Here are six (6) advantages that an open economy can provide to a country:
1. Economic Growth
It is claimed that an open economy, with given productive resources, can have a higher GDP. Alternatively, for producing a given GDP, it spends a smaller quantity of productive resources.
This happens due to its enhanced access to improved and better technology which provides an upward thrust to economic development.
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2. Lower Costs
Open economies are able to get cheaper imports and can sell exports at higher prices. In other words, both importers and exporters of open countries [and therefore, their consumers] benefit from price differentials.
3. Improved Availability of Goods and Services
International trade in goods and services enables each country to concentrate on the production of those goods in which it has a comparative cost advantage, and import those in which it has a comparative cost disadvantage. That way, it can add to the volume, variety and quality of goods and services that go into determining its GDP.
4. Global Prosperity and Flow of Productive Resources
Traditional economic thinking dealing with international economic transactions assumed that there was near absence of mobility (flow) of capital and other factors of production between countries.
Over time, however, the realities of international trade have belied this theory. Currently, enormous volumes of a variety of capital funds are circulating between world economies.
In addition, international flows of other inputs (raw materials and intermediate products, technology, institutional set ups, work ethos and, to some extent, even labour) have increased in varying degrees.
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Some models of entrepreneurial and institutional set ups have gained the status of international standardisation. All this has also added to the overall global prosperity, as countries increasingly yearn, learn and earn together.
5. Superiority of Trade over Isolation
Some countries have been able to experience a rapid export-led economic growth. In contrast, it is difficult to find instances of widespread successful import substitution. Successful import substitution has been possible only in respect of a few specified industries.
6. Impetus to Innovation
Open economies provide an incentive for research and adoption of innovations. This is because open economies have ‘lie benefit of a wider scope for their profitable application over bigger markets and recovery of huge research costs. However, being an open economy also has its drawbacks.