Question

Choose one of the questions below to discuss. (200 word min)

1. What is meant by the term "open economy"? "Closed economy?"

2. What imported goods do you often buy? How would you be affected if the U.S. restricted international trade or stopped trading with other nations entirely?

3. What happens to the trade from either developed or underdeveloped nations when monopoly export and import agencies are set up? Why?

4. What are the differences between common markets, custom unions and free trade agreements? Which of these is the most comprehensive form of trade agreement.

5. What was the basic role of GATT? What is the basic objective of the WTO?

6. What are the major threats to further world trade liberalization?

7. What are the differences between the static vie of comparative advantage and the dynamic view of growth?

Answer 1

An open economy is generally referred to as an economy which takes part in international trade. In other words an open economy is an economy which is open to trading of goods and services. An economy which sells its goods and services to a foreign economy is said to be the exporter of the good. On the other hand when a country buys any goods or services from a foreign country, then it is said to be an importer of the good. When a country is open to trading goods it has some advantages and also disadvantages. Trading can make the producers better off when the world price is greater than domestic price. Again, consumers are better off in a situation when the world price is lower than the domestic price. But, sometimes, producers and consumers are worse off too. Another disadvantage of trading is that it harms the domestic infant industries and erodes the domestic industries.

A model with an open economy is given by,

Y = C + I + G + (X - M), where Y is the aggregate output, C is the consumption, I is investment, G is government expenditure, X is exports and I is imports.

On the other hand a closed economy is referred to as an economy which does not take part in international trade. That is an economy which is not open up for trading is known as a closed economy. Thus a closed economy does not export or import any goods or services.

A model with a closed economy is given by,

Y = C + I + G, where Y is the aggregate output, C is the consumption, I is investment and G is government expenditure.