Understanding the Concepts of Closed and Open Economy

The subject of economics came after its concepts. In the old days, barter trades were the main form of trade for all societies, and therefore, even the most conservative nations in the world, were open communities that engaged in trade. In the current world, there is no country that has achieved a level of self-satisfaction and thus, trade is a form of way to acquire what others are producing and offer what they have. For example, most Middle East countries export petroleum products and in return import food grains. Today, a closed economy is one in which there is no economic relations with other nations but is only confined to itself.

The following activities are prohibited in a closed economy: it does not import goods and services from other countries nor does it export to them. Additionally, such a nation does not also borrow or lend o to foreign countries. Further, in a closed economy, no gifts are given or accepted from foreigners. Finally, the countries that operate a closed economy system do not allow other nationalities to work in their domestic territory.

From the given reason, in a closed economy, the Gross National Product and Gross Domestic Product are equal. However, such a scenario is just ideal, since in a strict sense, closed economies cannot exist. As such, a closed economy term applies to countries with high tariffs wall, and low foreign interaction. However, in an open economy, the country is involved in production within as well as globally.

An open economy is vulnerable to global risks that may slow down development. However, collaboration in trade matters may result in faster growth. As such, since it is hard for a country to operate independently, there is a need to adopt an open economy policy that will ensure that there is vibrant growth.

 

 

Arnas Simons
admin@findtutorsonline.com.au

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