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Merits and Demerits of an Open Economy

Merits and Demerits of an Open Economy

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The free movement of labor and capital among nations determines whether an economy is an open economy or a closed economy. Since no nation produces enough of any one commodity to meet its citizens' needs, almost every country today trades. The terms "closed economy" and "open economy" refer to the ways in which a nation completes these trade transactions.

Features of An Open Economy - The following are activities that take place in an open economy:

1. It sells securities to other nations and acquires shares, debentures, bonds, and other securities from other nations.

2. It lends and borrows money from other nations.

3. It can send and receive gifts and money sent from abroad.

4. People who live in an open economy are free to live and work anywhere in the country.

5. For these reasons, the terms "gross domestic product" and "gross national product" are not interchangeable in an open economy.

Merits of An Open Economy

1. Prices within the open economy are viewed as less, and item quality is worked on because of expanded rivalry.

2. Additionally, consumers have more consumption options.

3. An open economy also has the advantage of being more adaptable. The likelihood of adapting to shifts in the global economy is higher in an open economy.

4. Global growth is accelerated and enhanced by an open economy.

5. Innovation and research and development are aided by an open economy.

6. Product variety is another advantage of an open economy. There is always a less expensive and more effective alternative given the extensive trade base.

7. A nation can participate in international trade, decisions, and relations by having an open economy.

Demerits of An Open Economy

1. A slowdown, for instance, is one global risk that can affect an open economy.

2.An open economy runs the risk of becoming overly dependent on imports.

3. In an open economy, domestic producers may suffer because they cannot compete with low international prices. As a result, trade controls like tariffs, subsidies, and quotas can be used by governments to support domestic businesses.

4. A significant international transfer of funds can occur if either of these determining factors is altered.

5. It is possible that a nation will be forced to use certain production technologies, which will stop it from using its factor endowment to its full potential.

6. It could also be compelled to restrict its exports. A nation with limited bargaining power or difficulties with its balance of payments might find itself in such a situation.

7. As the 2008-2009 economic crisis in the United States demonstrated, shocks to one nation's economy can quickly spread to other nations.

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