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    how does an open economy versus a closed economy impact government policy decisions?

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    Analysis of Open and Closed Economies

    An open economy is an economy in which there are economic activities between domestic community and outside, e.g. people, including businesses, can trade in goods and services with other people and businesses in the international community, and flow of funds as investment across the border.

    Analysis of Open and Closed Economies

    Paper Type: Free Essay ✅ Subject: Economics

    Wordcount: 2485 words ✅ Published: 21st Sep 2021

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    1.0 DEFINITION OF OPEN ECONOMY AND CLOSED ECONOMY

    An open economy is an economy in which there are economic activities between domestic community and outside, e.g. people, including businesses, can trade in goods and services with other people and businesses in the international community, and flow of funds as investment across the border. Trade can be in the form of managerial exchange, technology transfers, all kinds of goods and services. Although, there are certain exceptions that cannot be exchanged, like, railway services of a country cannot be traded with another to avail this service, a country has to produce its own. This contrasts with a closed economy in which international trade and finance cannot take place.

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    The act of selling goods or services to a foreign country is called exporting. The act of buying goods or services from a foreign country is called importing. Together exporting and importing are collectively called international trade. There are a number of advantages for citizens of a country with an open economy. One primary advantage is that the citizen consumers have a much larger variety of goods and services from which to choose. Additionally, consumers have an opportunity to invest their savings outside of the country. In an open economy, a country’s spending in any given year need not to equal its output of goods and services. A country can spend more money than it produces by borrowing from abroad, or it can spend less than it produces and lend the difference to foreigners. There is no closed economy in today’s world.

    An economy in which no activity is conducted with outside economies. A closed economy is self-sufficient, meaning that no imports are brought in and no exports are sent out. The goal is to provide consumers with everything that they need from within the economy’s borders. A closed economy is the opposite of an open economy, in which a country will conduct trade with outside regions.

    1.1 DIFFERENCES BETWEEN OPEN ECONOMY AND CLOSED ECONOMY

    1.2 COUNTRY WHO PRACTISE OPEN ECONOMY AND CLOSED ECONOMY

    American countries in adopting open economy and free and other trade practices or the United States an open economy is the opposite of a managed economy. It is one that is characteristically market-oriented, with free market policies rather than government-imposed price controls. In an open economy industries tend to be privately owned rather than owned by the government. In the area of international trade an open economy is one whose policies promote free trade over protectionism .On the other hand, a managed or closed economy is characterized by protective tariffs, state-run or nationalized industries, extensive government regulations and price controls, and similar policies indicative of a government-controlled economy. In a managed economy the government typically intervenes to influence the production of goods and services. In an open economy, market forces are allowed to determine production levels. A completely open economy exists only in theory. For example, no country in the world allows unlimited free access to its markets. Most nations have fiscal and monetary policies that attempt to improve their economies. Many economies that are open in some respects may still have government owned, monopolistic industries. A country is considered to have an open economy, however, if its policies allow market forces to determine such matters as production and pricing.

    1.3 CONSUMPTION AMONG OPEN ECONOMY AND CLOSED ECONOMY

    In a closed economy, all output is sold domestically, and expenditure is divided into three components: consumption, investment, and government purchases.

    Y = C + I + G an open economy, some output is sold domestically and some is exported to be sold abroad. We can divide expenditure on an open economy’s output Y into four components: Cd, consumption of domestic goods and services, Id, investment in domestic goods and services, good government purchases of domestic goods and services, X, exports of domestic goods and services. The division of expenditure into these components is expressed in the identity.

    1.4 INVESTMENT AMONG THE OPEN ECONOMY AND CLOSED ECONOMY

    An open economy is one that engages in international exchange of goods, services, and investments. Exports are goods and services sold to buyers outside the country, while imports are those purchased from foreigners. The difference between exports and imports of goods and services is called net exports. When foreign trade is introduced, domestic demand can differ from national output. Domestic demand comprises consumption, investment, and government purchases (C + I + G). To obtain GDP, exports Ex) must be added and imports (Im) subtracted, GDP = C + I + G + X.

    1.5 IMPORT AMONG THE OPEN ECONOMY AND CLOSED ECONOMY

    The act of selling goods or services to a foreign country is called exporting. The act of buying goods or services from a foreign country is called importing. Together exporting and importing are collectively called international trade. There are a number of advantages for citizens of a country with an open economy. One primary advantage is that the citizen consumers have a much larger variety of goods and services from which to choose. Additionally, consumers have an opportunity to invest their savings outside of the country.

    Source : www.ukessays.com

    Closed Economy Definition

    A closed economy is considered self-sufficient with no interest in engaging in international trade with outside countries.

    ECONOMY ECONOMICS

    Closed Economy

    By CHRISTINA MAJASKI Updated November 29, 2020

    Reviewed by ERIC ESTEVEZ

    What Is a Closed Economy?

    A closed economy is one that has no trading activity with outside economies. The closed economy is therefore entirely self-sufficient, which means no imports come into the country and no exports leave the country. The goal of a closed economy is to provide domestic consumers with everything they need from within the country's borders.

    KEY TAKEAWAYS

    A closed economy is completely self-sufficient, with no imports or exports from international trade.

    The need for raw materials produced elsewhere that play a vital role as inputs to final goods makes closed economies inefficient.

    A government may close off a specific industry from international competition through the use of quotas, subsidies, and tariffs.

    In reality, there are no nations that have economies that are completely closed.

    Why There Are No Real Closed Economies

    Maintaining a closed economy is difficult in modern society because raw materials, such as crude oil, play a vital role as inputs to final goods. Many countries do not have raw materials naturally and are forced to import these resources. Closed economies are counterintuitive to modern, liberal economic theory, which promotes the opening of domestic markets to international markets to capitalize on comparative advantages and trade.

    By specializing in labor and allocating resources to their most productive, efficient operations, companies and individuals can increase their wealth.

    The Proliferation of Open Trade

    Recent globalization implies that economies are tending to become more open to take advantage of international trade. A good example of a raw material that is traded globally is petroleum. For instance, in 2017, according to World'sTopExport.com, an independent research and educational firm, the five biggest crude oil exporters accounted for over USD$841.1 billion worth of exports.

    Saudi Arabia at $133.6 billion

    Russia at $93.3 billion

    Iraq at $61.5 billion

    Canada at $54 billion

    The United Arab Emirates at $49.3 billion.

    According to the U.S. Energy Information Administration, even the United States, the largest producer of oil in the world, imported roughly 10.4 million barrels per day in 2017, most of which comes from Canada, Saudi Arabia, Mexico, Venezuela, and Iraq.

    Why Close Off an Economy?

    A completely open economy runs the risk of becoming overly dependent on imports. Also, domestic producers may suffer because they cannot compete at low international prices. Therefore, governments may use trade controls like tariffs, subsidies, and quotas to support domestic enterprises.

    Although closed economies are rare, a government may close off a specific industry from international competition. Some oil-producing countries have a history of prohibiting foreign petroleum firms from doing business within their borders.

    Example of a Closed Economy

    In practice, there are no completely closed economies. Brazil imports the least amount of goods—when measured as a portion of the gross domestic product (GDP)—in the world and is the world's most closed economy. Brazilian companies face challenges in terms of competitiveness, including exchange rate appreciation and defensive trade policies. In Brazil, only the largest and most efficient companies with significant economies of scale can overcome barriers to export.

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    What Is the Difference between an Open and Closed Economy?

    The difference between an open and closed economy is that an open economy allows businesses and people to trade with those in...

    What Is the Difference between an Open and Closed Economy?

    Terry Masters Date: May 31, 2022

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    The difference between an open and closed economy lies in a country's policies on international trade and financial markets. An open economy allows its businesses and individuals to trade with businesses and individuals in other economies and participate in foreign capital markets. A closed economy prevents its businesses and individuals from interacting with foreign economies in an effort to remain isolated and self-sufficient. The basic distinction between an open and closed economy concerns whether a country's government allows its citizens to participate in the global marketplace.

    Interaction with foreign countries is the basis of international trade. Trading between countries happens through the export, or sale, of goods and services by parties in one country and the import, or purchase, of those goods and services by parties in another country. On the surface, the ability to conduct trade across international borders may seem a luxury rather than a necessity, but the ability is incredibly important to the health of a country's economy. International trade expands the market for goods and services, allowing businesses to employ more people to make a quantity of goods that exceeds the demand in their home country.

    An open and closed economy differs in how each handles international trade. Open economies allow importing and exporting of goods. Closed economies prevent importing and exporting, and, instead, rely solely on goods and services produced within the country to satisfy domestic demand. The notion of an economy's production equaling its consumption is a type of autarky, or policy requiring self-sufficiency.

    The other distinction between an open and closed economy is the participation in capital markets. The international capital market consists of stock exchanges that enable a country's corporations to raise money from the public. It also consists of the ability of governments to raise money by selling debt instruments, such as treasury bonds, and to make investments in foreign currencies. In an open economy, a person can buy stock in a corporation that is located in a foreign country or purchase foreign currency to go on a vacation. Closed economies, however, prevent businesses and individuals from using the country's money to make purchases outside its borders.

    There are no countries that exist today with completely closed economies. Some countries, like North Korea, restrict their trade to a certain limited block of countries, but their economies are not completely closed. The only instances in world history where countries have implemented a classic closed economy for a time is when a country was under the thumb of a totalitarian regime that isolated the country to keep political or military control. Globalization of world markets ensures that countries prefer to operate under an open economy system, but that notion can also have limitations. For example, the U.S. might seem a classic example of an open economy, but it restricts its citizens from trading with Cuba.

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