What is a closed economy?
A closed economy is an economy that does not trade with other economies. Characterized by having no imports, no exports and no capital flows, a true closed economy is completely self-sufficient and self-sustaining. An open economy, on the other hand, is one in which trade occurs with outside markets.
Closed Economies vs. Open Economies
Nearly all economies in the modern world are open economies, in which trade with outside economies is common. In the past four decades, trade between nations has increased in prevalence and become essential to most countries. Due to the growing importance of international trade and the opening of even small markets, importing and exporting are almost universal. Nations which still operate in a closed economy are relatively rare, and tend to be either less developed countries or those with authoritarian politics. Because truly closed economies are largely nonexistent, the term nowadays may refer to a relatively closed system that has limited exposure to foreign markets. For instance, North Korea and Bhutan have been described as closed economies, although both engage in some trade with outside markets.
Closed Economies: Helping Create Economic Models
The concept of a closed economy is most useful as a theoretical construct in economic thought experiments and analysis. Economists use closed economies to develop economic models and theories. It is simpler to understand a single economy rather than taking into account multiple complex economies and their interrelations, such as exchange rates and trade balances. By considering a closed economy, economists are able to control for certain factors in order to analyze other variables. Students of economics typically begin by studying closed economies.
Considered an anomaly in the world today, a closed economy is a strategy that focuses all economic transactions inward rather than outward. The idea behind the closed economy is to meet all consumer needs with the purchase and sale of goods and services that are produced internally. In addition to meeting the needs and desires of all consumers within the economy, the method also excludes the possibility of exporting goods and services. Thus, the economy is considered to be completely self-sufficient. When the concept of a closed economy is applied to a geographic location such as a country, the system is normally referred to as an autarky. Essentially, an autarky goes to great lengths to avoid trade with other countries. Using the natural resources and combined talents of the population, the country will seek to meet every want and need of the country through the development and application of all the materials located within the geographic boundaries of the nation. Closed economies ar