OPINION | Openness of the Small Economies : Why Is It Necessary?

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/