Reaserch Paper Micro Economics.docVIP

China’s influence on the World Economy (Analysis of Business Cycles) Amir Alibasic, 1A – Tuzla Microeconomics Professor Dr. Carmen M. Castro, DBA American University in Bosnia and Herzegovina Abstract: In the bellow text we will be researching business cycles in China and in selected OECD countries. We show that, unfortunately negative correlation dominates for nearly all countries; we can also see large differences for various frequencies of cyclical developments. Countries facing a comparably longer history of intensive trading links tend to show also slightly higher correlations of business cycles with China. Introduction: The emergence of China in the world economy has been one of the major events in the world economy in the last two decades. While China was a predominantly agrarian economy before 1980, it is now to a large extent a modern industrial economy with booming urban regions. High trade growth was supported by large foreign direct investment (FDI) flows (see Eichengreen and Tong, 2005). Not surprisingly, growth in China has changed the distribution of economic activities across the world. Between 1980 and 2006, the share of Chinese GDP in the world economy increased from 1.7% to 5.5% (valued at market exchange rates, the share would be higher if purchasing power adjusted prices were used). Now, China is one of the most important exporting and importing nations worldwide. The new weights of the world economy have also important implications on business cycles around the world. The increasing weights of the emerging countries, and China especially, have lead to higher global growth. Moreover, global economic prospects are less influenced by few large economies (especially the US and Germany) than before. This may make the countries less vulnerable to the demand shocks in a particular region. In turn, business cycles have become also more globalized recently. The literature on business cycle synchronization stresses the importance of foreign trade and