Closed Economy

Reviewed by Komal | Updated on Sep 30, 2020

What is a Closed Economy?

A closed economy is one that does not swap their trading with outside economies. The closed economy is independent, meaning no imports enter the country and no exports leave the country. The aim of a closed economy is to provide all that domestic consumers need from within the boundaries of the country.

Why Close Off an Economy?

A wholly open economy risks becoming overly dependent on imports. Domestic producers can also suffer as they can't compete at low international prices. Governments, therefore, use controls, such as tariffs, subsidies, and quotas to support domestic enterprises.

Despite the uniqueness of closed economies, a government may close off a particular industry from international competition. Some oil-producing countries have a history of banning foreign oil companies from doing business inside their borders.

Why are there No Real Economies?

It is impossible in modern society to sustain a closed economy because raw materials, such as crude oil, play a vital role as inputs to the final products. Most countries obviously do not have raw materials and are forced to import those commodities.

Closed economies are unintuitive to new, liberal economic theory, encouraging the opening up of domestic markets to international markets to draw on competitive advantages and trade. Enterprises and individuals can increase their wealth by specialising in labour and allocating resources to their most productive, efficient operations.

Modern globalisation means economies continue to become more open to benefit from international trade. A good example of an internationally traded raw material is petroleum.

Real Example of Closed Economies

There are no economies which are completely closed. Brazil imports the least amount of goods in the world when measured as a portion of the gross domestic product (GDP) and is the most closed economy in the world.

Brazilian companies face competitive challenges, including appreciation of the exchange rates and defensive trade policies. In Brazil, only the biggest and most productive companies with substantial economies of scale can conquer export barriers.

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