Macroeconomics: Econ224 Unit 2 Ip

Macroeconomics: ECON224 - 1303A – 04

Unit 2 Individual Project

August 4, 2013

A closed system is an economic model that considers domestic exchanges only and not foreign agents (Macroeconomics, 2011). A closed system diagram is called a circular flow diagram which explains how money flows through the economic system that involves households, business, governments and foreign agents (Macroeconomics, 2011). There are no current examples of a closed system, unless there is an isolated island with natives that are sustainable on their own.

The only reason a country would be a closed system according to AmosWeb, is that they are too isolated physically to be able to participate in trade such as a small island in the middle of an ocean or a country that is extremely difficult to access due to mountain ranges and or deserts. The only country that would come close to being a closed system would be North Korea, there is a limited number of countries that they import and export too.

An open system is the complete opposite of a closed system. An open system is defined as an economic model that tallies the goods and services that are exchanged internationally and domestically (Macroeconomics, 2011). All countries around the globe participate in an open system. Some countries are more efficient at producing materials than another country which therefore opens the import and export flow of an open system. Almost everything that you see in a store, of any kind, was manufactured outside the United States; primarily China. The U.S. sends the raw material for a foreign country where they assemble or manufacture the product which in turn is imported back to the U.S. and sold.

When a consumer in the U.S. purchases an imported product, which is extremely difficult not to, or if a U.S. based company hires individuals for tech-support that is based in a different country creates leakages. Yet, with an open system, these are expected parts to a country’s economic...