Closed and Open Economy
An economy is a system that provides people with goods and services and directly or indirectly satisfies their wants. In this article, you are going to read about Open Economy.
On the basis of their nature, economies are classified into the following categories:
- Simple or complex economy
- Closed or open economy
- Planned or unplanned economy
- Agricultural or industrial economy
What is Open Economy?
An open economy is an economy that is involved in the process of production within its own country and participates in the production process anywhere in the world.
What is Closed Economy?
A closed economy is an economy that has no economic transactions with any other country.
Difference between Closed and Open Economy
| Closed Economy | Open Economy |
|---|---|
| Does not have economic relations with the rest of the world. | Has economic relations with other countries. |
| Activities taking place outside the territory do not affect economic activities. | The economic activities of such an economy are affected by international fluctuations. |
| There is no difference between national income and domestic income. | The size of national income may be greater or smaller than domestic income. |
| It is an imaginary economy. | It is a real economy. |
Economic Growth and Economic Development
Economic growth is an increase in the national income or per capita output over a period. It is a sign of quantitative growth in the country. On the other hand, economic development is a process where the real per capita income of a country increases over a period with a decrease in poverty ratio, unemployment, and income inequality.
Economic Problem
The demand for goods and services arises from human wants. No individual in the whole world can fulfill all his/her wants. Wants are unlimited and means are limited. Thus, this scarcity of means in relation to wants brings forth the economic problem of how many resources should be used in satisfying different wants. In this way, one has to choose a set of wants from among unlimited wants which are to be satisfied with limited resources. Scarcity means a situation where only a limited amount of goods can be produced because of the existence of a limited amount of resources.
Central Problems
Central problems of an economy are the problems faced by and common to all kinds of economic systems. These include problems with decision-making about what to produce, how to produce, and whom to produce. This is because it is not possible for any economy to produce an unlimited variety of goods with limited resources.
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