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An open economy is a type of economy where not only domestic factors but also entities in other countries engage in trade of products (goods and services). Trade can take the form of managerial exchange, technology transfers, and all kinds of goods and services. Certain exceptions exist that cannot be exchanged; the railway services of a country, for example, cannot be traded with another country to avail the service. It contrasts with a closed economy in which
international trade International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. (see: World economy) In most countries, such trade represents a significa ...
and
finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of f ...
cannot take place. The act of selling goods or services to a foreign country is called
export An export in international trade is a good produced in one country that is sold into another country or a service provided in one country for a national or resident of another country. The seller of such goods or the service provider is a ...
ing. The act of buying goods or services from a foreign country is called
import An import is the receiving country in an export from the sending country. Importation and exportation are the defining financial transactions of international trade. In international trade, the importation and exportation of goods are limited ...
ing. Exporting and importing are collectively called
international trade International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. (see: World economy) In most countries, such trade represents a significa ...
.


Advantages and Disadvantages

There are a number of economic advantages for
citizen Citizenship is a "relationship between an individual and a state to which the individual owes allegiance and in turn is entitled to its protection". Each state determines the conditions under which it will recognize persons as its citizens, and ...
s of a
country A country is a distinct part of the world, such as a state, nation, or other political entity. It may be a sovereign state or make up one part of a larger state. For example, the country of Japan is an independent, sovereign state, whi ...
with an open economy. A primary advantage is that the citizen
consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
s have a much larger variety of goods and services from which to choose. Additionally, consumers have an opportunity to invest their
savings Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...
outside the country. There are also economic disadvantages of an open economy. Open economies are interdependent on others and this exposes them to certain unavoidable risks.


History

The idea of the open economy shares a relationship with the idea of
globalization Globalization, or globalisation (Commonwealth English; see spelling differences), is the process of interaction and integration among people, companies, and governments worldwide. The term ''globalization'' first appeared in the early 20t ...
. This process of people, businesses, and governments connecting and interacting with one another across all countries and continents is a direct correlation to the idea of open economies. There are several historical events that have affected these ideologies simultaneously. For example, the
Silk Road The Silk Road () was a network of Eurasian trade routes active from the second century BCE until the mid-15th century. Spanning over 6,400 kilometers (4,000 miles), it played a central role in facilitating economic, cultural, political, and rel ...
, which connected Eastern Asia with the Middle East and Europe. Another example would be global wars such as
World War I World War I (28 July 1914 11 November 1918), often abbreviated as WWI, was List of wars and anthropogenic disasters by death toll, one of the deadliest global conflicts in history. Belligerents included much of Europe, the Russian Empire, ...
and
World War II World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the World War II by country, vast majority of the world's countries—including all of the great power ...
, which had the effect of creating alliances and partnerships between countries, tying them economically to one another. Open economies are influenced by political views as well
Economic openness
as a political economic concept began in the 19th century and was characterized two schools of thought. Opponents of open economies believe that it could weaken national economies due to its competitive nature, while proponents of open economies believe that economic openness would positively impact
trade Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market. An early form of trade, barter, saw the direct exc ...
and stimulate job growth and economic opportunities.


Conclusion

If a country has an open economy, that country is spending in any given year need not equal its output of goods and services. A
country A country is a distinct part of the world, such as a state, nation, or other political entity. It may be a sovereign state or make up one part of a larger state. For example, the country of Japan is an independent, sovereign state, whi ...
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. there is no totally-closed economy.


See also

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Exchange rate In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of t ...
*
Gains from trade In economics, gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other. In technical terms, they are the increase of consumer surplus plus producer surplus from lower tariffs ...
*
Terms of trade The terms of trade (TOT) is the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods an economy can purchase per unit of export goods. An i ...
*
International trade theory International trade theory is a sub-field of economics which analyzes the patterns of international trade, its origins, and its welfare implications. International trade policy has been highly controversial since the 18th century. Internation ...


References

{{DEFAULTSORT:Open Economy Economics catchphrases International trade International macroeconomics