3. OPEN ECONOMY

We all know what globalization is, or have a slight idea.

Let's try to define the international economic context of a somewhat clearer:

Thanks to the well-known advances of technologies in recent centuries / years, removal and other advances, has reached a situation of an interconnected world (internet, telephone, supersonic airplanes ...). This affects the economy, bringing countries and blurring boundaries.

Along with this technological change, include the change in the behavior of countries, where techniques isolationist, protectionist and autarchic have given way to integration.

Where do we want to go with this?

To try to explain why some countries depend both from abroad.

Thanks to international openness, countries are able to increase their consumption over their productive capacity. Everyone will think: you are high!

Here it goes:

In the wonderful country of Happyland the population lives based on hugs. The country can consume as many kisses as it can produce. No more, no less.

But now let think that the population of Happyland want more hugs than they can produce. The solution to this problem is to import hugs or, seen another way, funding more hugs than we can produce. In this way the population is satisfied. THE END

...Well no.

Those hugs we got over, must be returned. Plus interests. And ... how to return the hugs with interest, if we consume all the hugs we produce? We have a big deal, we will see it with numbers.

Normally we produce and consume 100 hugs. The year we need more hugs, we had to import 20 hugs, plus interest at 5 million hugs. So we have to pay back 25 hugs when we produce 100 and all our production is for self-consumption!

There are different ways out of this mess:

• reducing the number of hugs consumed up to 75 hugs the year after borrowing those hugs (100 produced minus 25 that should be given back). But no one likes to run out of hugs...
• Another possible solution is cutting a little part of our hugs consumption each year, for example, if we reduce 1 hug a year for 25 years (as Nescafé does), in 25 years we can return to using the 100 annual hugs.

Can you find the relationship among the reduction of consumption due to the debt and our current situation?