Open Economy

An economy in which goods, services, and resources are permitted to flow freely with very little rather than no restriction. The flow of capital (physical, human, and financial), labor, and entrepre neurial skill normally constitute a significant proportion of international exchange or trade. For this reason, the [Page 359]expression is also used to describe countries for which international trade constitutes a substantially significant proportion of national income or gross domestic product (exports and imports as a percentage of gross domestic product).

The degree to which an economy is open depends on a number of political and economic considerations. For example, dictatorial regimes tend to have a tight control over the money supply, imports, investment (including capital flows), and the use of international currencies. Inflation, output, and currency availability are normally indicators of trouble in such countries.

Some developing countries complain that they have inadequate access to foreign markets and are disposed to impose restrictions of their own to ensure fair trade and equitable returns. Weak and unstable economic systems are normally mindful of interest rate movements and the effects of such movements on capital flows, capital reversibility, and currency valuation or crisis. International organizations such as the World Trade Organization (WTO) and the International Monetary Fund (IMF) promote freer world trade and openness in economic relations.