Economic interdependence is the consequence specialization or division of labor. Participants in any economic system should be part of the trading network to get products that they can not efficiently produce for themselves. Any change in such networks affects other participants, so the demands for the various products and income of the participants are interdependent. As AA Cournot writes in Mathematical Research into theories of Wealth "... the economic system is the whole in which all parts are connected and reacted to each other." Increased revenue from commodity producer A will affect the demand for commodity B , C, etc. and income from their producers, and by their reactions will affect the demand for commodity A. "Such complex reactions are evident in general equilibrium theory.
The economic interdependence of countries has been widely studied by professors around the world. Such international economic interaction is generally regarded as the dollar value of intercompany goods and services transactions (Cooper), some academics have challenged this fundamental paradigm over time. Baldwin points out that economic interdependence can be understood as the opportunity cost arising from potential exit costs arising as a result of the breakdown of inter-country economic relations. Whitman, cited by Baldwin, further extends Cooper's definition and proposes that economic interdependence should also involve a degree of sensitivity of a country's economic behavior towards state policies and development beyond its borders. However, empirical evidence to support the latter definition is much harder to find, given its ambiguity (Baldwin).
Video Economic interdependence
Approach to measure international economic interdependence
Because economic interdependence can be perceived differently depending on the scale and context involved, various methods are used to measure interdependence between and within countries. The following documents several approaches that have been adopted to measure the level of economic dependence.
Hierarchical Network Approach
This approach is based on the principle that globalization enhances the integration and interdependence between the economies of different countries. The Hierarchical Network Approach is used to measure economic interdependence by analyzing growth clusters and cross-country linkages, and synchronizing business cycles. Cross-country relations or economic interactions between countries or countries are most often measured by the Pearson cross correlation coefficient. The correlation matrix is ​​a methodical method that shows the reciprocal relationship of states over a given period of time. To measure growth groups, economists need to hold and analyze changes in GDP for each country over a period of time. The relationship between interdependence and business cycles was calculated with distance correlation matrices over a 10-year period. The combination of results from the data presents the interdependence of the country's economy over time. Given this measure, trends from data have shown that the level of interdependence of the world economy is increasing due to globalization.
Geopolitical Approach
Another way of measuring the level of economic interdependence is through a geopolitical approach, based on the assumption that economic interdependence may exist because countries trade with each other to acquire the strategic goods needed for national and defense industries. Geopolitical approach is based on vertical and horizontal interdependence. Vertical interdependence measures how changes in the price of goods in State X will affect State Y (or how price changes in Country A will affect State B), while horizontal interdependence calculates the level of bilateral trade, transactions and investments involved between the two. countries. Both vertical and horizontal interdependence data should be used to measure economic interdependence. This is because in the given situation that there is a high correlation of vertical interdependence between state X and state Y, if there is no horizontal interdependence (transactions of goods, services or capital) between the two countries, country X and state Y will have little/no economic interdependence. Vertical horizontal interdependence can arise due to other factors such as changes in economic power around the world. For example, consider the case of trade and factor flow among the Arab countries (which is usually very limited); while we observe parallel movements in factor prices, this may be simply because of the influence of global market forces that affect all economies in the same way.
Exit Approach Model
As suggested by Baldwin and Crescenzi, economic interdependence can be modeled as a function of potential economic exit costs, which can hinder, motivate or fail to influence political conflict. The main challenge faced is the need for valid methods for measuring outgoing and interdependence costs, while maintaining a systematic approach with many countries involved (n-large analysis). Crescenzi discusses this by interacting bilateral price elasticity data with trading activity data, to represent both market structures and the potential exit costs of potential economies. While the price elasticity data reflect a country's ability to react to economic change initiated by other countries, its interaction with trade share data is very important because it shows how strong the relative interdependent relation to each country's economy and the trade portfolio in the global market.. With these two components, Crescenzi continued his studies by explaining the relationship between economic interdependence and its relationship to political conflict.
Maps Economic interdependence
Evolution of Economic Interdependence
The interdependence of the global economy has grown exponentially in the span of a generation, as a result of great technological advances and related policies aimed at opening the national economy internally and externally to global competition.
Paehlke noted that international investment and trade have increased dramatically over the last 100 years except during World War I and World War II. Over time, economic interdependence has incorporated other aspects brought about by contemporary globalization - as a result of the beginning of the age of computerization, telecommunications and travel and low cost shipping. Since international trade has risen at a rate above 8% during the 1950s to 1970s, and has also been driven by improvements in information technology in the 1990s, inter-country economic interdependence has increased more rapidly.
Given the rapid rise in international trade and capital flows traditionally attributed to globalization, there has been an increasing interest in issues of financial and economic interdependence, in part driven by contagion caused by the financial crisis.
References
Source of the article : Wikipedia
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