A closed economy is a concept in economics that refers to a system where a nation does not engage in international trade, meaning it neither imports nor exports goods and services. The absolute goal of a closed economy is to achieve self-sufficiency, providing all domestic needs through local production. While this idea represents an interesting theoretical construct, fully closed economies are largely outdated and nonexistent in today's globalized world, with most nations leaning towards openness and international collaboration.

Key Characteristics of Closed Economies

  1. Self-Sufficiency: Closed economies aim to produce all the necessary goods and services for their population within their borders. This self-reliance means they do not depend on foreign markets.

  2. Lack of Trade: There is no exchange of goods and services with other countries, meaning no imports and no exports are involved in the economic cycle.

  3. Protectionist Policies: Although true closed economies are rare, some nations approach this model by implementing protectionist measures. This can include tariffs, quotas, and subsidies, aimed at shielding local industries from international competition.

Key Takeaways

The Reality of Closed Economies Today

The concept of a completely closed economy is rare, perhaps even impossible, in the modern context. The push for globalization has influenced many governments to foster international trade to capitalize on comparative advantages. Historically, open economies have been observed to grow faster, and job opportunities improve for citizens when international trade is part of the economic landscape.

According to the OECD, “Relatively open economies grow faster than relatively closed ones.” Moreover, positive outcomes related to trade often lead to better salaries and working conditions. Keeping economies open encourages opportunities and stability that benefits global citizens.

Importance of Raw Materials

An inherent challenge to maintaining a closed economy is the reliance on raw materials for the production of goods. Countries that excel in manufacturing often lack specific raw materials, compelling them to engage in international trade. For example, as of 2023, data from World's Top Exports shows that the most significant importers of crude oil include:

Additionally, the growing demand for lithium, necessary for electric vehicle batteries, signifies another layer of the reliance on international trade. Currently, Australia, Latin America, and China account for over 98% of the world's lithium production.

Trade Control: Protectionism vs. Open Markets

While fully closed economies are rare, certain sectors within an economy may be temporarily shielded from foreign competition. For instance, some oil-rich nations limit the operation of foreign petroleum firms to protect local industries. This balance lies in the protectionist approach where governments utilize tariffs, subsidies, and quotas to support domestic businesses.

A notable example is the United States, which, in 2018, imposed a 25% tariff on steel and a 10% tariff on aluminum imports, aiming to protect domestic manufacturers from competition, especially from China.

Evaluating the Openness of Economies

Economists often measure how open or closed an economy is by assessing imports and exports as a percentage of the country's gross domestic product (GDP). For instance, Sudan has one of the most closed economies, with imports making up only 1.0% of its GDP, and exports at 1.2%. In contrast, the United States shows figures of 15.4% in imports and 11.6% in exports.

Related Economic Terms

Conclusion

In conclusion, while the notion of a closed economy offers an intriguing perspective, the complexities of modern economic relationships make it challenging for any nation to exist entirely without trade. Most economies today, though not completely open, rely to varying degrees on international trade to thrive. The overarching consensus among economists is that engaging in global trade tends to provide better economic outcomes for both individual nations and the international community at large.