Chapter 10: Problem 18

Why should the business cycles of Canada and Mexico be much like the U.S. business cycle, while those of South Africa and Turkey may differ from the U.S. pattern of economic expansion and contraction?

Short Answer

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Answer: The business cycles of Canada and Mexico are more likely to be similar to the U.S. business cycle because of their close trade relationships, shared economic policies, and similar cultural structures as a result of their geographical proximity and participation in trade agreements like USMCA. In contrast, South Africa and Turkey have different trade relationships, economic policies, and cultural structures due to their geographical distance and lesser economic interdependence with the U.S., making their business cycles less likely to be synchronized with the U.S. pattern of economic expansion and contraction.

Step by step solution

Understand the concept of a business cycle

A business cycle is a sequence of economic activity characterized by periods of expansion and contraction in an economy. Expansion refers to an increase in economic activity, such as higher employment and output, while contraction refers to a decrease in economic activity, such as rising unemployment and decreasing output.

Examine the factors affecting business cycles

Several factors can influence business cycles, including trade relationships, economic policies, and even cultural similarities. When countries have close trade relationships or similar economic policies, their business cycles are more likely to be synchronized, as changes in one economy can affect the others.

Compare the relationships between the U.S., Canada, and Mexico

The United States, Canada, and Mexico are closely connected through trade, as they are part of the North American Free Trade Agreement (NAFTA) and its successor, the United States-Mexico-Canada Agreement (USMCA). Additionally, all three countries have similar cultural and social structures, which further contribute to more synchronized economic activities.

Compare the relationships between the U.S., South Africa, and Turkey

South Africa and Turkey are geographically distant from the United States and have different trade relationships and economic policies. As a result, the influences on their economic cycles are less likely to be in sync with the U.S. business cycle. Furthermore, cultural and social differences may contribute to different economic patterns and developments.

Conclusion

In summary, the business cycles of Canada and Mexico are more likely to be similar to the U.S. business cycle due to their close trade relationships, shared economic policies, and similar cultural structures. In contrast, South Africa and Turkey have different trade relationships, economic policies, and cultural structures, making their business cycles less likely to be synchronized with the U.S. pattern of economic expansion and contraction.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Understanding Economic Expansion and Contraction

Economic expansion and contraction are fundamental phases of the business cycle, a natural rhythm of an economy's growth and decline. Imagine the business cycle as a heartbeat, showing that the economy is alive and constantly changing.

During an economic expansion, businesses flourish, and unemployment rates typically fall as companies hire more workers to meet growing consumer demand. Rising incomes, increased industrial production, and a bullish stock market are also indicators of this prosperous phase. Conversely, an economic contraction is characterized by slowing economic activity. Here, businesses may see declining profits, leading to reduced production, layoffs, and a bearish stock market.

These alternating periods of economic growth (expansion) and downturn (contraction) affect not just the national economy, but also the global markets and can be triggered by various factors ranging from technological innovations to geopolitical events. By observing these patterns, investors, policymakers, and businesses make strategic decisions to sustain growth or mitigate losses.

Trade Relationships and Their Impact on Business Cycles

Trade relationships are the lifelines connecting economies around the world, and they play a pivotal role in determining the synchronicity of business cycles among trading partners. When countries engage in substantial trade, they create a domino effect—what happens economically in one country can ripple through and impact the others.

For instance, if the U.S. increases its imports from Canada, the Canadian economy may experience a boost due to higher demand for its products. However, if the U.S. faces an economic downturn and reduces its imports, the Canadian economy might feel the pinch as well.

Trade relationships can also spur innovation, as countries work to keep up with or outpace their partners. This dynamic is why countries with strong trade ties, like the U.S., Canada, and Mexico, often see their business cycles move in tandem. In contrast, nations with weaker trade connections may experience less correlated economic cycles, leaving them more isolated from the ebb and flow of their trading partners' economies.

The Role of NAFTA in Business Cycle Alignment

The North American Free Trade Agreement (NAFTA), which has been replaced by the United States-Mexico-Canada Agreement (USMCA), represents a landmark trade deal that eliminated most tariffs on goods traded between the U.S., Canada, and Mexico. This agreement fostered deeper economic integration among the three countries, leading to an alignment in their business cycles.

NAFTA facilitated a more seamless flow of goods and services, investment, and labor across North America, interlinking the economies. As trade barriers fell, businesses expanded cross-border operations, further intertwining the economic fortunes of these nations.

Such economic interdependence means that an economic shift in one NAFTA member country will likely impact the others. For example, if the U.S. automotive industry experiences a boom, Canadian and Mexican suppliers may also benefit, demonstrating synchronized growth. Therefore, NAFTA has been a critical factor in harmonizing the business cycles of its member countries, contributing to their shared prosperity and challenges in the global economy.