Open and Closed Economy Defined - Essay Example

Open and Closed Economy Defined Economics is the science that deals with the production, distribution and allocation, and use of goods and services.It is important to study how resources can be best distributed for the greatest number of people. Merriam-Webster Dictionary defines economics as a social science that is chiefly concerned with the description, analysis of production, distribution, and consumption of goods and services. There are two types of economies, in terms of macroeconomy, that a specific country might have. These are open and closed economies. Each has its own advantages and disadvantages. Whatever economy a country has is dependent on the country itself – the decision of its government. But how do they differ? A closed economy is the type that does not trade with other nations (Wessels 2001). It does not interact with other economies in the world – no exports, no imports, and no capital flows. It means they have to be completely sufficient to whatever resources are available in their country. They have to be completely self-sufficient that they cannot rely on imports abroad and make income from selling products to other nations. Many macroeconomic models assume the economy is closed because it is easier to understand. It is said that in this type, the economy has no activity conducted with the outside economies. The ultimate goal for closed economy is to provide consumers with everything that they need within the county’s borders. Closed economy can be less likely successful if the country lacks sources of some raw materials such as oil, gas and coal. Other important trade goods such as rice, flour and other basic goods play vital role in affecting the success on this economy’s type. However, due to the prevalence of international trade, closed economy in its strict sense is rare. Even governments that seek to limit the political and cultural influences of the outside world are likely to trade with other economies on some scale (Guell 2006). But it is impossible that one country can have all the raw materials sufficient to sustain life and is highly dependent on agricultural and farming methods in other to survive and not to starve. Those countries operating a closed economy tend to be less developed than those who are free trading. A closed economy neither borrows nor lends to other nations, as well as, receives and sends gifts to them. Normal residents of a closed economy cannot go to other countries to work in their domestic territory. They do not allow any foreigner in domestic territory of a closed economy. Gross National Product and Gross Domestic Product are the same in a closed economy (Suri 2011). Lack of trade may mean other reasons from some nations. According to AmosWEB, the country may be physically isolated with others or have natural barriers that prevent their trade. High transit cost can also be a reason because of the lack of transportation systems to other nations. The government may also make a decree of prohibiting trades to other countries which when violated may be punishable. Cultural factors are also included that those citizens of a certain economy do not want to interact with foreigners. There are no countries today that are in completely closed economy. The only instances that it is practiced are the time when the country was under the totalitarian regime that isolated the country to keep military and political control. An open economy on the other hand, is one freely trading goods and assets with other nations (Wessels 2001). In this type, there are economic activities between domestic community and outside. This includes people, businesses, goods, services with other people and businesses in the international community, and allows flow of funds as investments across the border. International trade has become increasingly important, especially in countries where goods, trades and services are lacking; the international market arena enables them to achieve their people’s needs. The primary advantage of having an open economy is that the consumers can choose from a variety of goods. This is because imports and exports are permitted which the citizens can have access of products and services from other nations. If a nation has an increase in the number of competitions producing different goods and services, it is like to have a less cost for the products. Lower prices with quality will be beneficial to the consumers. The increase in production will help improve the efficiency of resource allocation. With the increase also of industrial competition more innovative production methods can be done to improve the quality of the products made. One of the key of principles of economics is that trade benefits all the parties involved and is possible only in open economy. Trade allows nations to specialize in producing goods in which they have comparative advantages and trade with other nations to obtain goods in which other nations specialize (Ricardo 1800). An open economy can opt to move their funds, companies and ideas that can also help develop political ties and can be able to provide the consumers the products to complete their demands. It allows other countries to gain access to the products of other nations. A normal resident of an open economy can move or be employed in domestic territories of other countries. Gross Domestic Product and Gross National Product are not the same in an open economy. There is a greater chance of adjusting itself with the possible changes that may take place in an open economy because it is flexible. All the effects of having an open economy can help a nation or a country have a rising living standard, increase incomes and increase their economic growth because of increase production, industries and production levels. Although an open economy has numerous benefits some arguments set by other groups oppose this type of economy. One of which is the increase in economic instability from international trade cycles because economies become dependent on global markets. Free trade can cause pollution and other environmental problems because of increasing number of companies operating under weaker environmental legislation. Short term unemployment may occur caused by the removal of trade barriers. Developing or new industries (infant economics) may find it difficult to become established in a competitive environment with no short term policies included by the government. International markets are not “level playing field” as those with surplus products may dump them in world market at lower cost that may have been difficult to maintain and compete in long periods (Edge 1999). In the distinction between open and close economy, a study was made that these economies assumed to have opposite relations between responding and programmed density of reward (Peden 1987). The experimental procedures treated as open economies provided supplemental income outside the experimental session. It was assumed that an open economy is directly related to reward density while closed economy is inversely related. The results showed that behavior regulation theory predicts both the direct and inverse relationship of both the type of economies. An investigation was also made regarding the effects of adaptive behavior of two individuals with developmental disabilities. Progressive ratio (PR) was used to improve reinforcement. Patterns under open and closed economy account for different responses. (Hursh 1980, 1984) suggested that the difference between these two might be sue to the anticipated access to supplemental feeding which affects the elasticity of the demand for the reinforce. (Timberlake & Peden 1987) suggested that any differences are a function of reward density, not a function of specific economic arrangements. A fact file according to the Department of Foreign Affairs and Trade, of how Australia benefitted from free trade is that its ratio of export and import increases every year. The result of the rise in openness in trade has been structural change with the narrowing of the manufacturing and the industrial base and the rise in resources base. A bigger market that helped a business sell more, increase profit and pay higher wages. The export growth in Australia has been essential to their economic growth and job creation (Edge 1999). Closed and open economies both have their ups and downs. It is dependent on the county on which type they would choose, in relation to better supplying the needs of their general population. Closed economy can be found in counties where there are no economic interactions between the domestic and foreign countries. Trade between people, business, goods and commodities and flow of income are restricted. This type of economy can be successful if the said country has a steady supply of prime commodities within their boundaries to supply the general needs and demands of their people. However, the down side of this is that no single country has everything within them, if ever they do, the supply would be limited and as time goes by, will be depleted, thus, will not be enough for the demands their people may need. Open population on the other hand, is when the economy has open interaction with other economies – business, people, trade, and other commodities openly pass within borders. Most countries have open economies for it is more feasible. Even if a country has an abundant supply of one prime commodity, it may lack the supply of others. It would be more beneficial for their economy, and in turn to their people, to have a steady supply of commodities that their own country cannot provide for it lacks in their boundaries. Judgment on which economy to be implemented truly is a herculean task. It has to address the needs of the general population, without compromising their own welfare. Thus, although suck task is a challenge, a better understanding on the differences and applications of the two concepts can be considered paramount in the field of application. Works Cited AmosWEB Encyclonomic Web*Pedia. “Closed Economy.” Last modified November 27, 2011. http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=closed+economy. Dornbusch, Rüdiger, Cornelis, Leslie and Helmers, Hazlewood. The Open Economy: Tools for Policymakers in Developing Countries. 1998. Edge, Ken. “Free Trade and Protection: Advantages and Disadvantages of Free Trade.” Last modified 1999. Accessed November 27, 2011. http://hsc.csu.edu.au/economics/global_economy/tut7/Tutorial7.html. Guell, Robert. Issues in Economics Today. McGraw-Hill/Irwin, 2006. Hall, Shane. “The Advantages of an Open Economy.” Last modified 2011. Accessed November 27, 2011. http://www.ehow.com/list_5801085_advantages-open-economy.html. Hursh, S.R. “Behavioral Economics.” Journal of the Experimental Analysis of Behavior 42.3 (1984): 435–452. Nearshore Americas. “Opinion: Brazil’s “Closed Economy” has to Change and Mature.” Last modified. Accessed November 27, 2011. http://nearshoreamericas.com/brazil-closed-economy-matur/. Rødseth, Asbjørn. Open Economy Macroeconomics. Cambridge University Press, 2000. Suri, Sushil. “What are the Differences between Closed Economy and Open Economy?” Last modified 2011. Accessed November 27, 2011. http://www.preservearticles.com/201103144509/closed-economy-and-open-economy.html Wessels, Walter. Economics. Barrons Educational Series, 2000. Read More