Economic interdependence

Economic interdependence is a consequence of specialization or the division of labour. The participants in any economic system must be part of a trading network to obtain the products they cannot produce efficiently for themselves. Any change in such a network affects other participants, so that the demands for various products and the incomes of the participants are interdependent. As A. A. Cournot wrote in Mathematical Researches into the theory of Wealth "...the economic system is a whole in which all of the parts are connected and react on one another. An increase in the income of the producers of commodity A will affect the demand for commodities B, C, etc. and the incomes of their producers, and by their reaction will affect the demand for commodity A." Such complex reactions are evident in general equilibrium theory.

The economic interdependence of nations has been studied extensively. Such an international economic interaction is commonly thought of as a dollar value of the transaction of goods and services between nations (Cooper), several academics have challenged this fundamental paradigm over time. Baldwin suggests that economic interdependence may be conceived as the opportunity costs incurred from potential exit costs that incur as a result of breaking existing economic ties between nations. Whitman, cited by Baldwin, further expands on Cooper's definition and proposes that economic interdependence should also involve the degree of sensitivity of a country’s economic behaviour to policies and development of countries outside its border. However, empirical evidence to support the latter definition is a lot harder to find, given its ambiguity (Baldwin).

As economic interdependence may be perceived differently depending on the scale and context involved, various methods are used to measure the degree of interdependence between and within countries. The below documents some of the approaches that have been adopted to measure the degree of economic interdependence.

This approach is based on the precept that globalisation increases the integration and interdependence between the economy of different countries. The Hierarchical Network Approach is used to measure economic interdependence by analysing growth clusters and cross-country liaison, and business cycle synchronisations. The cross-country liaison or economic interaction between countries or states is most commonly measured by Pearson's cross-correlation coefficient. The correlation matrix is a methodical method which exhibits the mutual relationship of countries over a specified time period. To measure growth clusters, economists need to get hold and analyse changes in GDP for each country over a specified period of time. The relationship between interdependence and business cycles is calculated by the distance correlation matrices over a period of 10 years. The combination of results from the data presents the economic interdependence of countries over time. By this measure, trends from the data has shown that the degree of world economic interdependence is growing due to globalisation.

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