What Is Circular Flow Of Income In Closed And Open Economy?


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David Gill Profile
David Gill answered
The circular flow of income is a phrase used to describe an economic model which illustrates the way a country operates. An 'open' economy is a term used to define a country which is somewhat, if not completely reliant on, and influenced by other countries and their economies. A 'closed economy' is by definition entirely self-reliant, therefore nations and states that adopt this system should theoretically not be influenced by what goes on outside of their own economy.

  • Can you give me an example of an open economy?
Virtually every nation on the planet is an open economy. In essence any nation that has some trade with another country is by default an open economy, however as you might gather some are more open than others. The United States and Great Britain are both prime examples of open economies, countries where there is a high level of dependence on importation of goods and industry.

  • Can you give me an example of a closed economy?
There are few examples of a closed economy in the world today. The nearest would probably be the communist state of North Korea - even they are open to foreign investment and trade, if only with a handful of countries such as China, South Korea, India and Singapore. The emphasis of their economy however, is very much on an ideology of being self-sufficient.
  • Which is best?
That's really a matter of personal preference, but for the sheer volume of countries operating an open economy, it seems evident that this is most preferable. Most governments appear to see the trade off between the convenience of free trade and the reliance on a world economy a risk worth taking.

An open economy allows a country to develop one or a perhaps few particular avenues of exportation, without having to worry about trying to produce everything themselves. An entirely closed economy by contrast is responsible for the provision of everything the society needs, and by definition does not trade with other countries; enjoying the responsibility of being culpable for its own success or failure.
Anonymous Profile
Anonymous answered
Explain The Circular Flow Of Income Under Open And Closed Economy, Frugal Economy And Governed Economy And Spend Thrift Economy?
Anonymous Profile
Anonymous answered
In a closed economy, the flow of income between the firms and households within the country.
I.e. No exports and imports to the other countries.

In a open economy, the flow of income between the firms, households, governments and other countries.
Imports more the circular flow of income will decrease with in the country.
Exports more the circular flow of income will increase with in the country,

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