If events in a single country cause its economic activity to move up or down through a business cycle, what difference(s) might it make that the economy is closely integrated with other economies in the world?

Question

What will be an ideal response?

Answer 1

One consequence of global integration is that goods and saving can flow to where they seem to offer the highest return, adjusted for risk. An economy with, say, political instability is likely to see a substantial outflow of saving, while imports might flow in where domestic output has been disrupted. Thus, other economies might benefit from the first economy's misfortune. Or, the decrease in income in one economy might hurt its trading partners by depressing demand for their exports. Similarly, financial disruption in one economy might spread to related economies. In either case, once economic conditions seem to be improving in a globally-connected economy, the expansion is likely to be strengthened by saving inflows and ready availability of markets for both imports and exports. In sum, the correlation of growth rates in linked economies may be strengthened or weakened when one economy is faltering. When one economy is booming, the effect is to strengthen the correlation.