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The T20 Game !

Closed Economy Innings

Closed Economy Innings

What is Closed Economy ? (Power play 1)

What are the advantages of Closed Economy ? What are its features ? (Power play 2)

Examples…… (Power play 3)

Open Economy Innings

What is Open Economy ? What are its features ? (Power play 1)

What are the advantages of Open Economy ? What are its features ? (Power play 2)

Examples…… (Power play 3)

Closed Economy Innings: POWER PLAY 1

What is Closed Economy?

Closed economies or Autarky exists whenever an entity can survive or continue its activities without external assistance or international trade.

Autarky imposes a stringent condition on production:

xi = yi, where xi = consumption of good i, yi = production of good i

The maximum welfare is achieved at the tangency point between the highest indifference curve and the PPF. Thus, when a maximum is attained, the two curves must have the same slopes.

aL1 y1 + aL2 y2 = L (L = labour supply)

MRT ≡ aL1/aL2

Closed Economy Innings: POWER PLAY 2

Fig.1 :

Equilibrium in a closed economy

MATCH SUMMARY

A closed economy does not enter into any one of the following activities:

It neither exports goods and services to the foreign countries nor imports goods and services from the foreign countries.

It neither buys shares, debentures, bonds etc. from foreign countries nor sells shares, debentures, bonds etc. to foreign countries.

It neither borrows from the foreign countries nor lends to the foreign countries.

It neither receives gifts from foreigners nor sends gifts to foreigners.

Normal residents of a closed economy cannot go to other countries to work in their domestic territory. No foreigner is allowed to work in the domestic territory of a closed economy.

Closed Economy Innings: POWER PLAY 3

Open Economy defeated Closed Economy with a Power play to spare

Open Economy is the obvious winner because it is prevalent throughout the world

Some Examples:

In the 1930s, autarky as a policy goal was sought by Nazi Germany, which maximized trade within its economic bloc and minimized external trade, particularly with the then world powers such as Great Britain, the Soviet Union, and France.

A current attempt at autarky is North Korea, based on the government ideology of Juche (self-sufficiency), which is concerned with maintaining its domestic localized economy in the face of its isolation.

India had a policy of near-autarky that began after its establishment as an independent state, around 1950; it increased until 1980 and ended in 1991 due to imminent bankruptcy.

Closed Economy

vs.

Open Economy

Lets see who wins the match….

Open Economy Innings: POWER PLAY 2

Open Economy Innings: POWER PLAY 3

Open Economy Innings: POWER PLAY 1

Open Economy Innings

What is Open Economy?

An open economy is an economy in which there are economic activities between domestic community and outside, e.g. people, including businesses, can trade in goods and services with other people and businesses in the international community, and flow of funds as investment across the border. Trade can be in the form of managerial exchange, technology transfers, all kinds of goods and services.

The open economy's problem is to choose y1, y2, x1 and x2 to maximize u(x1, x2), subject to a constraint that the total value of consumption is equal to that of production, i.e.,

p*1x1+ p*2x2 = p*1y1 + p*2y2

(expenditure = income)

Well….

There are no special Examples because……

All the present economies are OPEN !

Hence the match is over....

An open economy involves itself in the following activities:

It buys shares, debentures, bonds etc. from foreign countries and sells shares, debentures, bonds etc. to foreign countries.

It borrows from foreign countries and lends to foreign countries.

It can send gifts and remittances to foreigners and can receive the same from them.

Normal residents of an open economy can move or be employed and are allowed to work in the domestic territory of other economies.

Due to these reasons, Gross Domestic Product and Gross National Product are not same in an open economy.

It is to be noted that at present all economies of the world are open economies.

Open Economy Innings: POWER PLAY 1

Fig.2 :

Utility maximization

This is a complicated problem of choosing 4 unknown variables, subject to a constraint.

In an open economy, a country's spending in any given year need not to equal its output of goods and services.

A country can spend more money than it produces by borrowing from abroad, or it can spend less than it produces and lend the difference to foreigners. There is no closed economy in today's world.

One primary advantage is that the citizen consumers have a much larger variety of goods and services from which to choose.

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