Macroeconomics

Macroeconomics

Introduction

An economy is the backbone of every country. it is responsible for the success and prosperity of the country and consists of the labor strength of that country, capital contained in an economy, land resources and the manufacturing, quantity of different products that it can produce, trade, distribution and last but not the least consumption of goods and services by the consumers. Money is an important part of an economy thus there are systems by which money can be injected in the economy or extracted by the government if it thinks that there is excess supply of money in the market. Macroeconomics is the field of the economics that deals with how individuals change their economic behavior when there is change is the market-wide policies. This paper will discuss the open and closed system of an economy and the injections and leakages that take place in it.

Closed System

A closed system is considered as circular flow of money. This system is a good model; however, is not perfectly accurate because people not only spend money on domestic products but also on imported products. A closed system is when both GDP and GNP are equal because when the economy is closed its trade is only allowed at the national level without foreign companies so that the output of all the domestic firms could be equal to anything produced by domestic firms (Carnauskas, Et.al, 2011, pp. 27). In this interpretation, a closed system is a theoretical model that allows us to understand the mechanism of functioning of the national economy, which is the main objective of macroeconomic analysis (Mankiw, 2006). The aggregate demand in a closed economy is represented as the sum of consumption, investment and government expenditure planned:

AD = C + I + G

Example: Autarky is an example of closed economy although there are very few countries with closed economy in the world.

Open System

An open system is a system that allows the country to participate in international trade and financial relations with various countries around the world. An open system is one that has relations with the rest of the world, which implies the existence of demand for exports and import. The countries are increasingly interdependent on the economic relations, as reflected in the figures of trade in goods and services, and financial assets between economies. The analysis of these relationships is divided into two areas: international trade and international finance (Castaneda, ...