What is a closed economy?
A closed economy is an economy that has no commercial activity with external economies. The closed economy is self-sufficient, which means that no imports enter the country and no exports leave the country. The goal of a closed economy is to provide domestic consumers with everything they need within the country’s borders.
Why there are no real closed economies
Maintaining a closed economy is difficult in modern society, as raw materials, such as crude oil, play a vital role as inputs for final products. Many countries do not naturally have raw materials and are forced to import these resources. Closed economies are counterintuitive to modern liberal economic theory, which promotes the opening of domestic markets to international markets to take advantage of comparative advantages and trade.
By specializing in work and allocating resources to their most productive and efficient operations, businesses and individuals can increase their wealth.
Key points to remember
- Closed economies have no commercial activity with external economies.
- There are no nations whose economies are completely closed.
- The need for raw materials which play a vital role as inputs in the final products makes closed economies ineffective.
- A government can shut down a specific industry from international competition by using quotas, subsidies and tariffs.
The proliferation of open trade
Recent globalization implies that economies tend to become more open to take advantage of international trade. A good example of a commodity that is traded around the world is petroleum. In 2020, according to “World’sTopExport.com”, an independent research and education company, the five largest exporters of crude oil accounted for more than $ 841.1 billion in exports.
- Saudi Arabia at 133.6 billion dollars
- Russia at 93.3 billion dollars
- Iraq at $ 61.5 billion
- Canada at $ 54 billion
- The United Arab Emirates to 49.3 billion dollars.
According to the U.S. Energy Information Administration, even the U.S., the world’s largest oil producer, imported about 10.4 million barrels per day in 2020, most of which came from Canada, Arabia Saudi Arabia, Mexico, Venezuela and Iraq.
Why close an economy?
A completely open economy risks becoming too dependent on imports. In addition, 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 businesses.
Although closed economies are rare, a government can close a specific industry from international competition. Some oil producing countries are used to banning foreign oil companies from doing business within their borders.
Real example of a closed economy
There are no completely closed economies. Brazil imports the least amount of goods – measured as part of the gross domestic product (GDP) – of the world and is the most closed economy in the world. Brazilian companies face challenges in terms of competitiveness, including an appreciation of the exchange rate and defensive trade policies. In Brazil, only the largest and most efficient companies with significant economies of scale can overcome export barriers.