Economics Chapter: Open vs Closed Economies

Open vs Closed Economies

• An open economy interacts freely with other economies

• This involves importing (buying goods from other countries), exporting (selling goods to other countries), and investing in foreign businesses

• South Africa is an example of an open economy

• A closed economy does not interact with the rest of the world

• There are no imports or exports, and foreign companies are not allowed to operate

• The government controls all aspects of the economy to ensure domestic goods and services meet local needs

Circular Flow Model

• The circular flow model shows the flow of goods, services, and money in an economy
• Shows the relationships between households, businesses, and the government
• The model has two main markets:
  • The goods and services market
  • The factor market

Participants in the Circular Flow Model

• Households consume goods and services, offer factors of production (labour, natural resources, entrepreneurship, and capital) to businesses.
• Businesses produce goods and services and purchase factors of production from households.
• Government collects taxes from households and businesses and provides services to them. Taxes are used to build infrastructure, provide education and healthcare services etc. The government is also a consumer as it purchases goods and services.

Flow of Goods and Services in a Closed Economy

• In a closed economy, goods and services move between households, businesses, and the government.
• Households purchase goods and services from businesses
• Businesses purchase factors of production from households and factors from the government
• Government collects taxes from households and businesses. The government pays wages, offers subsidies or other support to businesses. The government also produces goods and services (such as roads or schools) and provides them to households and businesses.