Hey I was trying to figure this out. Why is the effect larger in the closed economy and small in the open economy where international trade is allowed. Can anyone help?
Why is the multiplier effect smaller in an open economy and larger in a closed economy?
Mon, Mar 8, 2010
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March 8th, 2010 at 5:28 am
The multiplier effect is all about money moving through the economic system in a repetative pattern, with each ‘loop’ through the pattern having another effect on the system. When an economy is open, some of the money that would ‘loop’ back through the local economy is lost oversees through trade. So subsequent ‘loop’s will have less of an impact, and therefore have a smaller multiplier effect.