CLASS 12 Economics - Introductory Macroeconomics Open Economy Macroeconomics

An open economy is one that interacts with other countries through various channels. So far we had not considered this aspect and just limited to a closed economy in which there are no linkages with the rest of the world in order to simplify our analysis and explain the basic macroeconomic mechanisms. In reality, most modern economies are open. There are three ways in which these linkages areestablished.1. Output Market: An economy can trade in goods and services with other countries. This widens choice in the sense that consumers and producers can choose between domestic and foreign goods.2. Financial Market: Most often an economy can buy financial assets from other countries. This gives investors the opportunity to choose between domestic and foreign assets.3. LabourMarket: Firms can choose where to locate production and workers to choose where to work. There are various immigration laws that restrict the movement of labour between countries.