Open economy

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Economies
Sectors and Systems
  Closed economy
  Dual economy
  Gift economy
  Informal economy
  Market economy
  Mixed economy
  Open economy
Participatory economy
  Planned economy
  Underground economy
Real-World Examples and Models
  Anglo-Saxon economy
American School
Global economy
Hunter-gatherer economy
  Information economy
New industrial economy
  Palace economy
  Plantation economy
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Ideologies and Theories
Capitalist economy
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  Token economy

An open economy is an economy in which people, including businesses, can trade in goods and services with other people and businesses in the international community at large. This contrasts with a closed economy in which international trade cannot take place.

The act of selling goods or services to a foreign country is called exporting. The act of buying goods or services from a foreign country is called importing. Together exporting and importing are collectively called international trade.

There are a number of advantages for citizens of a country with an open economy. One primary advantage is that the citizen consumers have a much larger variety of goods and services from which to choose from. As well consumers have an opportunity to invest their savings outside of the country.

Economic models of an open economy

The basic model

The basic economic model of an open economy is the same as a closed economy model except two new terms are added: Exports [(EX)] and imports [(IM)]:

[Y = C^d + I^d + G^d + (EX - IM)]

With Y being gross domestic product / National income, [C^d] is consumer consumption of domestic goods and services, [I^d] is investment in domestic goods and services, [G^d] is government expenditures on domestic goods and services. The term [(EX - IM)] is usually called net exports and is sometimes designated with the term NX.

Open economy

Economic models of an open economy

The basic model

See also