An open economy is an economy in which there are economic activities between the domestic community and outside can trade in goods and services with other people and businesses in the international community, and flow of funds as investment across the border. Trade can be in the form of managerial exchange, technology transfers, all kinds of goods and services.
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.
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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. Additionally, consumers have an opportunity to invest their savings outside of the country.
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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A completely open economy is one that has no trade barriers. Most of the world’s hundred-plus nations are relatively open, but much less than they could be because of a wide assortment of trade restrictions. The more an economy is open, the more dependent it is on happenings around the world.
An open market is characterized by the absence of tariffs, taxes, licensing requirements, subsidies, unionization and any other regulations or practices that interfere with the natural functioning of the free market. Anyone can participate in an open market. There may be competitive barriers to entry, but there are no regulatory barriers to entry.
In an open economy, a country’s spending in any given year need not to equal its output of goods and services. A country can spend more money than it produces by borrowing from abroad, or it can spend less than it produces and lend the difference to foreigners.