Closed
and Open Economy:
Closed
Economy: A closed
economy is the economy in which there is no economic dealings and social
interaction with outside the world. A
closed economy is said to be a self-sustained, self-contained, self-sufficient
and 100% sovereign economy. A
closed economy is a hypothetical economy. In
the real world, it is impossible for a country, even for a socialist or
communist country, to not interact with its fellow countries. The existence of a closed economy is only assumed for
economic study.
The closed economy is
consist of three activities:
(a) Production activities,
(b) Consumption, and
(c)
Accumulation or capital transactions.
The flow diagram of a
closed economy is as follows:
Open
Economy: Open economy is an economy
having economic and social dealings with other countries of the world.
In the real world, all the economies are entered into extensive economic
relationship with other economic systems. No
country in this world is 100% self-sufficient, self-contained and sovereign.
Every economy to a certain degree is dependent on other economy, esp., in
the 21st century’s global village.
The activities of an
open economy can be divided into:
(a) Production activities,
(b) Consumption,
(c) Accumulation or capital transactions, and
(d)
Interaction with ‘rest of the world’.
The flow diagram of an open economy is as follows:
Stock
and Flow Distinction:
There are two kinds
of quantities:
(a) Stock, and
(b)
Flow.
A stock is any
quantity that is measured at a single instant in time.
A flow is any quantity that must be measured over a period of time. For example, the amount of orange juice a person drinks in a
month is a ‘flow’. The amount
of orange juice he has in his refrigerator is a ‘stock’.
The number of sheets of ¾ inch plywood in the warehouse is a stock.
The number it sells in a typical week is a flow.
Income is a flow,
whether for an individual, or will all the individuals added up to get national
income. everything that is done
with income is flow, for example, paying taxes, saving, consumption, etc.
The amount of money in existence is a stock quantity, not a flow quantity. When we talk about saving, we mean new saving during a given period, not the total stock of a household’s wealth. Therefore, saving is flow and wealth is stock.