Open economy

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An open economy is an economy in which people, including businesses, can trade in goods and services with other people and businesses in the international community at large. This contrasts with a closed economy in which international trade cannot take place.

The act of selling goods or services to a foreign country is called exporting. The act of buying goods or services from a foreign country is called importing. Together exporting and importing are collectively called international trade.

There are a number of advantages for citizens of a country with an open economy. One primary advantage is that the citizen consumers have a much larger variety of goods and services from which to choose from. As well consumers have an opportunity to invest their savings outside of the country.

In an open economy, a country's spending in any given year need not to equal its output of goods and services. A country can spend more money than it produces by borrowing from abroad, or it can spend less than it produces and lend the difference to foreigners.^[1]

Contents 1 Economic models of an open economy 1.1 The basic model 2 See also 3 Footnotes and sources

[edit] Economic models of an open economy

[edit] The basic model

The basic economic model of an open economy is the same as that of a closed economy model except two new terms are added: Exports <math>(EX)</math> and imports <math>(IM)</math>:

<math>Y = C^d + I^d + G^d + (EX - IM)</math>

With Y being gross domestic product / national income, <math>C^d</math> is consumer consumption of domestic goods and services, <math>I^d</math> is investment in domestic goods and services, <math>G^d</math> is government expenditures on domestic goods and services. The term <math>(EX - IM)</math> is usually called net exports and is sometimes designated with the term NX.

[edit] See also

• Exchange rate
• Terms of trade

[edit] Footnotes and sources

de:Offene Volkswirtschaft

et:Avatud majandus fr:Économie ouverte ja:開放経済 vi:Kinh tế mở uk:Відкрита економіка