Debate on open economy versus closed economy and their features

briefly described-open economy vs closed economy

1. Debate on open economy versus closed economy and their features
Open economy:
 Market-economy mostly free from trade barriers and where exports and
imports form a large percentage of the GDP.
 No economy is totally open or closed in terms of trade restrictions, and
all governments have varying degrees of control over movements of
capital and labour.
 Degree of openness of an economy determines a government's freedom
to pursue economic policies of its choice, and the susceptibility of the
country to international economic cycles.
 In terms of the percentage of the GDP dependent on foreign trade, the
UK is a more open economy than the US.
 In an open economy, market forces are allowed to determine production
levels.

Closed economy:
 An economy in which no activity is conducted with outside economies. A
closed economy is self-sufficient, meaning that no imports are brought
in and no exports are sent out. The goal is to provide consumers with
everything that they need from within the economy's borders.
 Closed economies are more likely to be less developed if they lack
internal sources of some raw materials, such as oil, gas and coal.
 Due to the prevalence of international trade, truly closed economies are
rare. Even governments that seek to limit the political or cultural
influences of the outside world are likely to trade with other economies
on some scale.
 Closed economy is characterized by protective tariffs, state-run or
nationalized industries, extensive government regulations and price
controls, and similar policies indicative of a government-controlled
economy.

2. Features of an open economy:
 Import and export helps increase the GDP and thus there is economic
growth.
 Open economies are able to get cheaper imports and can sell exports at
higher prices. In other words, both importers and exporters of open
countries [and therefore, their consumers] benefit from price
differentials.
 International trade in goods and services enables each country to
concentrate on the production of those goods in which it has a
comparative cost advantage, and import those in which it has a
comparative cost disadvantage. That way, it can add to the volume,
variety and quality of goods and services that go into determining its
GDP.
 An open economy is more flexible if it exports and imports in such a
manner that when there is a crisis they are able to withstand those
pressures, in other words are not totally dependent on other countries.
 Open economies provide an incentive for research and adoption of
innovations. This is because open economies have benefit of a wider
scope for their profitable application over bigger markets and recovery
of huge research costs.
 Open economies are interdependent. And this exposes them to certain
unavoidable risks. Disturbances like trade cycles, and fluctuations in
income, prices and employment etc., originating in one economy, spread
to other economies also, this depends on the size of the economy,
intensity of the initial disturbances and degree of integration or
interdependence.
 Certain varieties of imports can expose a country to undue political,
economic and cultural risk. Examples are imports necessary for defence,
health care, energy needs, food needs, and the like.
 Large scale increase in international capital flows has resulted in
problems like heavy indebtedness of certain countries and their inability
to repay their debts.
 International trade adds to the productive capacity of a country, but if its
terms of trade deteriorate so much that there is a net decline in its
economic welfare then it is not economic growth.

3. Features of a closed economy:
 A closed region is independent from other regions, so there is no fear of
coercion or interference.
 Transit costs may be a problem for an isolated region, but the absence of
imports and exports relieves all shipping costs.
 Nearly every country or region has regulations on items produced and
sold. These ensure that the product is safe or satisfies certain conditions.
While regulating every item is difficult, a region with a closed economy
may find it slightly easier. This is because it does not have to check
imports, only internal items.
 A closed economy must also be able to feed itself and so is highly
dependent on agricultural and other farming methods to be able to
survive. If the country suffers from any adverse conditions such as too
much rain or not enough rain, this will have a direct impact on the
economy and people may starve.
 An economy on its path of development, like India, should focus more
on producing for the country on domestic level and restrict themselves
from using imported goods.

Conclusion:
An economy should be neutral when it comes to having trade between
countries. If it’s able to withstand the pressures of any crisis by having backups
then it would flourish. Pure open economy and closed economy exists only in
theoretical terms but a mixture of both can benefit a country and its people to
develop as well as grow. Both of them have their own advantages and
disadvantages though a country should adopt policies according to the
situation and keeping in mind the prevalent economic factors.