Closed Economy

What is a 'Closed Economy'

A closed economy is an economy in which no activity is conducted with outside economies. A closed economy is self-sufficient, meaning no imports are brought in and no exports are sent out, the goal being to provide 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 outside regions.

BREAKING DOWN 'Closed Economy'

Maintaining a closed economy is difficult in modern society, where certain raw materials, such as crude oil, have such a vital role as inputs and final goods; a country is forced to import if these resources are not naturally within its borders. Closed economies run counterintuitive to modern, liberal economic logic, which preaches opening up domestic markets to international markets to capitalize on comparative advantages and gains from trade. Through the specialization of labor and allocation of resources to their most productive, efficient means, a person is able to become wealthier.

As late philosopher and economist Henry George expounded upon in "Progress and Poverty," the concepts of division of labor and gains from trade can be described with a simple illustration. On a plot of undeveloped, resource-abundant land, 20 people can produce much more than 20 times the amount of wealth that one person can produce, if the people cooperate intelligently. This logic holds true for households, cities and whole economies.

Proliferation of Open Trade

In 2015, the five biggest exporters of crude oil alone accounted for over $370 billion worth of exports: Saudi Arabia at $133.3 billion; Russia at $86.2 billion; Iraq at $52.2 billion; United Arab Emirates at $51.2 billion; and Canada at $50.2 billion. Even the United States, the largest producer of oil in the world, imported roughly 2.682 million annual-thousand barrels in 2015, 36.4% of which was imported from OPEC members including Saudi Arabia, Venezuela, Ecuador, Iraq and Kuwait. This underscores how reliant the global economy is on international trade.

Argument for a Closed Economy

A completely open economy runs the risk of becoming overly dependent or having important industries not develop if domestic producers are not competitive at low, international prices. For this reason, governments use controls such as tariffs, subsidies and quotas to help keep domestic enterprises profitable. Truly closed economies are rare. If anything, a government closes off a specific industry from international competition. A number of oil-producing countries have a history of prohibiting foreign oil firms from doing business within their borders.