Closed Economy - Explained
What is a Closed Economy?
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Table of ContentsWhat is a Closed Economy?Why are Closed Economies Difficult?The Proliferation of Open TradeWhy Close Off an Economy?Real World Example of a Closed EconomyAcademic Research on Closed Economies
What is a Closed Economy?
A closed economy is a type of economy that produces all consumers needs without importing or exporting any goods and services inside or outside the country. This type of economy is self-sufficient and independent. It has no trading activity outside the country's borders.in a closed economy, consumers are required to consume domestic products without any expectation of import of goods from foreign countries.
Why are Closed Economies Difficult?
A closed economy is difficult to sustain because many countries lack raw materials essential for finished products. Raw materials are natural resources provided to few countries, maintaining a closed economy in this modern society will be difficult. Modern or Liberal economic theory strongly supports countries taking advantage of comparative advantage and trades between countries, this makes the theory opposed to a closed economy. Companies and individuals can make more money or accumulate wealth by focussing on labor and efficiently directing resources to their most productive and efficient operations.
The Proliferation of Open Trade
With the recent advent of technology and countries advancing in modernization, economies are steering towards being open to international trade. For example, petroleum is traded globally, and this one of the raw materials globally requested. Countries without these raw materials are always in constant demand for it. The United States which is one of the largest producers of oil in the world imports approximately 10.4 million barrels daily as of 2017. They trade with other countries like Canada, Saudi Arabia, Mexico, Venezuela, and Iraq. Also to note, according to World'sTopExport.com," a research firm estimated and accounted that the five biggest crude oil exporterstotaled approximately USD $841.1 billion worth of exports. With Saudi Arabia at $133.6billion, Russia at $93.3billion, Iraq at $61.5billion, Canada at $54 billion and the United Arab Emirates at $49.3billion. These statistics marked the high demand accompanied by crude oil in 2017.
Why Close Off an Economy?
The fear of depending only on imports and the inability to compete at international trades makes countries close off their economy. Domestic producers or enterprises fear the risk of low international prices which will, in turn, affect their profit or result in a loss for them. Countries don't mostly practice close economies, however, a country may stop an industry from international trade. For example, some oil-producing countries have stopped trading with other foreign countries.
Real World Example of a Closed Economy
Brazil can be closely associated with a closed economy because they import a reduced amount of goods. And, it is the world's most closed economy. Brazil's largest and efficient companies with pertinent economies of scale can actually export goods as companies have difficulty in terms of competitiveness, including exchange rate appreciation and defensive trade policies.