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Thursday, 15 September 2011

Open Economy/Closed Economy

The table below shows the cases for an open economy.

Case Study: Iceland

·     Deregulation of the financial system in 2000 led to a large growth in Iceland’s banks.

·     Iceland’s economy is small and so the banks expanded overseas and began to export financial services which enabled them to accumulate a lot of wealth (assets).

·     Because of this, Iceland began to import many luxury goods to maintain high standards of living for the rich population (Iceland’s HDI was the highest in the world in 2008).

·     In the economic crisis, Iceland’s banks also owned toxic assets thus the country’s financial system crashed and the economy shrunk.

·     The exchange rate fell.

·     Unemployment rose.

·     This case study is an argument against free trade and therefore for import controls because deregulation led to overexposure to free trade and capital. It argues the case against an open economy.

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