Understanding the complexities of economic systems, it is essential to know that how market or open economy different from closed economy? On the basis of political ideologies people of the nation pursue, economic system has been adopted to fulfill the pledged demands.
If the economic activities are driven by the forces of market demand and supply instead of government regulations and restrictions, it is termed as market economy. Market economy is the feature of open, liberal economic system.
The degree of economic development is the best yardstick to judge the country’s overall well-being. And, the pace of development is always powered by the nature of economic system in operation.
Presently, among all, the most favoured and preferred economic system is none other than market or open economic system which are driven by market forces instead of interventions and regulations.
Easy understanding of market or open economy
Simply, it is an interdependent system of production and distribution of goods and services, depending on the available resources and demands of people. With this, supply of money and the role of government is also essential.
For layman’s terms, economics is the scientific study of interrelations among production, transportation, and consumption.
It studies why and how the way firm produces the goods they produce; why do consumers prefer to buy the thing they do; and why the government diverts resources to facilitate all.
But, in case of market economy, there is hardly role for restrictions. Simply put, market forces decides the fate of market and economic growth.
What makes market or open economy different from closed or mixed economies?
Market economy is a type of economic system where demand of consumers and consequent supply of goods and services determine the nature and degree of production activities of a nation with minimum or no interventions by state.
In short, markets demand is considered to produce a goods to maximize profits. Hence, the clear motive of market economy is to maximize profit, by considering market demands and available resources.
Open economic system Vs closed economic system
If a given country has restriction free movement of goods and services, financial assets, and labour with outside world is termed as open economy.
Whereas, economy in which economic relations are restricted by the regulatory framework and relies on the self reliant is know as closed economy.
Healthy competitive atmosphere, comparative advantage, level playing field, no regulatory framework, global dependency, higher standard of living are the major characteristic features of the open economy.
In layman’s terms, open economy follows market forces demand and supply instead of government interventions and regulations.
Within open economy, apart from goods and services, borrowing, labour movement, technology transfer, foreign aid, competition and active global market is possible.
In short, in open economy consumers and producers always pay attention to maximize theirs surplus in terms of purchasing power and profit.
How to differentiate Closed economy from open or market economy?
Due to regulatory framework and focus on domestic market, closed economy lacks in relations with outside world and competitive atmosphere.
Consumers have to purchase domestic products even without comparative advantage and satisfaction. Here, focus is given for need instead of merits of manufactures.
Hereon, we could easily conclude that open economy favours competition, active global market, comparative advantage, profit and surplus for both consumers and producers, free flow of goods and services, labour and assets across the political borders.
In the today’s globalizing world, most of the modern economies prefer to be open to harness or reap the comparative advantage generated by WTO and free trade agreement.
In addition, movement of labour is being replaced by the movement of goods. But, in the closed economy, all the above discussed points have hardly any place.
Examples of open and closed economic system
North African oil producing nations like Morocco and Algeria, CIS countries such as Ukraine, and Tajikistan, Vietnam are some of the examples of relatively closed economy.
Factors responsible for the emergence of market or open economy
To be called a market economy, there are certain conditions need to be fulfilled.
1. Choice of production
First, there should be a choice of production. In other words, the decision about goods to be produced should be on the producers, instead manipulated by the directives of state.
2.Profit driven economic activities
Second, without the motive of profit maximization, we cannot imagine about such system. Here, profit is the driving force for producers.
3.At will entry and exit
Third, it is possible only in the absence of excessive government’s interventions. In case of government’s interventions, the motive of profit may be compromised.
In clear words, market economy is a system driven by mutual interests of market forces to maximise profit and satisfaction with minimum external interventions.
Now, after considering the determining factors of market economy, there may be a clear and vivid picture in your mind about the nature of market economy. Isn’t it? But, it isn’t so easy to reach any economy at this stage. Let’s see the course of evolution of market economy.
Stages of emergence of market or open economy
So far, We have gone through the determining factors of market economy. Now, hereafter, I’m going to describe the stages through which the emergence of such economy become possible.
1. Command economy or planned economy
It is also called planned economy. In such system, Production activities are executed according to the needs of society instead profit of firms. And, all the means of production are controlled by the state itself with no choice of production.
In the world, nations with greater economic inequality and backwardness, adopt command or planned economic system as a means of development.
2.Examples of command economies
Mainly, socialistic countries are known to implement this system to advance the interests of people. North Korea, Cuba, and Soviet Union are some examples of command economy.
- Command economy is one of the gateways to emerge market economy
- But, as time passes, it starts showing its shortcomings in the form of
- Low productivity.
- Higher opportunity costs, and
- Loss of comparative advantage.
- Then eventually, due to higher unemployment and inflation, this system paves the way for reforms with mix of command and market.
How mixed economy is different from open and closed economic system?
In this system, government offers better role for private players in certain sectors. Even here, government controls the industries of strategic importance, citing the cause of national interests.
The motive behind this move is to power the pace of stagnated economic growth with employment opportunities.
No doubt, it proves instrumental in revitalizing the productivity, research and development, and base of productive activities. Hereafter, to unlock more growth potential, further reforms become compulsory.
And, the final stage is none other than market economic system to realize the total untapped potential. This is all about the detailed explanation of market economy.
Last thought on How market or open economy different from closed economy?
So far, we have learnt that until We unleash the breath of clogged economic activities, it is hard to realise desired pace of development.
Really, market economy is a requirement not mere alternative form of economic system. Accordingly, most of the nations are following the alike economic policies.
Nonetheless, after detailed explanation of market economy, we can conclude that it is the last but not the absolute form of system of economy.
Unquestionably, rush for profit, plunder of resources, unethical means of production, plight of labours, and crony capitalism are some of fallouts that market economy bound to generate over a period of time.
Therefore, no system in itself is ideal or wrong, but it depends on the prevailing conditions of nations where it is going to become operational.
Solved Questions on how market or open economy different from closed economy?
Truly, explanation of market economy within an article is hardly possible given the domain of study. For more insight, here are some useful solved questions. Please, take a look.
Q. 1. What is mean by market economy? What are the determinants of market economy?
Ans: Economic activities in system is determined by the demand and supply forces of market instead restrictions. Such system qualify as market economy.
Most of the time, open economy and market economy terms are interchangeably used for one another. But, actually, one is the product of other and, are interdependent.
Choice of production, profit driven economic activities, at will entry and at will exit, are some of the characteristics of the market economy.
Q. 2. Write down the difference between open and close economy? Give examples?
Ans: There is no government restrictions. Market forces demand and supply move market freely No limits on entry and exit. No restrictions on investment in open economy.
Closed economy or regulated economy functions within limits. Government decides the course of market not market forces.
North African oil producing nations like Morocco and Algeria, CIS countries such as Ukraine, and Tajikistan, Vietnam are some of the examples of relatively closed economy.
Complex compound & mixed sentences
Conjunctions for alternative choices