Question

Discuss Rees’ Spillover Effect, and outline the specific assumptions he makes in order to achieve his results. Use diagrams where necessary.

Answer 1

Rees' Spillover Effect - At times an apparently unrelated event in one part of the world may start affecting the other parts of the world. The effect is generally negative. So a domestic event in country A can even affect country B even if these two countries are miles apart. This is what the Rees' Spillover Effect is about.

The spillover effect seemed to have increased especially because of globalisation. It basically exhibits a network effect or a ripple effect across economies.

Example 1 - A fall in the house prices in the US, led to the Sub-prime crisis that happened in the US which eventually impacted the entire world leading to a global economic crisis in 2008-09.

Example 2 - The first case of COVID 19 was discovered in Wuhan, China. It soon spread to the other parts of the country and has now become a Pandemic causing a severe global health and economy crisis.

Assumptions:

1. There'll be few unconnected economies that are cut-off from the world but will still be slightly affected because of globalisation.

2. There'll be certain safe-haven countries which are really strong and powerful but can still be vulnerable to the impact of events in another country.

For example- A slowdown in China will also impact the US Economy has most US Companies manufacture their products or get their products assembled in China because of cheap labour.