ABSTRACT
In today’s global economy, the phenomenon of the “closed economy” – one that is unaffected by international trade and capital flows – is little more than an abstract textbook concept. The notion of a closed economy is nevertheless quite useful in intermediate macroeconomics, as it allows for the analysis of the fundamental aspects of the economy (e.g. the impact of monetary and fiscal policy) without considering the complicating effects of globalization. With the fundamentals well understood, however, we can now provide more realism by looking at the “open economy” that is directly affected by the global marketplace. We are now focusing on the macroeconomic linkages between the world economies and to do so, we need to extend the information we gather in the national accounts to take these linkages into account.
