Question

The key distinction between an open economy and a closed economy is that:

Options

• A closed economy is linked only through the labour market

• An open economy is linked to the rest of the world, while a closed economy has no such linkages

• An open economy has no linkages with the outside world, while a closed economy trades freely

• Both types of economies have identical linkages with the rest of the world

Answer 1

An open economy is linked to the rest of the world through trade and financial markets, whereas a closed economy has no linkages with the outside world. This distinction underlies all three linkage channels: output market, financial market, and labour market.