Question

If we assume that there are two economies that are trading parties. When one of them goes through an economic recession show graphically how this business cycle is transmitted to the other country.

Answer 1

When two countries are trading partners, their economies get closely linked. Factors that influence one economy would also effect the other economy creating a dynamo effect.

Two trading partners would be importing and exporting goods from each other's economy. When there is a recession in one country,( recession is when a country has negative growth rate in two consecutive quarters) it means that the country would have lower income, widespread unemployment, lower demand and investment in it's economy. In such a scenario, the other country which exports certain good to the first economy would not be able to sell its product because of lower demand and income. This would lead to inventories in country two and It would cut down it's production. Also, since the supply of imported good would be less, the price of that good would go up, this would result in lower consumption also. Thus, lower consumption and lower production would start the cycle of recession in the second country two.

Graphically, it has been shown below-