It is common to limit questions of the world economy exclusively to Human economic activity, and the world economy is typically judged in monetary terms, even in cases in which there is no efficient market to help valuate certain goods or services, or in cases in which a lack of independent research or government cooperation makes establishing figures difficult. Typical examples are illegal drugs and prostitution, which by any standard are a part of the world economy, but for which there is by definition no legal market of any kind.
However, even in cases in which there is a clear and efficient market to establish a monetary value, economists do not typically use the current or official exchange rate to translate the monetary units of this market into a single unit for the world economy, since exchange rates typically do not closely reflect world-wide value, for example in cases where the volume or price of transactions is closely regulated by the government. Rather, market valuations in a local currency are typically translated to a single monetary unit using the idea of purchasing power. This is the method used below, which is used for estimating worldwide economic activity in terms of real US dollars. However, the world economy can be evaluated and expressed in many more ways. It is unclear, for example, how many of the world's 6.5 billion people have most of their economic activity reflected in these valuations.
World Economy in 1998-2005
Growth in global output (gross world product) (GWP) (in this article defined as GDP converted to US dollars through estimated purchasing power parity exchange rates) fell from 4.8% in 2000 to 2.2% in 2001 and 2.7% in 2002. The causes: sluggishness in the US economy (21.6% of GWP) and in the EU economy (21.4% of GWP) ; continued stagnation in the Japanese economy (7.0% of GWP); and spillover effects in the less developed regions of the world.
China, (12% of GWP), proved an exception, continuing its rapid annual growth, officially announced as 8% but estimated by some observers as perhaps two percentage points lower. India maintained a growth rate of around 6%, and its economic liberalisation pushed it forward into a modern economic superpower. Russia (2.6% of GWP), with 4% growth, continued to make uneven progress, its GDP per capita still only one-third that of the leading industrial nations. The other 14 successor states of the Soviet Union and the other old Warsaw Pact nations again experienced widely divergent growth rates; the three Baltic nations continued as strong performers, in the 5% range of growth. The developing nations also varied in their growth results, with many countries facing population increases that erode gains in output. Also, since 2003, the economies of the U.S and Japan have been speeding up.
Externally, the nation-state, as a bedrock economic-political institution, is steadily losing control over international flows of people, goods, funds, and technology. Internally, the central government often finds its control over resources slipping as separatist regional movements - typically based on ethnicity - gain momentum, e.g., in many of the successor states of the former Soviet Union, in the former Yugoslavia, in India, and in Indonesia.
The euro as the common currency of much of Western Europe in January 1999, while paving the way for an integrated economic powerhouse, poses economic risks because of varying levels of income and cultural and political differences among the participating nations.
The terrorist attacks on the US on September 11, 2001 accentuate a further growing risk to global prosperity, illustrated, for example, by the reallocation of resources away from investment to anti-terrorist programs. The opening of war in March 2003 between a US-led coalition and Iraq added new uncertainties to global economic prospects.
Growth in global output (gross world product, GWP) rose to 3% in 1999 from 2% in 1998 despite continued recession in Japan, severe financial difficulties in other East Asian countries, and widespread dislocations in several transition economies, notably Russia. The U.S. economy continued its remarkable sustained prosperity, growing at 4.1% in 1999, and accounted for 21% of GWP. Western Europe's economies grew at roughly 2%, not enough to cut deeply into the region's high unemployment; the EU economy produced 22% of GWP. India's economic growth continued at around 6%. China continued its strong growth and accounted for 12% of GWP. Japan grew at only 0.3% in 1999; its share in GWP is 7%. As usual, the 15 successor nations of the USSR and the other old Warsaw Pact nations experienced widely different rates of growth. The developing nations varied widely in their growth results, with many countries facing population increases that eat up gains in output.