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An open economy is one where a nation engages in copious amount of free trade with other countries. The country may impose some barriers or tariffs on international economic trade, but these are generally not meant to dissuade imports or exports. The advantages of an open economy are numerous, with the more important ones being lower prices and better variety of goods, a flexible economic environment, and higher investment from outside countries. All countries can engage in this type of economy. To do so successfully, the nation must set up a government that adequately controls the environment and prevents international countries from taking advantage of the economy.
In a standard free market economy, price is typically the hinge pin for all economic activity. When a country engages in an open economy, it allows for more competition, which tends to bring down prices on goods and services. Another related benefit here is the ability for goods and services to be of better quality. When this is the situation, higher prices can be offset with better-quality goods, making consumer choice more prevalent in the market. In short, the open economy allows for better competition in terms of product output, which can benefit consumers immensely.
Economic flexibility is often essential for a country to grow and expands its economic output. Smaller countries tend to have a disadvantage economically due to the lack of natural resources. Most times, these countries can only produce a certain number and quantity of goods within their borders. An open economy allows for trade in terms or resource allocation as well as purchasing the requisite items for economic production. Engaging in trade with multiple countries can greatly expand economic flexibility.
Early economies must be able to grow and expand through limited means. As more and more countries begin to engage in an open economy, however, the possibility for direct investment increases dramatically. For example, a country may initially be pleased with exporting hairs dryers to another country. As the demand for these units increases, however, making a direct investment by starting a production plant may be possible. Therefore, the company builds a plant to produce hair dryers in the foreign country in order to meet demand better.
Tariffs and trade barriers help prevent a foreign country from ruining a domestic economy. These two restrictions prevent a foreign country from dumping cheap or unsafe goods into an economy. Additionally, tariffs and trade barriers can maintain jobs and companies in the domestic economy in order to maintain domestic economic growth.
What influence does an open and a closed economy have on the money supply?