An open economy

An open economy is part of the circular flow of income model comprising domestic and foreign economic decision makers (households, firms, the government and the foreign sector). The foreign sector facilitates international trade (exports and imports). This model shows that not all income is spent on domestically produced goods and services. This is because some of the income may be taxed, saved, or spent on purchasing imported products. Similarly, additional funds can be injected into the economy in the form of government spending, export earnings and investment expenditure.