When defining the commercial relations that a country establishes with the rest of the world, we should look at its degree of openness. A closed economy is an economy that does not interact at all with other economies, which does not establish any exchange. Nowadays, closed economies are an exception, because most of the countries have an open economy. However, there are different degrees of openness, depending on the restrictions that the country imposes on free trade. A common basic measure of an economy’s degree of openness is the percentage that the sum of exports and imports represents over the GDP:
Nevertheless, there are two ways in which an open economy interacts with the rest of the world; buying and selling goods and services in the products markets; and buying and selling assets in the international financial markets. This equation just takes into account the first kind of interaction, but it may be used as a basic reference.
The reason why countries decide to open their economies is that they obtain clear benefits from it. International trade allows people to produce what they produce best and to consume a broad variety of products. These benefits can help raise living standards in all countries, because they produce those products in which they have a comparative advantage. This is one of the reasons why Ronald McKinnon, in his article “Optimum Currency Areas”, 1963, considered it as one of the conditions to have an optimum currency area.