Chapter 9: International Economics: Basic Theory and Core Institutions

Outcome:

You have opted for a fairly open economy, which will allow you to take advantage of the global market. Each of your decisions comes with some pros and some cons. Let's look at them briefly, one by one.

You have opted for a flexible exchange rate. This choice has a variety of pros and cons. The downside is that with a flexible exchange rate, those with holdings of Abkhazian currency might fear inflation, trade their Abkhazian money for other currencies, and, in doing so, flood the market with Abkhazian currency, spurring inflation. Additionally, a flexible exchange rate will not allow you to gain the same edge in trade that a fixed exchange rate can earn you. On the positive side, however, avoiding that edge means avoiding any retaliatory action that trade partners might take to penalize you for an unfair advantage. Since a flexible exchange rate ties you in more closely to international markets, the international economic community tends to prefer it.

Next, you have chosen to allow multinational enterprises into Abkhazia. On the positive side, MNEs will bring an influx of capital to the Abkhazian economy and provide jobs to Abkhazians, bolstering the domestic economy and growing both imports and exports. However, MNEs will also hinder the development of domestic firms, as large foreign conglomerates will make it difficult for Abkhazian companies to compete.

Lastly, your decision to join international institutions will likely help Abkhazia. Foreign aid will boost your economy (for more on the benefits and risks of foreign aid, see Chapter 10), and you will have a forum to solve any international disputes. Additionally, your willingness to embrace the international community is a boon to your international trade, as regional trade blocs and international trade organizations provide you with trade partners, further boosting your nascent economy. Overall, you have taken bold steps to embrace the global economy, and will now enjoy the benefits and weather the costs of that decision.