Concepts of Open Economy and Closed Economy (2024)

Based on the free movement of labour and money with other countries in the world, an economy is classified as either open or closed. Almost every country trades globally since no country can produce enough of each product to suit the requirements of its inhabitants. However, some nations tend to limit their trade and transactions with other countries. Let us see some examples of open and closed economies in the world.

What Is an Open Economy?

An open economy is one in which product exchange involves not only domestic factors but also entities from other countries (goods and services). Managerial interchange, technology transfers, and all kinds of products and services are examples of open economy trade.

An open economy is one that trades goods, services, and financial assets in a variety of ways with other countries. An open economy expands a country’s market in ways that a closed economy never can.

Features of an Open Economy

An open economy carries out the following activities:

• It buys and sells securities from other countries, including shares and bonds.

• It borrows money from other countries and lends it to them.

• It can send and receive gifts from outside the country.

• Citizens are free to travel or work in other economies’ domestic areas.

  See Also

  How Interest Rates Are Related to Open Market OperationsOpen Market Operations vs. Quantitative Easing: What’s the Difference?What are Open Market Operations - Benefits, Examples and How it is ConductedHow Do the Fed's Open Market Operations Affect the U.S. Money Supply?

Understanding Open Economy With Examples

Let’s understand the open economy with examples!

• Singapore: Singapore is regarded as one of the most easy-to-do-business countries globally that has an open economy. Its dedication to free-market policies has aided the country in attracting substantial amounts of foreign investment, resulting in rapid economic growth. It simply means that consumers have significant consumption options in the country.

• Netherlands: International trade is responsible for most of the Netherlands’ economic success, thanks to its well-connected seaports. As a result, the country is integral to Europe’s trade and economy.

• Finland: Finland has stayed dedicated to preserving an open economy as anti-globalisation sentiment has expanded worldwide. Finland has one of the lowest corporation tax rates in the European Union, at 20%, and it consistently ranks first in international surveys for economic competitiveness and transparency.

• India: Despite extensive domestic political risks, the open economy in India, which began in 1991, has been maintained. It has ramifications for countries looking to advertise prominent or controversial concepts on a political level. Devaluation, increased interest rates, fiscal and monetary constraints, and import constriction were among the extreme measures used by the government to initiate an open economy in India.

What Is a Closed Economy?

In terms of products and services, a closed economy does not import or export them from other governments. The supply of goods and services is limited when a country is “closed” to trade, as in a closed economy.

A closed economy is self-sufficient and aims to provide whatever local consumers require from within the country’s boundaries.

Features of a Closed Economy

• It exports no products or services to other countries and imports no goods or services from other countries.

• It does not buy or sell shares, debentures, bonds, or other financial instruments to other countries.

• A closed economy does not trade with other countries.

• Ordinary citizens of a closed economy cannot go to other countries to work on their own. No foreigner is allowed to labour on the home territory of a closed economy.

• For the reasons described above, Gross Domestic Product and Gross National Product are the same in a closed economy.

Understanding Closed Economy With Examples

Let’s understand the closed economy with examples!

• Brazil: Brazil’s economy is unusually limited in terms of trade penetration, with exports plus imports accounting for only 27.6% a few years ago. Brazil’s immense size is frequently used to justify its lack of openness.

• China: In the 2020s, China’s economy changed from a small open economy to a continent-sized, far more closed economy. It has more in common with the United States than with trade-dependent economies such as Japan, Germany, the United Kingdom, or large emerging markets such as Brazil.

• Japan: The Japanese economy is restricted to foreign goods and companies, and it does not respond to market incentives or other countries. According to proponents of a results-oriented approach to Japanese trade, a managed trade system is not ideal.

• Moldova: Moldova has close economic links to both Ukraine and Russia. Its rising energy crisis and the consequences of mass displacement are placing a strain on the 2.6 million-strong country during the Ukraine war. Thus, it identifies as a closed economy.

Conclusion

Countries adopted open economic policies once their domestic sectors grew to the point where they could compete with MNCs. Many economists believe that indigenous industries should be protected in the early stages of development but that once they have grown strong, the country should pursue an open economic strategy.