Open and Closed Economy

 

Open Economies

An open economy is one in which trade takes place between the home population and the outside world. With other people and enterprises in the global community, people can conduct commerce in goods and services, and money can move freely between countries to finance investments. Exporting is the process of selling products and services to another nation. Importing is the process of purchasing goods and services from another nation. International trade is the term used to describe both importing and exporting together.

A free market system would be an illustration of an open economy. The free exchange of goods and services between customers and sellers. The market is not being interfered with by the government. The chance for consumers to invest their funds abroad exists. The US is a prime example of this kind of economic structure.

National Income (Y) = Total Consumption (C), Total Investment (I), Total Government Expenditures (G), Total Export (X), and Total Import (M).

Closed Economies

An economy that has no interaction with the economy of another nation is said to be closed. A closed economy forbids imports, exports, and foreign participation in its stock exchange. A closed economy is one in which a centralized authority controls all commodities and services. It neither takes foreign aid nor gives aid to foreign countries.  Citizens of a closed economy system neither go to foreign countries nor allow to work in domestic countries. Brazil is a prime example of a nearby closed economy. The government has control over what people buy and sell in this form of economy. Without the government's approval, people are unable to exchange their items. 

A closed economy system is divided into two types:

They are :

Two sector economy and three sector economy.

The economic system consists of household and business sectors and is called a two-sector economic system. In this economic system, GDP = C + I.

Three sector economy system consists of household, business sector, and government.

National income in a three-sector closed economy is calculated as Y = C + I + G, where C stands for total consumption, I for total investment, G for government spending, and Y for overall income.

Benefits of an Open Economy

In an open economy, consumers have access to a wide variety of products at competitive prices. Consumers can choose among different brands and manufacturers. Because of competition, companies strive to provide high-quality products and services.

 Benefits of a Closed Economy

Closed economies tend to produce higher-quality goods than open economies. Companies in closed economies have fewer competitors, which means they can charge higher prices. However, these countries often lack innovation and technological advancement.

Open Economy vs Closed Economy

The open economy is where goods and services are traded freely between individuals. In contrast, the closed economy is where goods and services are controlled by a central authority. It is impossible to meet the demand for goods and services within a boundary.

Conclusion

Both types of economies have advantages and disadvantages. Countries that have both open and closed economies are known as mixed economies. Mixed economies allow for a balance between the two types of economies.