Open and Closed Economies

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