1/19/23, 9:57 AM Open Economy and Closed Economy - Indian Economy Notes

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Open Economy and Closed Economy - Indian Economy Notes

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An economy is decided as an open economy and closed economy based on the free movement of labour and
capital with other countries in the world. In the present day, almost every country engages in trade because no Quizzes
country produces enough of each commodity to meet the needs of its citizens. Based on how a country
completes these trade transactions the types of economies are divided into a closed economy and an open
economy. This is an important topic for the UPSC IAS Exam. Human Development Part-2
(Geography NCERT Class 12 Book 2…
Table of Contents
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1. Types of Economies Start Download

2. Open Economy
3. Examples
4. Features Migration (Geography NCERT Class 12
Book 2 Chapter 2)
5. Benefits
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6. Disadvantages
7. Closed Start Download
8. Example
9. Features View More
10. Benefits
11. Disadvantages
12. Difference Between Open and Closed Economies Full Test
13. Conclusion
14. FAQs UPSC Civil Service Prelims General
15. MCQs Studies Mock Test
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Types of Economies
A society is classified as having a closed or open economy based on the following factors. They are

Output Market: An economy can deal with and trade commodities and services with other countries or
do so on its own. This broadens preferences by allowing customers and manufacturers to choose
between domestic and foreign commodities. Previous Year Paper
Financial Market: An economy can frequently purchase financial assets from other countries or strive to
produce enough to meet its needs.
Labor Market: Companies can choose where to locate their manufacturing plants, and employees can UPSC CSE 2022 Prelims PYQ: Economy
choose where to work. There are several immigration laws that limit the movement of labour between (Part 1)
countries. 5 Min 5 Ques 5295 Attempted

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International Monetary System Balance of Payment

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1/19/23, 9:57 AM Open Economy and Closed Economy - Indian Economy Notes
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Current Account Capital Account
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Balance of Payment Surplus Balance of Payment Deficit
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Open Economy
Also Check
An open economy is one that trades commodities, services as well as financial assets with other
countries.
An open economy is one that conducts business with other countries in a variety of ways. IAS Exam Overview
An open economy broadens a country's market to an extent that a closed economy can never achieve.

Examples of An Open Economy IAS Exam UPSC Syllabus

It is to be noted that at present all economies of the world are open economies.
Some Notable Examples are:
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India
USA
Singapore IAS Exam Exam Pattern
Finland
Hongkong
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Features of An Open Economy
An open economy participates in the following activities:
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It purchases shares, debentures, bonds, and other securities from foreign countries and sells securities to
foreign countries.
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It borrows money from and lends money to other countries.
It is able to send and receive gifts and remittances from foreigners.
Normal residents of an open economy are free to move or work in the domestic territory of other IAS Exam Courses
economies.
In an open economy, Gross Domestic Product and Gross National Product are not the same things for
these reasons. IAS Exam Apply Online

Benefits of An Open Economy

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Prices in an open economy are found to be less, and product quality is improved as a result of
increased competition.
Consumers have more options for consumption as well.
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Another advantage of an open economy is that it is more adaptable. An open economy has a better
chance of adapting to changes in the global economy.
An open economy contributes to faster, more vibrant global growth. IAS Exam Preparation Tips
An open economy encourages research and development and fosters innovation.
Another advantage of an open economy is product variety. Because the trade base is so large, there is
always a less expensive, more efficient alternative. IAS Exam News
An open economy allows a country to have a voice in international trade, decisions, and relations.

Disadvantages of An Open Economy

An open economy is susceptible to global risks such as a slowdown.
A completely open economy risks becoming overly reliant on imports.
Domestic producers may suffer in an open economy because they cannot compete at low international
prices. As a result, governments may use trade controls such as tariffs, subsidies, and quotas to help
domestic businesses.
Any change in either of these determining factors can result in a large-scale international movement of
funds.
It is possible that a country will be forced to adopt certain production technologies that will prevent it
from making the best use of its factor endowment.
Alternatively, it may be forced to limit its exports. Such a situation may be thrust upon a country with
limited bargaining power or that is experiencing balance-of-payments difficulties.
Economic shocks in one country can quickly spread to other countries, as demonstrated by the 2008-
2009 economic crisis in the United States.

Closed Economy
A closed economy is completely self-sufficient, which means that no imports enter and no exports leave
the country.
A closed economy's goal is to provide domestic consumers with everything they require from within the
country's borders.

Example of A Closed Economy

In practice, no economy is completely closed. Brazil imports the fewest goods in the world when measured
as a percentage of GDP, and it has the world's most closed economy.

Features of A Closed Economy

A closed economy engages in none of the following activities:

It does not export goods or services to other countries and does not import goods or services from other
countries.
It neither buys nor sells shares, debentures, bonds, and other financial instruments to foreign countries,
making it a closed economy.

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1/19/23, 9:57 AM Open Economy and Closed Economy - Indian Economy Notes
It does not borrow from or lend to other countries.
It accepts no gifts from foreigners and sends no gifts to foreigners.
Normal residents of a closed economy are unable to travel to other countries to work in their home
country. No foreigner is permitted to work on a closed economy's domestic territory.
In a closed economy, Gross Domestic Product and Gross National Product are the same for the reasons
stated above.
In a strict sense, however, completely closed economies do not exist today because every country trades
with the rest of the world.

Benefits of A Closed Economy

The protection of the domestic economy from the world economy's cyclical upswings. The greater a
country's reliance on foreign trade and investment, the more vulnerable it is to a global slowdown.
A closed economy is self-sufficient and does not rely on international trade for imports or exports.
A government may use quotas, subsidies, and tariffs to exclude a specific industry from international
competition.
Companies and individuals can increase their wealth by specialising in labour and allocating resources
to their most productive, efficient operations.
International trade and capital flows facilitate the spread of the recession or financial crisis. As a result,
because neither exists, a closed economy is immune to these risks.
Furthermore, because there are no transactions with the external sector, the exchange rate risk does not
apply.

Disadvantages of A Closed Economy

Limited growth: The economy's ability to develop is hampered by a lack of domestic resources (factors of
production and financial capital).
Fewer product variations: Domestic production is the sole source of supply.
Excluded from international diplomacy: International trade exists because countries require one another.
If that does not exist, the country is deemed to be self-sufficient.
Low Growth: The need for raw materials produced elsewhere, which are critical as inputs to finished
goods, renders closed economies inefficient.

Difference Between Open and Closed Economies

Parameters Open Economy Closed Economy

International Under an open economy, a country When running a closed economy, a

Relationships allows the import and export of goods country has no exposure to the external
and services. sector. There is no export or import.

Dependency Internationally dependent Self-reliant

Trade Relation Borrows and lends internationally. Does not borrow or lend.

Foreign Aid Takes and Gives Neither takes nor gives.

Degree of High Low

Competition

Factors of Interaction with the external sector also There is no international

Production involves production factors (capital and movement/interaction of factors of
labour), technology transfer, and production.
intellectual property.

Example USA, India, Singapore etc None

Concept Most of the world economies are open Closed economies remain only in theory
economies. now.

Conclusion
Most economies in their early stages of development follow a relatively closed economy policy out of fear that
competition will crush their fledgling domestic industries. When their domestic industries are strong enough to
compete, they adopt open economic policies.

Other Relevant Links

Indian Economy Notes Tax Evasion

Taxation Types of Taxes

Indirect Tax Direct Tax

FAQs

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1/19/23, 9:57 AM Open Economy and Closed Economy - Indian Economy Notes
Question: What is an Open economy? ➕

Question: Why are there no real closed economies? ➕

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Question: Which among the following could be said to be an 'Open Economy'? Search for Government Ex Register
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(a) A country that adheres to the doctrines of free-market and laissez-faire economics.
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(b) A country that trades with other countries in goods, services, and financial assets.

(c) An economy that operates without the intervention of the government

(d) None of the above

Answer: (b) See The Explanation ➕

Question: A closed economy is one in which:

(a) Only exports occur.

(b) The money supply is completely under control.

(c) Deficit financing occurs.

(d) There is no import or export.

Answer: (d) See The Explanation ➕

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*The article might have information for the previous academic years, please refer the official
website of the exam.

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