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, you have chosen not to join international institutions. Given that you have embraced the global economy, this is a tricky decision. You have jumped into the international economic community without joining the institutions that guide it. International partners are hesitant to trade with or invest in Abkhazia, and your international economic action is constrained. If you are going to maintain an open economy, you will likely want to move toward membership in international institutions soon.