What Is a Closed Economy?

A closed economy is one that has no trading activity with outside economies. The closed economy is self-sufficient, which means no imports come into the country and no exports leave the country. The purpose of a closed economy is to provide domestic consumers with everything they need from within the country's borders.

Why There Are No Real Closed Economies

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 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.

Key Takeaways

  • Closed economies have no trading activity with outside economies.
  • There are no nations that have economies that are completely closed.
  • The need for raw materials that play a vital role as inputs to final goods makes closed economies inefficient.
  • A government may close off a specific industry from international competition through the use of quotas, subsidies, and tariffs.

The Proliferation of Open Trade

Recent globalization implies that economies are tending to become more open to take advantage of international trade. A good example of a raw material that is traded globally is petroleum. In 2017, according to "World'sTopExport.com," an independent research and educational firm, the five biggest crude oil exporters accounted for over USD$841.1 billion worth of exports.

  • Saudi Arabia at $133.6 billion
  • Russia at $93.3 billion
  • Iraq at $61.5 billion
  • Canada at $54 billion
  • The United Arab Emirates at $49.3 billion.

According to the U.S. Energy Information Administration, even the United States, the largest producer of oil in the world, imported roughly 10.4 million barrels per day in 2017, most of which comes from Canada, Saudi Arabia, Mexico, Venezuela, and Iraq.

Why Close Off an Economy?

A completely open economy runs the risk of becoming overly dependent on imports. Also, domestic producers may suffer because they cannot compete at low international prices. Therefore, governments use controls like 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 petroleum firms from doing business within their borders.

Real World Example of a Closed Economy

There are no completely closed economies. Brazil imports the least amount of goods—when measured as a portion of the gross domestic product (GDP)—in the world and is the world's most closed economy. Brazilian companies face challenges in terms of competitiveness, including 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.