An open economy engages in free trade with other countries, allowing for lower prices, better quality goods, economic flexibility, and more investment. Tariffs and trade barriers can protect domestic economies from foreign competition.
An open economy is one in which a nation engages in copious amounts of free trade with other countries. The country may impose some barriers or tariffs on international economic trade, but these are generally not intended to deter imports or exports. The benefits of an open economy are numerous, the most important of which are lower prices and a better variety of goods, a flexible economic environment, and more investment from outside countries. All countries can engage in this type of economy. To do this successfully, the nation must set up a government that properly monitors the environment and prevents international countries from taking advantage of the economy.
In a standard free market economy, price is typically the hinge pin for all economic activity. When a country engages in an open economy, it allows for more competition, which tends to drive down the prices of goods and services. Another related benefit here is the ability for better quality products and services. In this situation, higher prices can be compensated for with better quality goods, making consumer choice more prevalent in the market. In short, the open economy allows for better competition in terms of product manufacturing, which can bring huge benefits to consumers.
Economic flexibility is often essential for a country to grow and expand its economic output. Smaller countries tend to be at an economic disadvantage due to a lack of natural resources. More often than not, these countries can only produce a certain number and quantity of goods within their borders. An open economy allows for trade in terms of allocating resources and purchasing the items needed for economic production. Interacting with more countries can greatly expand your economic flexibility.
Early economies must be able to grow and expand with limited means. As more and more countries begin to engage in an open economy, however, the scope for direct investment increases dramatically. For example, one country may initially be satisfied with the export of hair dryers to another country. As the demand for these units increases, however, a direct investment can be made by starting a manufacturing plant. Therefore, the company builds a hair dryer manufacturing plant in a foreign country in order to better meet the demand.
Tariffs and trade barriers help keep a foreign country from ruining a domestic economy. These two restrictions prevent a foreign country from offloading cheap or unsafe goods into an economy. Additionally, tariffs and trade barriers can keep jobs and businesses in the domestic economy in order to maintain domestic economic growth.
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