Difference Between Open Economy and Closed Economy

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)

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

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

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)

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

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)

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

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

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)