Open and closed systems - Essay Example

The diagram below shows the macro economy as a closed system. Basically, a closed system represents an economy that is sustained by local productionand consumption where there are no exports or imports getting out or inside the economy respectively (Lipsey & Chrystal, 2007). A closed economy sustains itself and the major players include households, firms, government as well as market factors. A good example of a closed economy is where a country does not deal with other foreign economies. The outer flow in the closed economy is one way.

The firms produce goods which are sold into the market. The consumers buy the products and they inject some money into the economy. The inward flow is mainly comprised of four major groups that participate in the cycle namely: households, financial institutions, firms and governments. The flow is two way since it can go in either direction. The government makes payments to the households and the households spend this money on the purchasing consumer goods. However, not all households spend their total income since they save any surplus income (Stapelberg & Steyn, 1989).

The surpluses flow into financial institutions and these place the savings at the disposal of the credit needy like companies which produce different goods and services. The government also buys the goods and services from the firms. The flow can also take a reverse direction. Closed economy. An open economy system directly interacts with other foreign economies through engaging in different levels of trade with other countries. In this kind of economy, the state engages in activities such as importing or exporting different goods and services to other countries (Stapelberg & Steyn, 1989).

The inward flow in this cycle mainly shows the movement of goods and services from the firms to the households. The households buy the goods and services from the firm and they inject income into the economy. The firms on the other hand employ people to perform different tasks and these employees get payment. The outer flow shows the movement of money and it goes in the opposite direction to the inward flow of goods and services. The households get income from the firms and they spend this money on the goods and services.

This money contributes to the GDP and the revenue generated into the economy. This can also include economic activities with other countries. A leakage in the open system occurs when the amount of imports exceeds the amount of export. This entails that there is an imbalance of payments hence the GDP is negatively impacted (Lipsey & Chrystal, 2007). A leakage can also occur when the income generated from exporting a particular product is less than the production costs incurred in producing that product or service.

For instance, if it costs $1 00 to manufacture a fridge, then if that fridge is exported for less than that amount, this entails that income has leaked in the economy. Instead of generating profits from exporting different goods and services to other countries, the country will record loses which can be referred to as leakages. On the other hand, an injection can be referred to as money that is directly pumped into the economy. This can be in form of foreign direct investment in another country.

This entails that the investor brings in forex into the economy and it increases the GDP of that economy. For example, if a manufacturing company invests in another country, it brings forex that is injected into the macro economy of the country. This can contribute to the growth of the economy which means that it gains more revenue to sustain its operations. When there are more injections in the economy, problems such as unemployment can be reduced and the workers can also gain more income through better wages.

This entails that the consumers can spend more money which significantly injects more money into the cycle. References Lipsey, R. & Chrystal, A. (2007). Economics. 11th Edition. New York: Oxford University Press. Stapelberg, N.H. & Steyn, F.G. (1989). Economics: An introductory study. Pretoria: N.H.S. Publishers.