What is Open Economy?
An open economy is one which deals with other countries through distinct methods. Till now, we had not contemplated this feature and just restricted to a closed economy in which there are no connections with the rest of the world in order to ease our analysis and elucidate the basic macroeconomic systems. In fact, most of the modern economies are open. There are 3 ways in which these connections are entrenched.
- Output Market: An economy can deal and trade in commodities and services with other nations. This broadens the preferences in the sense that the customers and manufacturers can pick between domestic and foreign commodities
- Financial Market: Often, an economy can purchase financial assets from other nations. This furnishes investors the opportunity to pick between domestic and foreign assets
- Labour Market: Enterprises can pick where to locate manufacturing plant and workers to pick where to work. There are several immigration laws which constraint the movement of labour between nations
Movement of goods has typically been seen as an alternate for the movement of labour. We concentrate on the first 2 connections. Hence, an open economy is said to be one that trades with other countries in commodities and services and often also in financial assets. Indians, for example, can utilize goods which are manufactured around the world and some of the goods from India are exported to other nations.
When commodities move across national frontiers, money must be utilised for the transactions. At an international degree, there is no currency that is issued by a bank. Foreign economic brokers or agents will get a national currency only if they are persuaded that the number of commodities they can purchase with a definite amount of that currency will not change intermittently.