Macroeconomics
access to these resources, closed economies may face challenges in effciently producing certain products. Alternatively, an open economy is one that takes part in international trade ; therefore, its GDP measurementincludesnetexports(exports−imports):GDP=C+I+G+(X−M).Sincetheexpanded circular flow of income explained in Chapter 2 Section Bincludesimportsasleakagesandexportsas injections, it is a representation of an open economy. In an open economy, policymakers also consider trade policies, capital flows, and exchange rate management as tools to achieve macroeconomic objectives. The openness of an economy can bring both opportunities and challenges, such as increased export potential and exposure to global economic fluctuations. Tarifs, Quotas, and Subsidies Governments have the ability to influence the degree of openness of their economies. They can implement various policies to regulate international trade. For instance: ● Quotas: Governments can impose restrictions on the quantity of specifc goods that can be imported or exported. Quotas limit the volume of international trade in certain sectors, and protectdomesticproducers. Forexample,theU.S.maylimitthenumberofChinesecarimportsto 1millioncarsperyear.Thisisanimportquotathatputsarestrictionontheamountofcarsthat can be imported from a specifc country.
● Tariffs: Tariffsaretaxesordutiesimposedonimports.Theycan be used to protect domestic industriesbymakingforeigngoods more expensive for consumers. For example, to reduce corn imports and protect American corn farmers, theU.S.government may impose a 2% tariff on imported corn, making them more expensive for American citizens.
● Subsidies: Governments may provide fnancialincentives,orsubsidies,todomesticindustries to make them more competitive in the global market. Subsidies can support the growth of specifc industries. For example, the U.S. may provide subsidies or fnancial incentives to Americanfarmerstoencouragetheexportofparticularcropssuchaswheatorcorn.Bydoingso, someoftheAmericanfarmers’costsareoffset,whichincreasestheirpricecompetitivenessinthe global market. Study Tip To reduce imports, import quotas should decrease, limiting the volume of importsallowedintothe country.Meanwhile,importtariffsshouldincreasetomakeimportedgoodsmoreexpensiveandless competitive.
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