The previous economic history and economic theory unambiguously confirmed that no national economy can not survive in conditions of autarchic (closed) economy in which domestic consumption would be met exclusively with domestic production. On the contrary, there are many reasons and purposes for which a country establishes economic relations or links its national economy with the economies of other countries.
By Vera Karadjova and Snežana Dičevska
The previous
economic history and economic theory unambiguously confirmed that no national
economy can not survive in conditions of autarchic (closed) economy in which
domestic consumption would be met exclusively with domestic production. On the
contrary, there are many reasons and purposes for which a country establishes
economic relations or links its national economy with the economies of other
countries.
First of all, no
country produces everything which is necessary to meet the needs of the economy
and the population. With this in mind it can be said that the basic reason for
the existence of economic relations among countries in the world stems
primarily from the need to supplement the production structure of the country.
This is particularly the case for small economies with limited scope or type of
resources. Each country is guided by comparative advantages and alternative
costs and is so determined and specializes to produce those products that have
comparative advantages, lowest alternative costs, and which may be offered for
sale on the world market.
Another basic
reason for linking the country’s economy with the economies of other countries
in the world is the influence of foreign economic relations on the formation
and distribution of gross domestic product. Thus, some countries achieve high
production that they do not spend a whole inside the country (certainly on
particular allocation system), but are able to lend a part of that production
to other countries in the form of credit or otherwise. On the other hand there
are countries, in particular least developed countries and developing countries
that cannot meet the needs of the population and the economy using only its own
production, and have inevitable need of foreign income to supplement domestic
savings, which would be used for economic development. In such conditions the
assumption which has to be included is that the borrowed foreign income be used
for creation of economic conditions and manufacturing facilities that will be
able to repay the borrowed funds. If borrowed funds are used irrationally, for
example most of them for private and public consumption and a less part for
investment spending, then it will create problems with the return of the
external debt and reduce the possibilities of getting new loans for
development.
Basic type of
foreign economic relations is foreign trade relations, i.e. import and export
of goods. Given that no country can meet the growing needs only
with its own production but must be linked to other countries, and have to
import or export goods and services. Only in exceptional cases such as wars,
economic crises and so on, a country can be brought into a state to satisfy
domestic consumption only with its own production.
Each country as
a rule is striving to finance alone its development using its own savings
without having to borrow abroad. Undeveloped and less developed countries often
do not have such economic independence because by its own production barely
cover existential needs, and their saving a so small to achieve independent
economic development. These countries need to use someone else’s income,
primarily for economic development. Developed countries from its side usually
does have that kind of economic independence, i.e. they can with their own
production and their own savings to provide consumption by volume, and can
provide such a savings that can provide further economic development. However,
in modern conditions of free flows on the international capital market
developed countries also use someone else’s income to provide even faster
economic growth, and foreign capital finds its interest in safer and faster
growth.
Specifically
speaking many conditions can be indicated that determine the foreign economic
relations of the country with other countries. The main reason and requirement
for external economic relations between countries is limited natural resources,
or in other words the diversity of natural resources the countries dispose
with. Striving to expand, to diversify domestic production, to produce as many
different products, some countries have to import raw materials and inputs that
do not have and to export those raw materials that have in quantities that
exceed domestic needs. Different natural conditions for agricultural products
also affect the connectivity of the national economy of a country with other
countries. Even small economies can have specific and unique resources that can
be exported to the world market or to specialize in a certain type of
production and thus to engage in the international division of labor.
In this context
as a requirement and reason for the spread of external—economic relations among
countries in the world is also the transfer of technical-technological progress
that goes from developed to less developed countries, starting by imports of
new advanced equipment, through the purchase of patents and licenses, until
establishment of long-term production cooperation and joint ventures, where
despite the additional capital in less developed countries comes a new
technique, technology, new management and marketing, new markets, etc.
Foreign economic
relations occur in various forms, such as import and export of goods,
performance and using services, lending and borrowing, equity joint ventures,
state’s and population’s financial transfers, transfer of technological
development etc. However, the basic and most important form of foreign economic
relations is foreign trade relations, i.e. imports and exports of goods. In
this sense, the trade balance is most important sub balance, the most important
and biggest item in the balance of payments and that the participation of
imports and exports in GDP measured the degree of linkage of the national
economy with other foreign sides.
About The Authors:
Vera Karadjova - Faculty of Tourism and Hospitality, Ohrid, Republic of Macedonia and
Snežana Dičevska - University “St. Kliment Ohridski”, Bitola, Republic of Macedonia
Publication Details:
This article is excerpt from a research paper titled "Investment Activity in Small Open Economies" by Vera Karadjova (Faculty of Tourism and Hospitality,
Ohrid, Republic of Macedonia and Snežana Dičevska(University “St. Kliment
Ohridski”, Bitola, Republic of Macedonia) | Technology and Investment, Vol.5 No.2(2014), Article ID:45625,14 pages: DOI:10.4236/ti.2014.52008
© 2014 by
authors and Scientific Research Publishing Inc.This work is licensed under the
Creative Commons Attribution International License (CC
BY).http://creativecommons.org/licenses/by/4.0/
