Check sibling questions

Closed Economy

It is an economy which has no interactions with outside world

There are no economic relations or dealing with outside world

There are no imports and exports

All trades are internal (within the country)

What is Closed Economy - Teachoo.JPG

Open Economy

It is an economy which has interactions with outside world

There are economic relations with different countries

There are exports and imports as well as internal trade

What is an Open Economy - Teachoo.JPG

Difference
Closed Economy Open Economy
No interaction with outside world There are interactions with outside word
No Economic relation outside country There are economic relations with different countries
Only Internal Trade is done There are exports and imports as well as internal trade
It is an unrealistic concept (not normally found). It is mostly found now a days and almost all countries in world are open economies (some more open and some less).
 

Difference between  Closed Economy & Open Economy - Teachoo.JPG

Linkages in Open Economy

In Open Economy, there are 3 types of linkages with outside world

 

Product Market Linkage

Consumer and Firms can choose whether to buy goods and service from domestic goods and foreign goods

They can buy local products or imported products

 

Financial Market Linkage

Investors can choose whether to invest in domestic assets or foreign assets

They can purchase shares of Indian companies or Foreign companies

 

Labour Market Linkage

Labour can choose where to work, whether in India or outside India

Firm can also choose where to set up their factories, within India or outside India

Different Linkages in Open Economy - Teachoo.JPG

Characteristics Properties Of Open Economy - Teachoo.JPG

Is India Open Economy or Closed Economy?

India is an Open Economy as we have trade with other countries

India's import and export form significant proportion of GDP

However, we are less open as compared to other countries who have higher proportion of trade

 

Also in India, all 3 types of linkages are available

We can choose between Indian products or imported products (Product Market Linkage)

We can invest in Indian stock market or Foreign stock market (Financial Market Linkage)

We can choose to work in India or Outside India (Labour Market Linkage)

Why is India an Open Economy - Teachoo.JPG

Domestic Trade & Circular flow of Income Circular flow of Income - Teachoo.JPG

How does Foreign Trade Affect Circular Flow of Income - Teachoo.JPG

NCERT Questions

No questions in this part

Other Books

Question 1

In the following questions, select the correct answers:

Which of the following is a point of difference between Open and Closed Economy?

  1. Open economy has interaction with outside world, while closed economy has no interactions.
  2. Open Economy has internal trade, exports and imports; closed economy has only internal trade
  3. Open Economy has economic relations with outside country, closed economy does not have economic relations.
  4. All of these
View Answer

Oswaal Questions

Question 1

Read the news report given below and answer the questions that follow on the basis of the same:

The trade deficit between India and China in April-June this fiscal year fell to USD 5.48 billion as compared to USD 13.1 billion in the same period last year, Parliament was informed on Wednesday.

In a written reply, Commerce and Industry Minister Piyush Goyal said the bilateral trade between the countries too dipped to USD 16.55 billion during the first three months of 2020-21 as against USD 21.42 billion in the same period last year.

Government has consistently taken steps to balance our trade with China by increasing our exports to China and reducing our dependence on imports from China, he said.

In a separate reply, the minister said at present, about 550 tariff lines (or products) are under the restricted/prohibited category for imports under the Foreign Trade Policy.

Imports of these products are restricted from all countries, including China.

Replying to a separate question, he said merchandise exports from special economic zones (SEZs) dipped to Rs81,481 crore during April August, 2020 as against Rs1,30,129 crore in the same period of 2019-20.

However, services exports have shown a growth of 9 per cent during April to August 2020 in comparison to corresponding period of previous year, he added. - "Indo-China trade deficit dips to $5.48 billion in April-June" - The Economic Times - September 16, 2020

 

Question 1

Considering the steps taken by the government to reduce the Trade deficit with China, choose the correct alternative:

  1. To reduce the dependence on imports from China.
  2. To increase our exports to China
  3. To make Rupees stronger than Yuan
  4. To prohibit the use of the Chinese good.
  1. (i) and (ii)
  2. (ii) and (iii)
  3. (i), (ii) and (iii)
  4. (iii) and (iv)
View Answer

 

Question 2

Which of the following has seen a growth?

  1. Trade deficit with China
  2. Imports of merchandise
  3. Export of merchandise
  4. Export of service
View Answer

Question 3

The bilateral trade between India and China dipped to ___________.

  1. 5.48 Billion USD
  2. 13.1 Billion USD
  3. 16.55 Billion USD
  4. 21.42 Billion USD
View Answer

Question 4

550 tariff lines (or products) are under the restricted/prohibited category for _________ under the Foreign Trade Policy.

  1. Imports
  2. exports
  3. either (A) or (B)
  4. neither (A) nor (B)
View Answer

Are ads bothering you?


Transcript

What is Closed Economy? North Sentinel Island There is no interaction with Outside World All transactions within the tribe. (North Sentinel Island) (North Sentinel Island) What is a Closed Economy It is an economy where All transactions within the country No interaction with Outside world What is an Open Economy? Sale Export (India) (Singapore) (USA) (India) What is an Open Economy It is an economy where There are transactions both within and outside country. There are import and export Difference between Closed Economy & Open Economy Closed Economy No Interaction or Economic Relation with Outside world There is only Internal Trade It is unrealistic Concept No country is completely closed economy There is no Linkage Open Economy There is interaction & Economic Relation with Outside world There is Internal Trade+ Export Import It is Mostly found All countries are Open Economies Some more Open Example-USA Some less open Example-North Korea There are 3 types of linkage: Product Market Financial Market Labor Market Linkage Different Linkages in Open Economy Output (Product) Market Linkage Financial Market Linkage Labour Market Linkage Customer can choose which product to buy Domestic or Imported Trade in Goods and Service Allowed with Other Economies Investors can choose where to Invest Domestic Assets or Foreign Assets Trade in Financial Assets allowed with Other Economies Labour can choose where to work India or Outside India Trade in Labour Market Allowed With Other Economies Characteristics /Properties Of Open Economy What is Open Economy? It is an economy which trades with other economies in goods, services and financial assets It has 3 types of linkages Output Market Linkage Financial Market Linkage Labour Market Linkage Trade in Goods & Service allowed with Other Economies Trade in Financial Assets allowed with Other Economies Trade in Labor Market allowed with Other Economies Why is India an Open Economy? Because India has all 3 types of Linkages We can choose to buy Indian product or foreign product (Product Market Linkage) We can choose to invest in Indian Companies or Foreign Companies (Financial Market Linkage) We can chose to work in India or Outside India (Labour Market Linkage) Domestic Trade & Circular flow of Income Circular flow of Income FIRMS Sell goods and Services Factor Service Factor Payments Consumption Expenditure HOUSE- HOLDS Note:- Incase of domestic trade Money Remains within country As both Firm and household are from within country How does Foreign Trade Affect Circular Flow of Income? Import USA Sale Money India Here, Money is flowing out of India Hence we can say, Import leads to Leakage from Circular flow of Income Export India Sale Money USA Here, money is flowing into India due to exports Hence we can say, Export leads to Injection into Circular flow of Income

CA Maninder Singh's photo - Expert in Practical Accounts, Taxation and Efiling

Made by

CA Maninder Singh

CA Maninder Singh is a Chartered Accountant for the past 12 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.