When Does a Private Closed Economy Expand?


Quick Answer

The Theory of Aggregate Investment predicts that the economic advantage of capital inflows, either from a government or from external private sources, is the catalyst to transformation of a private closed economy to an open economy, notes the International Monetary Fund. Capital inflows are mechanistic to expanding an economy.

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Full Answer

Derived from a Keynesian economics theory of aggregate demand, the theory of aggregate investment follows the idea that an open economy is guided mainly by private sector interests, yet partly operated by the government, suggests the IMF. While the distinction between public savings and private savings is made by Keynes, subsequent theories point to the relevancy of property investment by private households, and the transfer of capital inflows to those assets by the government and by private investors in pursuit of profits.

The securitization of the mortgage sector illustrates how private household finance is equated as market liquidity, whereby investors, including the government, earn interest and a rate of return on mortgage backed securities, explains the IMF. Deviation of the theory of aggregate investment from that of Keynes original proposal is found in the emphasis on labor, and specifically unemployment and social welfare dependency, as the rationale for the persistence of a closed economy.

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