Question

Differentiate between a closed economy and an open economy.

Answer 1

Sr. No.	Basis	Closed Economy	Open Economy
1.	Foreign Trade	Does not engage in international trade (no exports/imports).	Engages in foreign trade (exports and imports).
2.	Foreign Sector	No interaction with the rest of the world.	Has economic transactions with other countries.
3.	Components in Circular Flow	Only households and firms (or government in 3-sector).	Includes foreign sector (X for exports, M for imports).
4.	Equilibrium Condition	S = I (in basic two-sector model).	S + T + M = I + G + X (with trade and government).
5.	Example	A theoretical model, no real-world economy is fully closed.	Most modern economies like India, the USA, and China, are open.