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An economy moves between extended periods of positive output growth and shorter periods of negative growth. Shifting between these phases is typically referred to as the business cycle. This cycle is a prominent feature in economies—both advanced and developing—and can be correlated across countries. The correlation of business cycles implies that groups of countries are in the same phase for stretches of time. The example which shows the annual gross domestic product(GDP) growth rate in United States, Canada and Mexico also show the correlation of business cycle between countries. From 1981 to 2014. The GDP of United States and Canada move similarly over the past 30 years, in the past 10 years the Mexican economy also fell into sync. The correlation between U.S. and Mexico increased by over 100 percent, which is good to them.
Business cycle synchronization might occur because countries experience shocks common to all countries. For example, the oil price shock ups and down the price of oil for everyone in the country. Or shocks common to countries in the same region. For example, the interruption of weather and collision between region. Otherwise, shocks could occur in one country and spread rapidly to nearby countries. The degree to which business cycles synchronization across countries might depend on, among other things, physical distance, the amount of bilateral trade, similarities in institutions or language, or historical trade routes.
Imagination of country’s business cycle as having a global component, a regional component and a country component is one of the way to think about business cycle synchronization. This three type of component has their own define and efficacy. Global component captures the same movement of all country’ business to represent as global synchronization. Regional component captures the same movement with country’ neighbour to represent as regional synchronization. Country component capture the movement in business cycle which are unique to the country leading it to a more independent business cycle. The relative of these component will influence the strength of the correlation of country’s business cycle, if the regional component of a country’ s cycle is larger than the other two components, than the country may appear more synchronized with its neighbors than with the world.
Over time everything changes, as well as the determinants of business cycle synchronization like institutions and trade patterns. The formation of the European Union and the ratification of the North American Free Trade Agreement will be the good example of change. Increased bilateral trade between countries by decrease in transportation costs and the ability of more ports to off-load large shipping containers. regional trade agreements have replaced the trade led to globalization, rather than globalized business cycle synchronization it has more potential in the future.
The important of regional cycle in Europe and Asia had risen significantly, to understand the synchronization and which country are synchronized can be the important assembly for implementing countercyclical policy. Downturns in other countries that have synchronous cycles can forecast domestic downturns, leading to more timely policy. Understanding synchronization can also provide insight into the impact of trade diversification, of the increase in financial flows and of regional trade agreements, all of which have helped to define the global economy in the 21st century.
In conclusion, the global components and regional components, which indicate cross-country comovement, rather than the country components, which indicate how data within the country move. For this article’ authors, what they do for studying the business cycle is consider the importance of these components for each country’s business cycle over a 30-year period beginning in 1960. Countries are sorted into seven “continental” regions based on geographic proximity. And then consider whether geographically defined regions are optimal and provide some evidence for using economic institutions, in addition to physical distance, as a measure of forming regions.
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