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Growth in an Open Economy

Growth in an Open Economy

An open economy allows trade and finance to flow freely. Opening an economy has a significant impact on economic growth.

Impact of Open Economy on Economic Growth

  1. Countries can adopt technology. This way, they increase technological development and hence the overall productivity of their economies.
  2. An open economy is a requirement for global trade. International trade increases competition in the domestic markets, compelling the companies to produce improved products, enhance productivity, and keep prices low.
  3. Companies in an open economy can reach the international market for their products, allowing them to utilize economies of scale and increase the potential reward from successful innovation.
  4. When a country opens its economy, it can borrow or lend funds in a global market, and international savings can finance domestic investment. Therefore, investments will not be restricted by domestic savings.
  5. Countries can allocate resources to more profitable industries in an open economy and leave inefficient industries thereby increasing productivity and employment. https://www.caasimada.net/

Question

A developing country’s government is concerned about illiteracy and the low standard of living in the nation. The government forms a committee to benchmark in an advanced country and develop strategies to increase the country’s output.

Which one of the following strategies would least likely improve the per capita GDP of the country?

  1. Lowering the tax rate of the country.
  2. Coming up with plans to include women in the workforce through training camps.
  3. Creating policies that encourage the coming back of highly educated citizens.

Solution

The correct answer is A.

From the information given in the question, the standard of living in this country is low, implying a low GDP per capita and a large informal workforce. Therefore, the tax rate is unlikely to be an impediment to economic growth. Given the foregoing line of reasoning, lowering the tax rate might not contribute so much to economic growth.

Reading 7: Economic Growth 

LOS 7 (l) Describe the expected impact of removing trade barriers on capital investment and profits, employment and wages, and growth in the economies involved.

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