What is a 'Closed Economy'?
A closed economy is an economy in which no trade activity is conducted with outside economies. A closed economy is self-sufficient meaning that no imports are brought into the country, and no exports are sent out of the country. The intent of a closed economy is to provide domestic consumers with everything they need from within the economy's borders. A closed economy is the opposite of an open economy, in which a country conducts trade with other nations.
BREAKING DOWN 'Closed Economy'
Maintaining a closed economy is difficult in modern society because raw materials, such as crude oil, play a vital role as inputs to final goods. Many countries do not have raw materials naturally and are forced to import these resources. Closed economies are counterintuitive to modern, liberal economic theory, which promotes the opening up of domestic markets to international markets to capitalize on comparative advantages and trade. By specializing in labor and allocating resources to their most productive, efficient operations, companies and individuals can increase their wealth.
There are no completely closed economies. Brazil imports the least amount of goods in the world, as a proportion of GDP, and is the world's most closed economy. Brazilian companies face challenges in terms of competitiveness such as exchange rate appreciation and defensive trade policies. In Brazil, only the largest and most efficient companies with significant economies of scale can overcome barriers to export.
Proliferation of Open Trade
Recent globalization implies that economies are tending to become more open to take advantage of international trade. Oil is a good example of a raw material that is globally traded. In 2016, the five biggest exporters of crude oil accounted for over $330 billion worth of exports: Saudi Arabia at $136.2 billion, Russia at $73.7 billion, Iraq at $46.3 billion, Canada at $39.5 billion, and the United Arab Emirates at $38.9 billion. Even the United States, the largest producer of oil in the world, imported roughly 4,795 barrels per day in 2016, most of which comes from Canada, Saudi Arabia, Mexico, Venezuela and Nigeria.
Why Close Off an Economy?
A completely open economy runs the risk of becoming overly dependent on imports, or domestic producers may suffer because they cannot compete at low, international prices. Therefore, governments use controls such as tariffs, subsidies and quotas to support domestic enterprises. Although closed economies are rare, a government may close off a specific industry from international competition. Some oil-producing countries have a history of prohibiting foreign oil firms from doing business within their borders.
In the twenty first century there is a move towards an open trade policy between major countries in the world. However this hasn’t always been the case particularly in communist countries such as Chine or those with large populations such as India. An open economy promotes trade of goods and services between different countries whereas the opposite is true in a closed economy. In this case a country such as North Korea is solely responsible for the internal production of all goods and services required by its society. There are many advantages to the adoption of an open economic system however there exists several problems that countries have encountered in their attempts to move towards an open trade philosophy. Advantages include specialisation, reduced prices, greater variety of products and foreign investment. On the other hand disadvantages include unreliability with extreme conditions such as natural disasters, excessive importing and foreign ownership.
An open economy is an economy where interactions take place freely between other economies (Open Economy). Economies are free to export and import goods and services with another country. Few economies are truly open, but the world has taken a step forward towards freer trading. A closed economy is a self-dependent economy that has no trading relations with any other economies. There are no exports, no imports and no capital flow (Windward 2001). It may have barriers of protection such as tariffs, subsidies and taxes. The difference between an open and a closed economy is the fact that an open economy participates in international trade. This consists of importing and exporting goods and services with other countries (King, 2007).
(King, 2007) An open economy results in specialisation. This occurs when a country has a comparative advantage at producing a good. The country with the comparative advantage will use all their resources into producing that good and the other country will do the same with...