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What is Economic Dependence?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 04 November 2016
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Economic dependence is a situation in which the cost or the revenues associated with a given project are dependent on the cost or revenues generated by another project. The concept is found within companies, industries, and even the economies of different countries. Shifts in any of the factors associated with the two related projects can lead to changes in the profitability and the general stability of one or both of the projects.

An example of economic dependence within a business would be the relationship between the cost of producing a specific good and the cost associated with marketing that good to consumers. Production costs have a direct effect on determining the retail price for the good, since the goal is to earn a return on every unit that is sold. Should the price for any of the raw materials used in the production process increase, it will have a direct effect on the amount of profit generated by each sale.

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The same general idea of economic dependence can be applied to two businesses that have a working relationship. If one company produces machine components that the other company needs to manufacture goods, any change in the line of available components will have a direct impact on the supplier’s customer. This may mean an increase in the cost of the components. In a situation where the supplier discontinues production of a given component, the result is a shift in costs and revenues for the client, at least until the component can be secured from another supplier.

Along with this type of interdependence in business, the concept of economic dependence is also found among nations. In situations where two countries establish an equitable balance of trade, each enjoys the benefit of exporting goods at reasonable prices while also importing goods at prices that are considered equitable. Should one country decide to cut imports to the other, the situation could lead to an imbalance in trade that has a negative effect on the general economy of one or both nations, possibly driving up the price for available goods or by creating a series of job losses in related industries.

At its best, obtaining an economic dependence creates a situation where all parties involved benefit from the arrangement. When an imbalance takes place, the potential for one or both parties to experience a loss of revenue or an unfavorable change in associated costs is greatly increased. For this reason, taking the time to assess the impact that any change will have on other departments within the business, suppliers and customers, and even the trade balance between nations is extremely important. Once lost, restoring an economic balance may take a great deal of time and effort.

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stoneMason
Post 5

I think the US has an economic dependence on China. We have trade agreements with China and import a lot of products from them. We also owe China a lot of money. A TV show host recently said that as of 2014, US owes China $1250 billion dollars! That's a lot of money. If China were to stop trading with us or if it were to ask for its debt up front, we would be in serious trouble.

bear78
Post 4

@discographer-- I agree with you. I see this happening all the time with food products. Consumers are often upset with the increase in prices. People are not always aware of the price changes in raw materials. So it's assumed that the company is increasing prices for no reason, just to get more profits. But I don't think that businesses usually do that because people don't want to buy a product that seems too expensive.

My grandfather has a small shop in town and he sometimes has to hike prices for the same reason. He has to explain it to his customers that when he gets products and materials at a higher cost, he has to reflect that in his price.

discographer
Post 3

I think that there is some kind of a dependence relationship in most manufacturer of goods. For example, a manufacturer that produces cereal is dependent on the corn that it uses to make the cereal. If corn prices go up, so will the price of the cereal. Otherwise, the business will not make a profit or may even incur a loss.

It's all very easy and straightforward to understand really. There are probably very few industries and businesses where this kind of dependence doesn't exist. The only exception may be the sale of raw materials like coffee beans or something similar. Any product that goes through a process for production is dependent on one or more other products and businesses.

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