortgage, and banking services that we consume domestically.

Â So we have a situation where

Â transactions exceeding in multiples of what we would deal within

Â the real world that make a modest contribution to

Â a relatively small sector in relatively rich countries.

Â Huge volumes though small margins but

Â entailing massive financial risks that affect us all.

Â Well, I started this series of videos

Â with a reading from John Maynard Keynes and I'd like to end with one.

Â This time I want to read from Susan Strange "Casino Capitalism."

Â Susan and I spent a bit of time together at the European University Institute.

Â A fascinating person who came from

Â journalism into the economics game and actually writes well.

Â In her book "Casino Capitalism," which was published in 1986,

Â only two years after globalization began its penetration of economic literature,

Â she wrote the following: "The Western financial

Â system is rapidly coming to resemble nothing as much as a vast casino.

Â Every day games are played in this casino that

Â involve sums of money so large they cannot be imagined.

Â At night, the games go on on the other side of the world.

Â In towering office blocks that dominate all the great cities of the world,

Â rooms are full of chain-smoking young men all playing these games.

Â Their eyes are fixed on computer screens flickering with changing prices.

Â They play by intercontinental telephone or by tapping

Â electronic machines or with computer algorithms today.

Â They are just like the gamblers in casinos watching the clicking spin

Â of a silver ball on the roulette wheel and putting their chips on red or black,

Â odd numbers or even numbers."

Â And then she goes on to say,

Â "These bankers and dealers seem to be a very different kind of men working in

Â a very different kind of world from the world of finance

Â and the typical bankers that older people remember, like me.

Â Bankers used to be thought of as staid and sober men,

Â grave-faced and dressed in conservative black pinstripe suits,

Â jealous of their reputation for caution

Â and for the careful guardianship of their customers' money.

Â Something rather radical and serious has happened to

Â the international financial system to make it so much like a gambling hall."

Â What that change has been,

Â she said I'm writing in 1986 and how it came about are not clear.

Â Well, it might not be clear,

Â but one big thing has happened.

Â It has huge consequences for us today and we've gone through the effect of

Â that with the most recent financial crisis and underlying this is a loss of trust.

Â