Open Economy

             

           Open economy is an economy about activities between domestic community and outside. The act of selling goods or services to a foreign country is called exporting. The act of buying goods or services from a foreign country is called importing. For example, Ikea is import from China and our rice from Thailand. Thailand’s private exporters either have to buy rice from the government at the inflated price or go directly to farmers, who for obvious reasons prefer selling to the government. Because of the artificially high price, Thai rice exports in 2012 fell 37 percent, according to Thailand’s Ministry of Commerce.

              In an open economy, a country's spending in any given year need not to equal its output of goods and services. A country can spend more money than it produces by borrowing from abroad, or it can spend less than it produces and lend the difference to foreigners. There is no closed economy in today's world.          

          In an open economy, some output is sold domestically and some is exported to be sold abroad. We can divide expenditure on an open economy’s output Y into four components: Cd, consumption of domestic goods and services, Id, investment in domestic goods and services, Gd, government purchases of domestic goods and services, X, exports of domestic goods and services. The division of expenditure into these components is expressed in the identity.

Reference: 

1. http://en.wikipedia.org/wiki/Open_economy

2. http://www.businessweek.com/articles/2013-04-18/thailands-farmer-friendly-rice-subsidy-backfires#p1

By Liew Pau Yee 0314681