Topics: Economics, Economy, United States Pages: 2 (471 words) Published: April 14, 2013

A closed economic system is an economic model that only uses domestic exchanges of goods and services. The foreign produced goods and services that are bought by American households as well as factors of production acquired by American businesses from overseas owners are not included in the closed model. An example of a closed economic system would be communism. An open economic system is different from a closed economic model because this model includes all of the factors in a closed economy as well as the factors that come from foreign economies. These factors often lead to some sort of tax being paid to the government. An example of this type of economy would be capitalism. To explain the inner and outer flows of a closed economic system one must first remember that foreign agents are not included in this model. In this particular model the business would pay wages and rents to the household and in return the household would provide the business with land, labor, and capital. The household also pays the business money in exchange for goods and services. The inner and outer flows of an open system are similar to those of a closed system except that it must include foreign exchanges. This system also includes the leakages and injections caused by foreign trade. These are due to taxes placed on goods that are produced in a foreign country and sold in the United States. There is also a tax on services that are not purchased for domestic use such as a foreign customer service representative. A leakage in an open system is best described as money that either leaves the household or the business that is paid to a foreign country for its goods and services and or their factors of production. Therefore the money leaves the economic circle. One of the most common types of leakage that occurs is the tax that is paid to foreign governments for their goods and services. One more type of leak is...
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