An open economy allows businesses and individuals to trade and participate in foreign capital markets, while a closed economy prevents interaction with foreign economies. International trade is important for a country’s economy, and open economies allow for the import and export of goods and participation in capital markets. No countries exist with completely closed economies, and the globalization of world markets encourages open economies, but there can be limitations.
The difference between an open and closed economy lies in a country’s policies on international trade and financial markets. An open economy allows its businesses and individuals to trade with businesses and individuals in other economies and to participate in foreign capital markets. A closed economy prevents its businesses and individuals from interacting with foreign economies in an effort to remain isolated and self-sufficient. The basic distinction between an open and closed economy concerns whether a country’s government allows its citizens to participate in the global marketplace.
Interaction with foreign countries is the basis of international trade. Trade between countries occurs through the export or sale of goods and services by parties in one country and the import or purchase of those goods and services by persons in another country. On the surface, the ability to trade across international borders may seem like a luxury rather than a necessity, but the ability is incredibly important to the health of a country’s economy. International trade expands the market for goods and services, allowing companies to hire more people to produce more goods than the demand in their home country.
An open and closed economy differ in how each handles international trade. Open economies allow for the import and export of goods. Closed economies prevent importing and exporting and, instead, rely solely on domestically produced goods and services to meet domestic demand. The concept of economic production equal to its consumption is a type of autarky or policy that requires self-sufficiency.
The other distinction between open and closed economy is participation in capital markets. The international capital market consists of stock exchanges that allow a country’s companies to raise funds from the public. It also consists of the ability of governments to raise funds by selling debt instruments, such as treasury bills, and to make investments in foreign currencies. In an open economy, a person can buy shares in a company located in a foreign country or buy foreign currency to go on vacation. Closed economies, however, prevent businesses and individuals from using the country’s money to make purchases outside its borders.
There are no countries that exist today with completely closed economies. Some countries, like North Korea, restrict their trade to a certain limited bloc of countries, but their economies aren’t completely closed. The only instances in world history where countries have implemented a classical closed economy for any length of time is when a country was under the control of a totalitarian regime which isolated the country to maintain political or military control. The globalization of world markets ensures that countries prefer to operate within an open economy system, but this notion can also have limitations. For example, the United States might seem like a classic example of an open economy, but it restricts citizens from trading with Cuba.
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