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Lee has a BA in Political Science; and my MA is in Political Science with a concentration in International Relations.
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 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.
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.
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.
The positive aspect of economic interdependence is that it helps grow economies for both an advanced nation and a less developed one. The advanced nation grows because there are more unique goods to offer, and goods are offered more cheaply because the inputs of production (i.e. raw materials) coming from the other nation are inexpensive. The less developed nation benefits from the advanced nation making investments in the less developed nation, which boosts the less developed nation's economy.
An example of the benefits of economic interdependence includes the United States and China, or the United States and India. Both China and India were less developed nations in the 1960s and 1970s. However, due to economic growth in the United States, China and India have benefited by the amount of money that has been spent in their nation by the United States. Because of this economic interdependence, China and India have grown to become emerging economies on the brink of becoming advanced economies.
However, with economic interdependence, nations or companies can become so interdependent upon each other that a shift in either nation can strongly impact the other. A prime example of this is the economic crash of 2008. The near collapse of the financial system in United States economy had worldwide repercussions and caused a domino effect with other nations. Other nations, whose economy and industry relied upon American money, experienced significant impacts on their economies as well, due to the fact that there was less American money being invested in their economies.
Economic interdependence is a system by which many companies and nations are economically dependent upon each other. We've learned that it's a product of labor specialization, which is when so many products are produced in one nation that jobs become more specialized and economic interdependence is bound to form. A by-product of economic interdependence has been globalization, which is where each nation and their economies are dependent on other nations for products and goods.
We've also learned how economic interdependence is a phenomenon having positive and negative aspects. It's a phenomenon that is bound to happen, and to stop it would have serious effects on any nation's economy. For example, North Korea is a nation that does not trade with most of the world; due to its lack of economic interdependence, it's among the most economically depressed nations in the world.
Industrialization is a major cause of economic interdependence. Advanced economies often become dependent on other nations for goods and services they do not produce themselves. In general, nations benefit from economic interdependence. However, lesser economically developed nations tend to be hurt by economic interdependence when a slowdown in an advanced nation suppresses investment and demand for the products supplied by a lesser developed nation.
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