Shweta Suri

An open economy is a type of economy that is largely free from all trade restrictions and allows unbound trade practices with other economies of the world. Such an economy is an active participant in the global economic trade and facilitates the people and businesses around the world to enjoy the comfort delivered through exchange of goods and services.

An open economy encompasses two types of trade that are Export and Import. These economic trade activities of selling and purchasing of goods and services in an economy together lead to a term called international economic trade.

An open economy deals with various macroeconomic phenomena’s including exchange rates, trade balance, subsidies tariffs and import quotas. Such an economy allows the people to benefit from its trading exchange practices and indulge in economic activities at an international level. Other advantages of an open economy are increased direct foreign investment opportunities, higher flexibility and a larger variety of goods that is extended to the customers to choose from. In addition to all these, the major benefit of an open economy is that it allows an economy to gain higher chances of easily adapting to the technological changes taking place all across the world.

With the globalization taking place, the advantageous and popular open economy model is followed by a number of other economies across the world. The income level (Y) in an open economy is the accumulation of consumption of domestic goods and services by the consumers, investment on domestic goods and services, government expenditure in domestic goods and services and net exports.

Such an economy does not necessitate its customers to make a spending equal to its output of the goods and services produced. In an open economy, the people can easily borrow money from abroad and spend even more than what it actually produces or vice versa.