Closed Economy

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.