Open and Closed Economies

Topics: Economics, International trade, Free trade Pages: 5 (1302 words) Published: November 14, 2010
The economies of the world have become increasingly globalised and interdependent over the last two decades (Casey & Fair 1999, 449). Countries across the world are continuously involved with each other via trade, investment, communication and travel. Economic events in one country can have repercussions on the economies of other countries, as no economy operates in a vacuum or is completely closed. Nearly all economies are open economies (Hubbard et al 2010, 614). Openness has given societies access to goods and services that they would not otherwise be able to consume, and assisted some economies in achieving economic growth and increased standard of living. However an open economy does have its disadvantages and limitations, but in the long run the benefits out way the costs. This essay will explore what has come to be called “open and closed -economies” in more detail. Firstly, an explanation of the difference between an “open economy” and a “closed economy” will be outlined. Secondly,

By interacting in the global economic system, open economies are interacting in trade or finance with other economies, while closed economies have no interaction in these activities (Hubbard et al 2010, 614). An open economy is characteristically market-oriented, with free trade policies rather than protective government controls. Its openness allows the economy to export a large proportion of its output and/or has few or no barriers (e.g. tariffs or quotas) to international trade. This creates specialisation of skills and abilities, with each country of the world tending to specialise in the line of production in which they have comparative advantage in relation to their trading partners in the economic community (Ebeling 1991). Through such a global division of tasks and activities, the wealth and economic growth is increased, as compared to a situation in which individuals and countries are required to obtain what they desire through their own efforts.

A closed economy is built on the concept of isolation from other countries through trade, and this system is referred to an autarky. Essentially it goes to great lengths to avoid international trade with other countries by using protective tariffs and quotas on trade, extensive government regulations and further policies which promote protectionism and a government controlled economy (Bianco n.d.). Protectionism within a closed economy allows nations to protect domestic jobs, keep national security, and aid developing industries. However, it also creates higher prices and less selection for consumers, slower economic growth, and global tension. For example, with no reductions in tariffs on motor vehicles, Australians would pay around $10,000 extra on a $30,000 car (DFAT). The idea of a closed economy has become less feasible and functional in today’s economic system. In recent decades the global trend has moved forward from closed economies to greater openness, as world capitalist production, distribution, and exchange have become increasingly integrated along international and domestic lines (Referenence to business).

Most economies seek to create goods and services at an efficient and low cost, and to sell them where they can make substantial profit. An advantage of open economies and free trade is it enables production efficiency and increased production by allowing goods and services to be produced where it best suits the resources and skills of an economy (gov). In order to achieve production efficiency, resources must be shifted between industries within the economy. This involves some industries becoming smaller for other industries to expand, and can lead to structural unemployment. Short term job losses will decrease as jobs in the exports and imports sector increase. More than one in five Australian jobs, or around 2.5 million positions, is trade related (Nationals 2010, 1). With this taken into account, production efficiency in the long run allows an...
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