Open Economy and Closed Economy

Open Economy and Closed Economy

Open Economy

Economy which has financial relation with other countries are called as Open Economy. In this economy, products, services, financial assets etc. has relation with other countries. The relation of a country with foreign countries is mainly through three ways - Output Market, Financial Market and Labour Market.

Output Market - In this method, trade of products and services between countries is allowed. Here one can think and act whether to use domestic products or buy foreign products. Producers and Consumers has the choice to decide.

Financial Market - Here the persons and companies of an economy can buy financial assets from other countries. Financial Market give opportunities to depositers for depositing in domestic assets and foreign assets.

Labour Market - Here the labourer can decide where to work (domestic or aboard) in an economy. The independent move of labourer between countries is controlled by various immigration rules.

Open Market is the buying and selling of goods and financial deposit between other countries. The product and service trade between different countries is termed as International Trade. The Liberalisation of new economic reforms is related to International Trade. The gross demand of india influences International Trade in two ways - Import from foreign countries and export from India to foreign countries. Through Import, the money from the nation goes to foreign countries (Leakage). This will decrease the demand of domestic products. The income from Export will increase the money flow to nation (Injection). This will increase the demand of domestic products. In an Open Economy, the imports and exports influence the gross demand. Imports decreases the gross demand and exports increases the gross demand. Money is necessary for the smooth conduction of import and export. For this purpose, there is no currency printed by a bank at international level approved by all countries. Inorder to get international approval for a currency, its value should be permanent. That is, the currency should maintain a Permanent Purchasing Power. The exchange value between currencies is known as Exchange Rate.

Closed Economy

Economy which does not get into financial relations between other countries are called as Closed Economy. There are no exports, no imports and no capital flows in Closed Economy. International trade is minimal or non - existent. The country produces the consumer goods and services domestically.