Question

Are fears of ‘contagion’ justified?

Answer 1

In economics or finance, contagion refers to the situation in which an economic shock like a recession in one region to other regions. Due to global integration, most economic regions are interconnected. Therefore, economic events in one region have effects on other regions as well. For example, the world financial crisis of 2007-10 originated in the USA but it negatively affected almost all countries in the world. The economic crisis in one region makes investors more apprehensive of their investments and it increases the investments in different others regions as well. secondly, economic shock in one region affects trade flows as well as foreign exchange rates, which affects economies of other regions as well. So, the fear of contagion is justified.