1. Interaction between Open Economies:
An open economy is characterised by a continuous and intricate interaction between several forces, giving rise to series of complex and involved issues relating to its external sector.
Consequently, the authorities are compelled to choose from a multiplicity of objectives and policy instruments together with their respective weights.
For example, among other, things, they are expected to select a balanced set of targets relating to growth, employment, distribution, internal stability, and performance of balance of payments, etc.
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2. No Universally Accepted Philosophy:
The authorities are hindered by a lack of universally accepted economic philosophy. While the government of one country may believe in the merits of competitive markets and aim at removing the obstacles in their free working, the government of another country may believe in the philosophy of “market failures” and try to remove them through some form of intervention.
Obviously, there is bound to be a difference of opinion as to which of the two views is more realistic and better, and whether or not a given view is valid for all countries, or remains valid for a given country for all times to come.
Accordingly, we are faced with a variety of the objectives pursued by the authorities and the policy instruments selected by them. While some policy instruments aim at influencing the working of the market forces through economic incentives and disincentives, others take the form of direct controls, restrictions and regulations.
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The latter set of measures, for example, includes tariffs (to the extent they are levied on non-revenue considerations), quotas, licenses, import bans, exchange controls, and other types of restrictions on international flow of trade and capital.
3. Optimum Set of Objectives:
To identify an optimum set of objectives with a corresponding set of effective policy measures is a very difficult task, particularly in the context of dynamism of modern economies which are also characterised by a mixture of competitive forces and rigidities. Accordingly, most discussions have to be conducted under restrictive assumptions.