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Economic Interdependence: Definition, Causes & Effects

Economic Interdependence: Definition, Causes & Effects
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Instructor: Lee Davis

Lee has a BA in Political Science; and my MA is in Political Science with a concentration in International Relations.

This lesson will examine the pros and cons of economic interdependence and its definition as well as its causes and effect. We will also look at how economic interdependence happens and observe who ultimately benefits and is hurt by this phenomenon.

What Is Economic Interdependence?

Let's say you've just been appointed to the president's economic advisory board. You are tasked with examining America's economic interdependence and determining how to restore the economy of the United States. How will you do it? First, you must understand what economic interdependence is.

Economic interdependence is a system by which many companies are economically dependent upon each other. On a macroeconomic level, this can involve many countries being economically dependent upon each other as well. This interdependence is a product of labor specialization, meaning that when so many products are produced in one nation, jobs become more specialized and economic interdependence is bound to form. When this happens, companies must become part of a trading network, and they depend upon each other to supply products that they cannot produce themselves. One by-product of economic interdependence is globalization. This is where each nation and their economies are dependent on other nations for products and goods. For example, the United States today depends on China to provide it with many goods.

Economic Interdependence Examples

Economic interdependence is primarily a phenomenon involving a nation with an advance economy. In a nation that has multiple industries and manufacturers, such as the United States, not all companies can produce all the inputs that they need to make the products they sell. Therefore, each industry must rely on other industries to make their components. For example, the auto industry relies on the steel industry and the computer industry to make many of the components found in its cars.

Another example is Wal-Mart, the largest chain store in the world. Wal-Mart relies upon hundreds of other companies and manufacturers for goods to sell in its stores. The suppliers also rely on Wal-Mart to sell their goods; it's a co-dependent relationship in which each company relies on the other for goods, services, and sales.

Economic Interdependence Causes

The primary cause for economic interdependence is industrialization and the advancement of a nation's economy. First, economic interdependence occurs within the nation shortly after industrialization, as the economy advances. Then, interdependence takes place with other nations that have industries not found in the home nation. An example would be the creation of the auto industry in America. As it developed it became reliant upon Southeast Asian nations to provide rubber to make tires for cars since rubber was not produced in America.

As a nation develops it will either advance further to create the goods it needs within its own borders, or it will continue to seek goods and raw materials from other nations. As a nation advances it also transitions from a manufacturing-based economy to a service-based economy; therefore, it needs to rely on other nations for manufactured goods. This is the case with the United States and its reliance on other nations for manufactured goods such as electronics, clothing, and, in some cases, food.

Economic Interdependence Effects

The effect of economic interdependence can vary based upon a nation's type of economy and what that nation has to offer. It can be argued that more advanced nations have more to benefit from economic interdependence with smaller, less developed nations. This is because goods and services from less developed nations tend to be cheaper and labor costs are much lower. However, both an advanced economic nation and a less developed one experience both positive and negative effects from economic interdependence.

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