What is a 'Closed Economy'?

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

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 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. As a proportion of GDP, Brazil imports the least amount of goods 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.

The 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 crude oil exporters 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 7.9 million barrels per day in 2017, 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 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 oil firms from doing business within their borders.

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