Open economy

In macroeconomics, an open economy is understood to be the model of an economy that is connected to other world economies without restrictions. An open economy is opposed to a closed economy , as described in the two-sector model .

In fact, in reality there are neither fully open nor fully closed economies. The model of the open economy is only intended to show the importance of foreign trade (by including imports and exports) in the creation and use of national income . This also enables statements to be made about the share of foreign trade in a country's national income. Germany, for example, has a high share of net exports compared to other countries. A special case is the small open economy model .

Basic model

In the model of the open economy, the following applies: Overall economic demand is the sum of private consumption, investments, government expenditure and net exports in a certain period of time (usually a calendar year).

${\displaystyle Y^{n}=C+I+G+(EX-IM)}$ (Production usage equation)

With

${\displaystyle NX=(EX-IM)}$

and

${\displaystyle Y^{n}=Y}$

With

• ${\displaystyle Y^{n}}$: Overall economic demand ( national income on the expenditure side)

• ${\displaystyle Y}$: Overall economic supply (national income on the production side)

• ${\displaystyle C}$: Private consumption

• ${\displaystyle I}$: Investments

• ${\displaystyle G}$: Government spending

• ${\displaystyle EX}$: Exports

• ${\displaystyle IM}$: Imports

• ${\displaystyle NX}$: Net exports

The extent of an open economy is determined by the share of net exports in national income:

${\displaystyle {\frac {\left|EX-IM\right|}{Y^{n}}}}$.

See also

• Closed economy