The standard of the living of people in a country depends on the economy of that specific country with the influence of international economy. The economy is important for all the countries, therefore with the correct use of key economic factors most of the countries can have high economic growth. The resources of the earth are limited but the desires of the people are unlimited. According to Hyman.D.N (1986) economy is a study that allocates the resources among alternative uses. However there are some other similar definitions of economy, the two types of economy: which are microeconomic which focuses economic in details on the domestic economy and the macroeconomic which focuses on the economy of the entire country. The key economic factors that is important for a country depends on the macroeconomic situation of a country. The natural resources, human capital and foreign direct investment (FDI) are the key economic factors that are important for economic growth of a country. One method of showing how key economic factors can contribute to the growth of economy in a specific country is by comparing the relation of natural resources, human capital and foreign direct investment with gross domestic product (GDP) of that country in two different years.
Impact of Foreign Direct Investment (FDI) to Economy
Foreign direct investment is one of the key important factors which are important for economic growth. Foreign direct investment (FDI) is when a country encourages the companies from different countries to invest their capital, technology and skilled employees in their country. Foreign companies buy the local currency to invest in local economy, this increases the demand for local currency, which makes it stronger. Strength of currency is vital for the economic growth it helps to keep the inflation rate lower, and reduce the price of imported goods. It helps to increase the standard of living, most of the citizens can afford to buy imported goods at lower cost.
However, there are disadvantages of FDI, the main issue is bankruptcy of local companies, and most of the local companies cannot compete with the foreign companies due to the cost and efficiency of production. Foreign companies have more capital and technology to reduce the cost of production, therefore they can reduce the price of goods they sell to the public. Local companies do not have the technology and capital to produce in mass production and due to these reasons they cannot reduce the cost of production. However, government implement’s barriers to protect the local companies from bankruptcy. The major government policy is an increase in tax for foreign companies. An increase in tax forces the foreign companies to raise the price of goods they sell.
Impact of Human Capital to Economy
One of the main goals of economy of a country is to minimize the unemployment rate. The human capital is important for the companies to maximize the production at minimum cost. The productivity of employees depends on the education and experience, therefore the governments try to improve the quality of the education. The education is the biggest contributor for the human capital. The education prepares the students to become valuable employees and in return the employees increase production of goods in the country. Another factor that contributes to the human capital is the foreign direct investment.
However, according to Soboleva (2011) there are two situations when human capital is undervalued or overvalued. An undervalued employee situation accurse when the employees perform low skilled works. The overvalued accurse when the employees are given jobs to perform that are beyond their capability. These two situations are common issues of human capital in an economy. An increasing globalized economy, these issues decreased dramatically and in return it created opportunities in international market (Soboleva 2011).
In conclusion, the economy is becoming more internationalized, the economy of one country has big impact on the economy of another country. It is important to have good relationship with other countries to maintain stable economy.