Question

If two regions are each other’s most important trading partners, can we assume that their business cycles will move together. Why or why not?

Answer 1

Being important trading partners of each other, the business cycle of their economy will move together, because robustness in economy of one region, will create demand that will be catered by robust supply in partner economy of another region. When there is a slowdown in one region and less demand as well as decrease in import, then it is going to negatively affect supply of another region, laying off workers and decrease in demand of another economy of another region. So, another region also goes into the slowdown. It proves that two trading partner economies complement each other.

In real world, it can be observed that slowdown in the USA due to 2008 crisis, led the spread of slowdown across the world in different capacity.