The Open Economy

424 words | 2 page(s)

The concept of an open economy on a macroeconomic scale is one that deals with the free interaction of economies around the world, allowing for multiple economies to interact with each other in ways that are mutually beneficial to both.1 The flow of goods and services between these different economies works to ensure the successful completion of trade between the two, providing the means by which economies are able to interact with each other.1 This flow of goods and services is referred to as the country’s imports and exports; the items that are shipped out of the country for use in other countries and the items that are brought in to the country for use within that country. 1

In order to determine the net exports of the country itself, it is necessary to first know the country’s exports and the country’s imports, allowing the country to gain a better idea of where it stands in relation to how much is being gained by the country versus how much is flowing out of the country and in so doing, providing a means for the country to work to assess itself.2 This information may be determined through the use of a simple formula EX(Exports) – IM (Imports) = NX(Net Exports);2 with this information the country is able to gain a better understanding of their GDP (gross domestic product), giving them not only a basis for comparison with the rest of the world, but a better understanding of where the country stands in terms of being able to support itself. The article on Bangladesh’s open economy3 was chosen for the purpose of showing a practical application of the information covered within the text, indicating consistency with the information reviewed in class, allowing for a practical application of the principles of open economy discussed herein from the text.

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The flow of capital allows the country to determine where the money is going; an individual, or a country, may either use money to purchase goods, resulting in a flow of goods, or they may use money to purchase stock in a given country or company, representing a flow of capital; an inpouring of funds into a specific organization or country for the purpose of investment.1 In order for the open economy to effectively function, there must be the flow of goods and the flow of capital, allowing for its continued success.

  • Mankiw N. Principles of Macroeconomics. Cengage Learning; 2011.
  • Arnold RA. Macroeconomics. Cengage Learning; 2010.
  • Available at: http://www.thedailystar.net/business/bangladesh-second-most-open-economy-in-trade-in-south-asia-22263. Accessed May 22, 2014.

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