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It is often said that when America sneezes, the entire world catches a cold. This is because of the high degree of integration between the American economy and other economies of the world. Ever since World War 2 ended, America became a dominant economic power. This led to increased integration between the American economy and that of other major global economies.
This increased integration is good as well as bad. It is good because it enables more trade and America benefits from the competitive advantage that it has. However, it is also bad because it created the risk of contagion. These increased inter-linkages are the reason that the subprime mortgage crisis of 2008 was not a local affair. Instead, its effects were felt all around the world.
This article focuses on the details of the integration between the American economy and the world economy.
Statistics provide the best representation of the degree of integration between the American economy and the world economy. Some of the important statistics are as follows:
It is estimated that over half the revenues earned by the top 500 companies in America are earned via international trade or foreign operations.
Since these 500 companies provide a lot of employment in the United States, it wouldn’t be far-fetched to say that the future of American workers is integrated into foreign economies.
There are some statistics which are not very favourable. However, they too explain the importance of foreign trade in the American economy. Some of them are as follows:
Many of these people are not able to find jobs that pay the same wages. Hence, their purchasing power is decreased. The nation as a whole loses about $50 billion in purchasing power every year. However, since the gains from foreign trade far exceed the $50 billion loss, trade continues unabated.
All the above statistics clearly show the integration between the American economy and the world economy. The above points make it clear that disintegrating from the world economy would be a difficult and tedious task for America. This is a wake-up call for the American population.
Hence, they implicitly believe that America is in a position where it is unilaterally calling the shots, and everybody else in the world economy has to listen to them. This is not really true.
As mentioned above, America needs the other world economies as much as they need America. Hence, all the trade wars are counterproductive and must be stopped.
It is easy to connect the dots and see that Americans have been borrowing money and spending it on consumption. The policies of debt-financed housing, consumer finance, and even government spending have to stop. The era of low-interest rates also needs to end, or else America will collapse under its own debt and take the world along with it.
The bottom line is that the American economy cannot be analysed in isolation. It is so interconnected with the entire world that economic events in distant places also have a huge impact on the American economy.
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