INTRODUCTION
International Economy can be understood as global trade and international investment, which allows countries to meet their short and long-term political-economic objectives. The classical economic model’s discouraged trade and therefore; the size of trade and international investment was low. However, gradually countries started to realize that trade can be used as an instrument to achieve various kinds of short, medium, and long-term political-economic objectives.
Also, when classical economic models were prevalent, the concept of Absolute Advantage was current. According to this Adam Smith’s concept, trade between the two countries is based on Absolute Advantage in production. Unless there is an Absolute Advantage, countries will not trade goods or services. However, this concept of Adam Smith was challenged by the Ricardian theory of trade, according to which countries trade is based on their Comparative Advantage rather than Absolute Advantage. This new concept, about trade, played a major role in changing perception regarding trade and its qualities. This concept also suggested that when countries’ trade is based on their Comparative Advantage, they allocate their resources more optimally and this apt or optimal employment or exploitation of resources allows countries to achieve their political-economic goals at a lower socioeconomic cost. Therefore, countries begun to reform their economic models, so that they might increase trade (Anderson, Larch and Yotov).
Later, at some stage, it was also acknowledged that international private sector investment was a component of International Economy or Trade (both terms are almost substitutes). In fact, several studies suggested that Foreign Direct Investment could be used as an instrument to expand the size of the economy and to improve quality of the economy. Therefore, we witness an almost simultaneous increase in both sizes of trade and global Foreign Direct Investment inflows.
THE UNDERLYING CONCEPTS OF INTERNATIONAL ECONOMY
The rationale, behind the emergence of the global economy, is that trade benefits country and therefore; the size of the trade must increase. Similarly, it is believed that because of Foreign Direct Investment inflows and outflows economies are affected positively. These underlying concepts facilitated countries to devise free trade agreements, such as North Atlantic Free Trade Agreement, so that countries may increase export their exports, which directly affect primary economic concerns such unemployment rate and economic growth.
For instance, when exports of an economy grow, firms generate more revenue. This increased revenue acts as an incentive to produce more, which not only increases the size of overall production in the economy, of both goods and services, but also it allows better allocation of resources because of specialization (Ricardian rationale regarding trade). However, studies also suggest that it is not merely the concept of comparative advantage, but also taste that plays a major role in trade. For instance, United States import and export almost same number of automobiles, which suggest that not just the comparative advantage, but also several other economic factors played the role the in the emergence of the global economy and to this playing their part in its sustenance (Rupert).
Other the Foreign Direct Investment and Trade, International Economy is also a consequence of political changes. For instance, in some cases, trade is increased with the intention to meet strategic objectives. The trade increases mutual dependency and allows countries to deepen their cooperation on other fronts too, such as defense and Science/Technology. Therefore, there are numerous factors, which have played their role in the emergence and sustenance of International economy, which is very complex and primary asked at trade (Gaston).
FOREIGN DIRECT INVESTMENT AS A COMPONENT AND INSTRUMENT OF INTERNATIONAL ECONOMY
It is very apparent from the scrutiny of evidence and literature, related to International or Global Economy that Foreign Direct Investment is not only a sub-component of International Economy but also it is an instrument, which is used by economies to realize various kinds of political-economic objectives. For instance, developing economies require private investment to intensify economic activity, which positively affects both 1) size of the economy and 2) quality do economically. In fact, the factor, liberal economic reforms, which was introduced to attract foreign direct investment, became one of the dominant reasons for the development or emergence of International Economy.
In the late early 90s, many countries introduced liberal economic reforms, which primarily focused Foreign Direct Investment and Size of trade. These countries devised strategies to attract investment in particular sectors of the economy, which required boost and improvement. Large corporations too were interested in investing in exploiting these incentives, which were being offered and thus suited their operations to these countries. We learn that type of investment determines its destination. For instance, in the global economy, where it is easy for corporations to invest in foreign economies, manufacturing-related investment, mostly lands in labor-intensive economies, whereas high-tech investment is mostly destined for advanced or developed countries. It suggests that not only Foreign Direct Investment is a sub-component of International or Global Economy, but also it is an instrument of It, which is used improve the quantity and quality of economies. It also gives the impression that world economy, partly self-governs itself and its design and nature play a part in directing Foreign Direct Investment.
TRADE AS A COMPONENT OF INTERNATIONAL ECONOMY
At the beginning of this discourse, it has been asserted, based on evidence, that terms the terms international trade and the global economy are similar (not identical); however, it is also true that trade has become a component of International Economy. We have discussed, in great detail how trade assisted the emergence and the sustenance of the global economy. The recent evidence suggests that trade is influenced by the global economy and its state rather than the other way around. After the Great Recession, of 2008, size of both FDI inflows and trade plummeted; however, as the global economy started to resuscitate, the size of both trade and FDI inflows started to swell.
It makes it lucid that the world economy affects both trade and foreign direct investment, which makes them the components of International Trade. We can also infer that to extent economists and statisticians will be able to predict changes in the global economy, world FDI and trade by considering any of the two variables for these three mentioned.
Trade is not only a component, evidence suggests, but also an instrument. However, this is not an instrument of the international or global economy, but rather of economies that come together to form the international economy. It is also a fact that trends in the international economic system affect countries’ decisions regarding trade (OECD).
INTERNATIONAL ECONOMY’S IMPACT ON ECONOMIES
One of the serious and most asked questions is that how the gradual emergence of the global economy has affected developed and developing economies. The numbers, which are supposed to be self-explanatory, have failed to explain the impact of globalization of economies and amalgamation of regional/international economies on various aspects of the economy. For instance, we know that increase in trade and Size of Foreign Direct Investment, which constitutes global economy, directly impacted and positively impacted Chinese economy. We learn that since the introduction of economic reforms, by the Chinese government, there has been a great economic improvement.
The manufacturing capacity of Chinese economy, increased spectacularly to the extent that it became a global manufacturing power. Studies suggest that Foreign Direct Investment in particular sectors of the economy allowed the Chinese economy to evolve at an unprecedented rate. However, similar cannot be said regarding other labor-intensive economies of that or other regions. This ambiguity regarding the impact of trade and FDI on the economy makes a trade, FDI, and international economy make them very controversial political-economic subjects, and during the election campaigns these subjects have been discussed at length and right of the central political parties and politicians have severely criticized free trade (Collins).
CONCLUSION
In the end, it is quite apparent from this lengthy discourse that Global Economy is a consequence of changing precepts regarding trade and investment. As the size of trade started to grow, world economies started to amalgamate, which gave rise to the global economy. However, with the time global economy became a semi-autonomous phenomenon, which influenced both trade and FDI that gave the impression that both were its components. Later studies based on evidence forced this point of view. The impact of trade and FDI is very apparent in some economies, adverse on few and ambiguous regarding the rest.
Work Cited
Anderson, James E, Mario Larch and Yoto V Yotov. “Trade and Investment in the Global Economy.” National Bureau of Economic Research (2017): 1-29. Document.
Collins, Mike. “Globalization: The Concept, Causes, and Consequences.” Forbes. Forbes, 6 May 2015. Web. 23 January 2018. https://www.forbes.com/sites/mikecollins/2015/05/06/the-pros-and-cons-of-globalization/#447a4e37ccce.
Gaston, Noel. Globalization and Economic Integration: Winners and Losers in the Asia-Pacific. Edward Elgar Publishing, 2010. Book.
OECD. “Services Trade Policies and the Global Economy.” OECD. OECD, 8 June 2017. 23 January 2018. http://www.oecd.org/publications/services-trade-policies-and-the-global-economy-9789264275232-en.htm.
Rupert, Mark. Globalization and International Political Economy: The Politics of Alternative Futures. Rowman & Littlefield, 2006.
+447462439809