Closed Economy

A closed economy is where the import and export of goods and services don't happen, implying that the economy is self-sufficient and has no trading activity from outside economics. The sole purpose of such an economy is to meet all the domestic consumers' needs within the country's border.

In practice, there are no countries with closed economies at present. Brazil is the closest to the closed economy as it has the least imports of goods compared to other countries. However, it is impossible to meet all the goods and service demands within the domestic boundary. Moreover, building and maintaining such economies can be arduous with globalization and technology dependency. We can say that India was a closed economy till 1991, and so were the other countries across the globe. However, it is not quite possible to run a closed economy.

The need for raw materials is important and plays a vital role in the final product making the concept of closed economies inefficient. Furthermore, the government can shut down any sector from the international competition through quotas, subsidies, tariffs, and making it illegal. As a result, they have no or limited economic relationship with other economies.

1. A closed economy is an economy where imports and exports don't happen, meaning that the nation's economy is self-sufficient and doesn't require trading from outside. 
2. Countries like Morocco, Algeria, Ukraine, Moldova, most of Africa, Tajikistan, Vietnam, and Brazil are closed economies.
3. Due to voluntary isolation, prevention of transit costs, protection of cultural preferences, and government decree, countries prefer closing their economies. 
4. Closed economies aren't the best in a world of adamant and powerful globalization. 

The following are examples of closed economy countries.

• Morocco and Algeria (excluding oil sales)
• Ukraine and Moldova (despite late exports sector)
• Most of Africa, Tajikistan, Vietnam (closest to the closed economy)
• Brazil (if imports are to be neglected)

Income calculation in the closed and open economy is shown below:

Closed Economy

Where,

• Y - National income
• C - Total consumption
• I - Total investment
• G - Total government expenditure

Open Economy

Where,

• Y - National income
• Cd - Total domestic consumption
• Id - Total investment in domestic goods and services
• Gd - Government purchases of domestic goods and services
• X - Exports of domestic goods and services

• It is impossible to establish and maintain a closed economy with globalization and international trade. Since the open economy has no restrictions on imports, it carries the risk of depending too much on them. The domestic players will not be able to compete with international players. The governments will have to use quotas, tariffs, and subsidies to tackle this.
• Resource availability across the globe varies and is never constant. Thus depending on this availability, an international player will find the best place to procure a particular resource and come up with the best price. Domestic players who have constraints to globalize will not be able to produce the same product at a price at par compared to an international player. Thus, domestic players will not compete with foreign players, and the government might have to use the above options to support domestic players and reduce dependency on imports.

There are a few reasons a country might choose to have a closed economy or certain factors that will facilitate the maintenance and building of a closed economy. First, the economy is assumed to be self-sufficient and doesn't require imports outside domestic borders to meet consumers' demands.

• Isolation: An economy might be physically isolated from its trading partners (consider an island or a country surrounded by mountains). The natural boundaries will factor in and lead the economy towards a closed one.
• Transit Cost: Due to physical isolation, the transportation cost of goods will be high leading to high transit costs. It doesn't make sense in trade if the price of goods is increased due to the high overheads of transport, and thus the economy tends to close in such cases.
• Government Decree: Governments might close down borders for taxes and regulations purposes. Therefore they will decree the trade with other economies. Violations will be punished. The government will support its domestic producers and tax international players to generate revenue.
• Cultural Preferences: Citizens might prefer to contact and trade only with residents of a similar culture, leading to another barrier and facilitating a closed economy. For example, when McDonald's came to India, people opposed the outlets claiming they use beef in their dishes against Indian culture.

Some of the advantages are as follows:

• It is isolated from neighbors, so there is no fear of coercion or interference.
• Transit costs will usually be very less in the closed economy.
• Taxes on goods and products will be less controlled by the government, implying less consumer burden.
• Domestic players need not compete with the outside players, and price competition is minimal.
• A self-sufficient economy will create better demand for domestic products, and agricultural products and producers will be compensated appropriately.
• Price fluctuations and volatility are easily controllable.

Some of the limitations are as follows:

• The economy will not grow if they lack oil, gas, and coal resources.
• The consumer will not get the best price for commodities compared to global prices.
• The economy will be hit severely in emergencies as most of its production will be domestic.
• They must meet all of their domestic demand internally, which is difficult to accomplish.
• They will have restrictions on goods and services to be sold, and thus the opportunity for the consumers in such markets decreases.
• The developing nations look down upon isolated economies, and globally, such an economy can expect limited aid when the need comes.

No doubt, a closed economy has its advantages. However, in today's era where the world is converging to one, with the degree of globalization, dependency on resources, and technology, it is impossible to have a closed economy and still grow. On the other hand, a completely open economy is highly volatile as its dependency on imports is high. Therefore, it is advisable to build a hybrid of two economies such that the dependency is moderate and domestic players also get support from the government.

Both open and closed economies are theoretical concepts in today's world; a country should adapt accordingly towards either of them depending on its current situation and the prevailing factors. The government should design a hybrid economy aptly to help its domestic producers without exploiting its consumers for an economy to grow.

This has been a guide to a closed economy and its definition. Here we discuss the examples of closed economy countries and their reasons and importance. You can learn more about economics from the following articles –

• Developed Economy Examples
• What is Law of Demand?
• Shared Economy
• Net Exports Calculation