Nowadays, pretty much every country in the world is considered to be an open economy. This means that the country will trade with the rest of the world, these exchanges being measured in terms of net exports. When analysing open economies, it is important to understand a few things about the countries being analysed, such as the volume of trade they have, their economic growth, their inflation and unemployment rate, etc.
An economy’s openness must be measured considering multiple variables. For instance, all countries are considered open economies to some degree, but not all allow free movement of capital across borders. Others might have governments that control information flows and Internet service. In this Learning Path, we’ll learn to analyse an open economy from a purely economic point of view, looking at their net exports and their Balance of Payments.
Balance of Payments:
Balance of Payments, which reflect the transactions between an open economy and the rest of the world;
Current account, shows the value of net exports;
Capital account, reflects net foreign holdings of capital;
Financial account, the net acquisition and disposal of financial assets and liabilities.
IS-LM, which focuses on the equilibrium of the market for goods and services;
IS-LM-BP, same as before, but taking into account international trade;
Net capital outflows, which analyses purchases of foreign and domestic assets;
The market for loanable funds, a simplified view of the financial system..