An open economy is an economy in which international trade takes place. Most nations around the world have open economies, and many nations rely heavily on international trade to meet economic and social goals. As a general rule, open economies are viewed as stronger than closed economies in which international trade does not occur, and this type of economy tends to be better for companies, investors, and individual citizens. For the global economy, however, open economies can become problematic, because when a large trade partner experiences economic difficulties, it can have a ripple effect across the globe, instead of being confined to that nation alone as it would be in a closed economy.
In an open economy, both imports and exports are permitted, and they can consume a large portion of the company's total gross domestic product in any given year. Imports give citizens of a country access to products and services provided by other nations, which allows for more consumer freedom because people have a wider range of choices. Exports allow companies and citizens to break into other markets to find new buyers for their products.
Nations with open economies generally have more access to credit, because they can rely on international sources as well as domestic ones for funds. Citizens also have more options in terms of investment and banking, because they can opt to move beyond their national borders with their funds, companies, and ideas. This in turn promotes the exchange between two or more economies, which creates mutual economic strength between trade partners. Open economies can also be used to forge political ties.
Many nations have laws in place which are designed to promote an open economy, and to minimize restrictions on imports and exports. Groups of nations such as the signatories to the North American Free Trade Agreement may in fact have free trade laws built directly into international treaties and agreements, to ensure that members do not later change their minds and alter regulations which pertain to international trade.
The term “small open economy” is used to refer with a nation which has an open economy, but not a lot of economic clout, because its economy is so small in comparison with trading partners. When small open economies experience financial problems such as recessions and inflation, for example, this does not have a very large impact on international trade as a whole, because their fraction of the total trade which occurs annually is negligible.