EU Integration & Macedonian Economy Analysis

This assignment requires an in-depth analysis of Macedonia's economic performance, focusing on its integration with the European Union. Utilizing a mix of academic sources (e.g., Papadimitriou's 'Negotiating the New Europe', Petrovska et al.'s 'Forecasting Macedonian Business Cycle Turning Points') and online data from TradingEconomics and Statista, you'll examine key indicators such as GDP growth rate, inflation, unemployment, balance of trade, foreign direct investment, and more. The goal is to assess how EU integration has influenced Macedonia's economy.

Economics

Table of Contents
INTRODUCTION...........................................................................................................................1
1. Trading block that country is member of................................................................................1
2. Globalization effects on the Mecedonia's trade relations........................................................3
3 The exchange rate and the Macedonia's currency in relation to trade.....................................7
REFERENCES................................................................................................................................1
Illustration Index
Illustration 1: Macedonia Inflation rate Source: tradingeconomics.com.........................................2
Illustration 2: Macedonia Unemployment rate Source: tradingeconomics.com..............................3
Illustration 3: GDP of Macedonia ...................................................................................................4
Illustration 4: Gross domestic product (GDP) growth rate in Macedonia 2022..............................5
Illustration 5: Macedonia Balance of Trade 2015-2018..................................................................5
Illustration 6: Macedonia Foreign Direct Investment .....................................................................7

INTRODUCTION
Macedonian economy has been transformed into independent nation as it was earlier in
dominance of Yugoslavia. The impact can be seen on Macedonia by Yugoslavia is that
bureaucratic costs of economic planning is difficult to allocate on resources in the nation.
Moreover, price fixation of goods and services is impacted because of Yugoslavia state.
Productivity is reduced as well and as such, over-employment may be seen in the country. State-
owned businesses are also minimised and it is again impacting economy quite adversely.
Customers needs and wants are not satisfied effectively as more corruption is prevailing which is
damaging overall economy. Moreover, demands and preferences of customers are required to be
attained. While, mal-investment is also there and investment is made in wasteful resources.
1. Trading block that country is member of
Macedonia is a trading block member of World Trade Organisation (WTO) and European
Union (EU) and EFTA (European Free Trade Association). The nation has transitioned since its
independence from Yugoslavia state which had dominance for number of years on the country
quite adversely. Macedonian economy joined WTO since 4 April 2003. Macedonia joined WTO
for the main reason in order to freely trade with the other nations and as such, to enhance
economic growth in the best possible manner. Furthermore, this help to increase overall GDP
(Gross Domestic Product) of the country in effective way (Sherifi and Turan, 2018).
On the other hand, Macedonia joined EU since 2005 for accession purpose. However, it
is candidate for enhancement of EU but no accession negotiation has been entered by the
country. This means that no such negotiations have taken place in the country. On the other
hand, Macedonia joined EFTA agreement on 19 June 2000. The main reason behind this
agreement was to freely trade industrial products and fish and marine goods as well with a period
of ten years. The country is regional trading block member of EU (Boskov and et.al, 2018). The
transition process of Macedonian economy was good for the nation as before Washington
consensus, poor economic growth was prevailing and further, unemployment rate was extremely
high. This led to decrease in Macedonian Denar as external value of currency was depreciated up
too much extent. However, this approach led to monetary stability and effective growth of
Macedonian economy in a better way.
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The macroeconomic indicator of Macedonia is that economy has transformed quite
effectively as inflation rate has been lowered down in January 2018 as it was more in past years.
The main measure of inflation is Consumer Price Index (CPI). It is a rate which measures
changes observed in price of products that are purchased by the households of the nation. It can
be analysed that CPI has maximised up to 1.6 % in the month of March 2018. This means that
inflation has been controlled as households spending are increased which is a good sign of
economy (Apostolov and Josheski, 2018).
On the other hand, income policy and balancing the budget are another macroeconomic
indicators which injected growth of country. However, these indicators often lead to minimise
output of the nation and as such, it should be in accordance to the structural reforms. This
implies that government initiates change with relation to economic reforms so that nation's
growth may be achieved in a balanced way. This is done so that output may be increased and as
such, structured growth can be attained by the country. The theory of second best implies that
feasibility of two options cannot be effectively satisfied or arrived at conclusion, then usually
second solution is taken into account to attain desired outcome (Papadimitriou, 2018).
The unemployment rate is also required to be reduced in order to inject growth in the best
possible manner. It can be interpreted from last two four years that unemployment rate in
Macedonia has been reduced which is good for the middle-income country and as such, it was
27.3 in 2015, while, it reached to 21.9 in 2018.
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Illustration 1: Macedonia Inflation rate Source: tradingeconomics.com

There are advantages of having open economy such as large variety of products are made
available to domestic customers. Furthermore, direct foreign investment can be easily injected in
the economy of Macedonia. The welfare effect of custom can be identified on the economy.
Custom unions clearly shows that reducing tariffs in the unions so that protection may be
attained with relation to free trade. On the other hand, trade diversion means that trade is being
diverted from efficient exporter to less efficient which results in evolution of custom union.
Moreover, transition process leads to increase in unemployment. It has negative effect on
inflation as it increases at rapid rate (Esmerova, 2018). Recession was existing and continued in
Macedonian economy at early stages of transition. Another disadvantage of this process is that
corruption cannot be controlled and as a result, income distribution was imbalanced in the nation.
Trade deficit were maximised because of non-competitive prices in the market. Moreover,
unemployment rate was hiked in the transition process and as such, economy was doomed at that
point of time. Thus, this process inculcates various limitations.
2. Globalization effects on the Mecedonia's trade relations
Globalisation refers to the process through which organisation develop international
relations with other countries in order to enhance their business productivity and profitability.
Globalisation impacts on the growth and development of the organisation as well as host and
parent countries (Mitreva and et.al., 2015). In the era, many large and medium scale
organisations are expanding their business operations in other parts of the world in order to raise
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Illustration 2: Macedonia Unemployment rate Source: tradingeconomics.com

their customer base and profits. This is due to agile globalisation and trade liberalisation policies
in many countries, trade practices such as import and export has been increased greatly. Due to
high level of unemployment, poverty and low growth rates, the positive impacts of globalisation
wouldn't apply on Macedonia. Below is the table that shows the GDP, export and import rate of
the country is provided:
Economy Value
GDP $11.46 billion (2016)
Imports $6.446 billion (2017)
Exports $5.805 billion (2017)
Macedonia is vulnerable to economic development in Europe. Macedonia was among the third
country which is considered as the poorest in the regions of south eastern part of the Europe. The
overall average population of the country is only 2 million. The major reason behind the poverty
of the country is large scale of unemployment in the country (Hlédik and et.al., 2016).
The above illustration represents the real gross domestic price of Macedonia from year 2012 to
2016. It can be understood from the above illustration that due to high volatile markets and lack
of political instability the GDP in the country was not able to show steady growth. In 2012 it
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Illustration 3: GDP of Macedonia
(Source: Macedonia GDP, 2018 )

declined to $9.75 billion from which it rises in 2014 to $11.36 billion and again fall to $10.05
billion (Velickovski, Petreski and Jovanovic, 2016).
The illustration rate shows and anticipate the growth rate of the Macedonia. It was identified that
in order to sustain in the competitive environment, the organisations established in Macedonia
would not able to thrive efficiently. The growth rate declined in 2015- 2016 and which is
presumed to be increase in 2022 (Lazarov, Kocovski and Konatar, 2017).
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Illustration 4: Gross domestic product (GDP) growth rate in Macedonia 2022
(Source: Macedonia Growth rate, 2018 )

The main trading partner of Macedonia are Germany (12% import, 47% export), United
Kingdom (11% percent import), Serbia (8.9% export, 8% import), Bulgaria and other European
countries. Food, tobacco, beverages, textiles and miscellaneous products has been mostly
exported and machineries, equipment, chemicals, automobiles, fuel products are mostly imported
by the country (Trenovski and Tashevska, 2015). The country has absolute advantage by
manufacturing mechanical and automotive parts. Macedonia in 2016 has exported centrifuges,
reaction and catalytic products and insulated wires in most of the countries. This implied that the
country has absolute advantage in manufacturing and producing industrial and chemical products
and equipment. It was further identified that Macedonia have comparative advantage in
manufacturing automotive products, textiles and food with respect to its competitive trading
partners such as Croatia.
Opportunity cost refers to the loss of other alternatives when one alternative is chosen. As
it was identified that Macedonian economy is not thriving due to excessive poverty, huge
unemployment rate and unstable growth rate. In order to enhance the growth and development of
the country the government has decided to maintain exclusive relations with other neighoubour
countries (Panagopoulou, 2015). This is to enhance the trade between the countries. With fertile
land and good industrial development capacities, the government of the country is further
focusing to increase investment for manufacturing sector. Globalisation is helping Macedonia
greatly by thriving its manufacturing and agricultural sectors and enhancing the standards of
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Illustration 5: Macedonia Balance of Trade 2015-2018
(Source: Macedonia Balance of Trade, 2018)

living of natives. Though there is long way to go for the country as the unemployment rates are
still high and ample amount of population is living below poverty line.
The above illustration shows the trends in Foreign Direct Investment in Macedonia. Due
to high interest rates in the country, foreign organisations tends to invest more in the country
(Boshkov, Temelkov and Zezova, 2017). But in recent years due to political instability and
unstable economic market, the investment laid by foreign countries declined. Foreign Direct
Investment in Macedonia decreased by -54.19 EUR Million in September of 2017.
Gravity Model for analysis
The gravity model for trade is essential model for international economics. It helps in
anticipating bilateral trade flows and these predictions are based on distance within two units as
well as their respective economic dimension. The equation representation is Fij = G * Mi * Mj /
Dij.
Here F stands for trade flows, G is constant, D stands for distance and M stands for the economic
dimensions of the countries.
Heckscher Ohlin Theory of Factor Proportion
It is one of the important model of international trade. It expands the Ricardian model largely by
introducing second factor of trade.
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Illustration 6: Macedonia Foreign Direct Investment
(Macedonia Foreign Direct Investment, 2018)

Ricardian Model of Trade
The Ricardian Model anticipates that two countries producing two goods using one factor of
production usually labour. The model shows equilibrium in all markets.
Long terms trends could assists the economy of Macedonia in order to improve their existing
performance. Technological acceleration, transformations in taste and preference of consumers,
multi polarity, etc. helps Macedonia to improve their productivity and economy.
3 The exchange rate and the Macedonia's currency in relation to trade
Introduction to Exchange rates
Exchange rate refers to the price of country's currency in terms of another country's
currency. It implies that an exchange rate has two components i.e. domestic currency and foreign
currency. Generally, exchange rates are quoted in the value against US dollars. An exchange rate
helps in comparing the currency of one country to another country (Hristov, Martinovska-
Stojcheska and Surry, 2015). It has two elements which are base currency and counter currency.
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For direct quotation, the base currency refers to the foreign currency and counter currency refers
to the domestic currency and in indirect quotation, the base currency is domestic currency and
counter currency is foreign currency (Berdal, 2017). Every country have different type of
currencies for transactions. In this context, the currency of Macedonia is Macedonian Denar. Due
to unstable economic conditions and low currency value, the Macedonian Denar (MKD) has very
low exchange rate. 1 MKD is equal to 0.20 USD.
Spot rates: Spot rates are the price which is quoted for the settlement of the commodity.
Figure 1: Source: Bloomberg
Forward Rates: Forward rates is used for both trading of currency and bonds which represent
the present expectations of future bond interest rates.
Hedging: It is the way through which company minimizes foreign exchange risk. Macedonia
used hedging in order to prevent uncertain risks and losses due to fluctuations in foreign market.
Importance of foreign exchange rates for Macedonia
Foreign exchange rates are very important in determining the value of foreign
investment. A volatile exchange rate discourages amount of foreign investment whereas highly
stable exchange rates encourages foreign investment. In order to increase value of foreign direct
investment in Macedonia it is important for the government to devise effective strategies which
boost up the economic conditions of the country. Foreign exchange rate and competitiveness are
inversely proportionate with each other. For example, as the inflation rate of Macedonia is -0.24
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per cent and its competitors such as Croatia inflation rate is -1.24 percent. This implies that each
year the products price will rise at a faster rate in Macedonia (Hristov, 2017). Therefore,
Macedonian consumers will start switching to Croatian imports. Also, it will be more
troublesome to export goods to Croatia as Macedonia's exports are more competitive. Currency
appreciation and depreciation are two terms which can be seen in floating exchange rate system.
Currency depreciation refers to the decrease in the value of currency of one country with respect
to one or many foreign currencies (Jovanovic and Petreski, 2016). Currency appreciation refers
to the process of increasing the value of one nation's currency with respect to another foreign
country currency.
Equilibrium foreign exchange rate
Equilibrium exchange rate means the exchange rate which the demand of the currency
meets the supply of same currency. There are numerous factors due to which the foreign
exchange rate got influenced and volatile. Usually, there are two types of foreign exchange rates.
These are fixed and floating exchange rate. Under fixed exchange rate the value of the currency
of one country is fixed corresponding to another single currency (Petrovska, Krstevska and
Naumovski, 2016). Floating exchange rate is the exchange rate regime in which the value of
currency of one country fluctuate in response to international exchange market mechanism. From
the analysis of the Macedonia exchange rate system, it was identified that the country uses
floating exchange rate system. This implies that the value of currency got fluctuates with the
volatility in the international markets. It indeed influence the growth and production of
organisations as well as affects its fiscal policies greatly.
Arbitrage
Arbitrage refers to the purchase and sale of assets due to imbalance in the price. It is the
trade that generate revenue through exploiting the differences in price of identical financial
instruments on different markets. Arbitrage occurs when buyer purchase security at lower price
form one market and sell to higher price at other market (Boshkov and Bishev, 2015). Arbitrage
is considered as risk free for the traders and they can earn ample of profits out of it. Macedonian
government used arbitrage policy in order to enhance the internal market and organisations. The
monetary system of Macedonia purchases securities at lower price from different markets such
as Croatia and sell it to higher price in other market in order to earn higher revenue.
Purchasing power parity theory
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Purchasing power parity theory states that the exchange rates between two countries’ currencies
are in equilibrium when their purchasing power is identical in the two countries. In simple terms
it means that the exchange rate of two countries should be equal the ration of price level of goods
and services of both the countries. Law of one price is the basis of PPP.
Values of currencies rise and falls
There are numerous factors due to which the value of currencies rise and falls. With good
economic conditions with increasing growth rates and GDP, the value of currency rises and with
unstable economic conditions, high inflations and unemployment rates, the value of currency
falls. International volatility in markets are also key factors that droves the value of currency
(Boshkov and Bishev, 2015). Political decisions of the country are also key factors that governs
the fluctuations in the currency. Any right decision will increase the value of currency and vice
versa.
CONCLUSION
Hereby it can be concluded that economic growth is quite essential for middle-income
nation such as Macedonia in order to stabilize and strengthen overall economy in the best
possible manner. This can be analysed that Macedonia has uplifted its effectiveness and is
stabilizing economy so that trade deficit may be lowered down and industrial growth may be
accomplished in a better way. Moreover, it is required that currency should be effectively
enhanced in order to maintain external value in effectual manner. This will appreciate currency
value with much ease and as such, balance of payment can be controlled. Furthermore, as per the
report, Macedonia is among the poorest nation of south east Europe and is required that
unemployment and inflation rate should be minimised. Globalisation effect is also carried out on
the economy and how is affecting nation. Exchange rate is also described of the economy.
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REFERENCES
Books and Journals
Apostolov, M. and Josheski, D., 2018. Macedonia’s exports toward Southeast Europe through
the gravity model. Journal of Economic and Administrative Sciences.
Berdal, M. ed., 2017. Political economy of statebuilding: Power after peace. Routledge.
Boshkov, T. and Bishev, G., 2015. Impact of exchange rate in the run-up to EU accession: An
empirical analysis of Republic of Macedonia. Asian Economic and Financial
Review, 5(12), p.1282.
Boshkov, T., Temelkov, Z. and Zezova, A., 2017. Euroisation in the Western Balkans: The
Evidence for Macedonian Economy. Mediterranean Journal of Social Sciences, 8(2),
p.307.
Boskov, T and et.al, 2018. The Impact of Culture and Urban Life-Cycle on The Economic
Development of City. IJIBM International Journal of Information, Business and
Management. 10(1). pp.284-295.
Esmerova, E., 2018. Regionalism of International Trade in the Global
Management. ANGLISTICUM. Journal of the Association for Anglo-American
Studies. 7(3). pp.56-62.
Hlédik, T. and et.al., 2016. Overview of the Macedonian Policy Analysis Model
(MAKPAM) (No. 2016-04]). Working Paper.
Hristov, J., 2017. An exploratory analysis of the impact of climate change on Macedonian
agriculture. Environments, 5(1), p.3.
Hristov, J., Martinovska-Stojcheska, A. and Surry, Y., 2015. Virtual water and input–output
framework: an alternative method for assessing trade and water consumption in FYR
Macedonia. Water Science and Technology: Water Supply, 15(2), pp.317-326.
JOVANOVIC, B. and Petreski, M., 2016. The Macedonian economy and the European Union.
In Small States and the European Union (pp. 171-201). Routledge.
Lazarov, D., Kocovski, M. and Konatar, A., 2017. The analysis of industrial and export
opportunities of Macedonian economy.
Mitreva, E., and et.al., 2015. The Need for Implementation of Integrated Management Systems
(IMS) in Macedonian Companies. Calitatea, 16(147), p.62.
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Panagopoulou, K., 2015. Touratsoglou (YP) A Contribution to the Economic History of the
Kingdom of Ancient Macedonia (6th–3rd c. BC)(KERMA 2). Athens: Lydia Lithos, 2010.
Pp. 233, illus.€ 31.95. 9789608898516. The Journal of Hellenic Studies, 135, pp.245-246.
Papadimitriou, D., 2018. Negotiating the new Europe: the European Union and eastern Europe.
Routledge.
Petrovska, M., Krstevska, A. and Naumovski, N., 2016. Forecasting Macedonian business cycle
turning points using Qual VAR model. Journal of Central Banking Theory and
Practice, 5(3), pp.61-78.
Sherifi, Ç. and Turan, G., 2018. Albanian Model of Free Zones: Implementation and
Implications. International Journal of Economics and Finance. 10(5). p.57.
Trenovski, B. and Tashevska, B., 2015. The Transmission Mechanism And Consequences From
The Global Economic Crisis For The Macedonian Economy. CEA Journal of
Economics, 9(2).
Velickovski, I., Petreski, M. and Jovanovic, B., 2016. 7 The Macedonian economy and the
European Union1. Small States and the European Union: Economic Perspectives, p.153.
Online
Macedonia Balance of Trade 2018. [Online]. Available
through:<https://tradingeconomics.com/macedonia/balance-of-trade>
Macedonia Foreign Direct Investment. 2018. [Online]. Available
through:<https://tradingeconomics.com/macedonia/foreign-direct-investment>
Macedonia GDP. 2018. [Online]. Available
through:<https://tradingeconomics.com/macedonia/gdp>
Macedonia Growth rate. 2018. [Online]. Available
through:<https://www.statista.com/statistics/510234/gross-domestic-product-gdp-growth-
rate-in-macedonia/>
Macedonia. 2018. [Online]. Available
through:<https://atlas.media.mit.edu/en/profile/country/mkd/#Trade_Balance>
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