An open economy is any economy that carries out commercial interaction with the outside world. That is, it buys and sells goods, services or financial assets, with the rest of the economies of the world.
With the consolidation of international trade and the phenomenon of globalization, this concept has reached its maximum expression. Given the existence of economies increasingly exposed to import and export. In addition to establishing itself as the basis of their economic model, as well as a greater weight in their respective GDP. In that sense, it could be said that a closed economy is currently utopian. Well, in practice, no country strictly meets its theoretical requirements.
The most common procedure to open an economy is the assumption of trade agreements between countries. Its purpose being that of regulating and controlling the entry and exit of goods and services. In this way, creating trade routes that can be expanded later in terms of economic integration.
In economic theory, the most basic analyzes and studies are carried out with assumptions of closed economies. Its objective being to achieve greater simplicity. Subsequently, it is when the macroeconomic assumptions are added and the open economy model is valued.
The main difference between an open economy and a closed economy is that, with the entry and exit of goods and services, the savings-investment identity changes. This happens because the internal physical capital is not financed with the help of savings, since this happens to be used to finance capital in other places. Another identity that changes is that of expenditure-production, since having openness to the outside, it is possible to acquire more financing. All this, thanks to loan mechanisms between countries.
The opening of an economy supposes that this flow of imports and exports throw new concepts to take into account. Aspects that are analyzed within international finance. In this way, international trade makes concepts such as exchange rates, the balance of payments or the current account balance gain importance.
Advantages of an open economy
- The existence of open economy models implies the possibility for consumers to choose between a greater variety of goods and services. Since, by adding nationals and foreigners, the offer is expanded. In addition, it often means finding products at a lower price.
- It also increases the amount of investment possibilities. All this, thanks to a greater openness in the financial sphere. As well as the important role of modern technology.
- In the same way, companies and organizations have the possibility of carrying out economic and exploitation activities all over the world. Thanks to the openness in terms of production factors, taking advantage of opportunities in other regions and stimulating competition.
Disadvantages of an open economy
- The improvement in competitiveness that international trade brings with it can turn out to be a negative thing for smaller producers. Well, they do not have certain advantages that a foreigner could have.
- Experience has shown how the benefit of trade is much greater for economies that export than for those that import, proportionally.
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