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Business and World Economy

Business and World Economy

The European Union

The EU is a political and economic association that consists of 28 European countries. EU was formed after World War II to counter the effects of the war and to deal with political, economic and social issues from a common platform. Most countries, especially the ones with developing economies, suffer budget deficits and require back up. Such back up can come in form of foreign investors committing their money to various development initiatives with a hope of getting a return on their investment with profit.

The main purposes of the union are to encourage interdependence and to discourage another war in Europe. The EU has since been instrumental in promoting peace, stability, as well as economic excellence of the member states.

The formation of the EU has been foreseen through an array of binding treaties with member states seeking to adopt common policies and harmonize laws on various political, economic and social issues. These member states have a common customs union that provides for a common market in which people, goods and capital move without any restrictions. The countries in the EU also share common agricultural and trade policies.

The Euro is a common currency to eighteen of the states that are part of the EU. Progress is also being made to come up with shared intrnal security measures through the development of Common Foreign and Security Policy. These states utilize common institutions for promotion of their collective interests, and set policy. The European council is one of the notable institutions and acts as the driving force for the European Union policy. The council comprises the heads of European countries’ governments. The European Commission and the Council of Ministers are also key institutions involved in setting policy for the EU.

Foreign Direct Investment

Foreign Direct Investment contributes to the growth of the economy of a country through their contribution to the aggregate demand of economy. FDI brings stable and long-lasting capital flows since they get invested in long term assets. Foreign investors threaten local companies; as a result, these firms have to be more productive and create more jobs in order to achieve economic growth.

FDI leads to transfer of specialized knowledge and technology which is favorable for the economy and leads to increased productivity. FDI also enables countries to clear budget deficits, thus fuelling development and economic growth.

Large international companies tend to invest in the most profitable, hence the most important, aspects of the host economy and in most cases lead to monopolization, which is not good for consumers. Siince the investments are foreign, most of the profits end up in bank accounts outside the host country, especially if these host countries have drafted poor policies on FDIs.

Most foreign companies concentrate on investing in intellectual property and machinery rather than employment for the local people. Most foreign investors’ emphasis is on setting the terms for the investments; in most cases, they are inclined against the host states.

The System of Bretton Woods

The system of Bretton Woods was coined in 1944 in New Hampshire. It lasted up to 1971. It was meant to govern exchange rates, international trade and foreign lending. The architects of the system wanted a monetary arrangement that would bring together the advantages of exchange rate stability with those of floating rates. The system was meant to avoid the shortcomings of floating rates and those of fixed exchange rate of gold. As a result, an adjustable peg system of fixed parties was formed. The system could only be adjusted in the event of a massive disequilibrium.

 The Breton Woods System saw notable macroeconomic performance as well as substantial expansion of investments and international trade. Inflation rate was lower for all industrialized countries; real per capital income was higher while the interest rates remained reasonable and stable.

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