The Interconnectedness between the American Economy and the World Economy

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.

How Integrated is the American 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:

• America is home to the largest number of multinational companies in the world. 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.
• America as a nation does not save much. As a result, America has to finance its operations by selling debt. It is estimated that more than 50% of this debt is owned by foreign countries like Russia and China.
• Apart from government borrowing, the American private sector is also largely dependent upon foreign investments. Much of the domestic investments which are required to maintain a healthy growth rate are financed by other countries.
• Experts believe that foreign trade has added close to $1.5 trillion to the nation’s Gross National Product. This works out to about 10% of the total size of the economy. To put the number into context, every family gains around $10000 per annum thanks to international trade.
• Lastly, America has the largest economy in the world. The American GDP is about $20 trillion. Hence, in dollar terms, the American economy accounts for almost a third of the entire world economy. This is enabled by American household consumption which is the highest in the world. All these factors make the American market an attractive destination for multinational companies based in other parts of the world.

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:

• International trade leads to a lot of workers losing jobs in America. This is because there are workers in lower income countries who are willing to do the same job for much less. This is the reason that every year half a million people lose their jobs due to globalization. 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.
• America has been obsessively borrowing for close to three decades now. This is the reason that America’s foreign debt is spiralling out of control. About 40% of the entire debt, i.e. $6 trillion is owned by foreigners. Increased indebtedness towards foreign countries makes the American economy vulnerable to economic attacks in the long run.

Implications for the American Public

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.

• Americans have been voting for Trump because they believe that he will put America’s interests first and renegotiate all the trade deals. 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.
• Secondly, Americans need to realise that they cannot continue to binge on debt. Numbers clearly tell America’s story. America is the highest consumer market in the world, and it is also the biggest borrower in the world. 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.

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.