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What is an Open Economy?

An open economy engages in importing and exporting goods.
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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 30 September 2014
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An open economy is an economy in which international trade takes place. Most nations around the world have open economies, and many nations rely heavily on international trade to meet economic and social goals. As a general rule, open economies are viewed as stronger than closed economies in which international trade does not occur, and this type of economy tends to be better for companies, investors, and individual citizens. For the global economy, however, open economies can become problematic, because when a large trade partner experiences economic difficulties, it can have a ripple effect across the globe, instead of being confined to that nation alone as it would be in a closed economy.

In an open economy, both imports and exports are permitted, and they can consume a large portion of the company's total gross domestic product in any given year. Imports give citizens of a country access to products and services provided by other nations, which allows for more consumer freedom because people have a wider range of choices. Exports allow companies and citizens to break into other markets to find new buyers for their products.

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Nations with open economies generally have more access to credit, because they can rely on international sources as well as domestic ones for funds. Citizens also have more options in terms of investment and banking, because they can opt to move beyond their national borders with their funds, companies, and ideas. This in turn promotes the exchange between two or more economies, which creates mutual economic strength between trade partners. Open economies can also be used to forge political ties.

Many nations have laws in place which are designed to promote an open economy, and to minimize restrictions on imports and exports. Groups of nations such as the signatories to the North American Free Trade Agreement may in fact have free trade laws built directly into international treaties and agreements, to ensure that members do not later change their minds and alter regulations which pertain to international trade.

The term “small open economy” is used to refer with a nation which has an open economy, but not a lot of economic clout, because its economy is so small in comparison with trading partners. When small open economies experience financial problems such as recessions and inflation, for example, this does not have a very large impact on international trade as a whole, because their fraction of the total trade which occurs annually is negligible.

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Tufenkian925
Post 4

Is China the model economy? I think that as we progress we will realize that "chi-merica" is the strong monetary empire of the world. We have both American innovation and Chinese savings for the future. A good long-term focus and risk-avoidance exists in China, while the opposite exists in the US. They complement each other very well.

Leonidas226
Post 3

@GigaGold

This kind of "capitalistic mayhem" is nevertheless the strong force which fuels exploration and new strong entrepreneurship. Boldly going forth and seeking new opportunities benefits nations in general and forges a path for new open economies. We may find that, as time goes on, we will need to reshape the role of world politics in general well-being.

GigaGold
Post 2

The politics of an open economy may be more difficult than that of a single nation. Outsourcing and quasi-legal practices can take place on the borderlands of different nations, as well as in a business transaction which is on the fringe of two nations. If a nation's political system is unsure of who governs who's affairs and business practices, the resulting economy can be a capitalistic mayhem.

dbuckley212
Post 1

It is exciting to see the open economy which now exists between South Korea and the US. As time progresses, the ties here will strengthen and both nations will benefit because of it. It is to be hoped that one day all nations will participate in an open and light-speed economy based on a strong and secure internet.

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