What Is a Closed Economy?
Let me explain what a closed economy is. It's a type of economic system where a country doesn't engage in international trade at all. You produce everything you need right at home to be completely self-sufficient. In this setup, no imports come in, and no exports go out. The whole point is to supply your domestic consumers with goods and services from within your own borders. In our interconnected world today, closed economies are mostly theoretical—you won't find a perfect example, but some countries are closer to it than others.
Key Takeaways
Here's what you need to know about closed economies. They refer to countries that make all their own goods and services without any international trade. In reality, they're almost nonexistent now, though some nations approximate them more than others. Even in open economies, governments might protect certain sectors from global competition using tools like quotas, subsidies, and tariffs—this is known as protectionism.
Why There Are No Real Closed Economies Today
You might wonder why we don't see any truly closed economies anymore. The push toward globalization in recent years means governments are opening up to international trade more and more. Closed economies go against modern economic thinking, which encourages opening markets to leverage comparative advantages for everyone's benefit. The idea is that by focusing labor and resources on what you're best at, companies and people can build more wealth.
Plus, as the OECD points out, economies that are relatively open grow faster than closed ones, and companies involved in trade often have better salaries and working conditions. This leads to more prosperity, opportunity, stability, and security worldwide. But maintaining a closed economy is tough in today's world because raw materials are essential for daily life and manufacturing. Many manufacturing powerhouses lack certain resources and have to import them.
Take crude oil as an example. In 2023, the top importers were China at $336.5 billion (24.8% of total), the United States at $172.4 billion (12.7%), India at $140.1 billion (10.3%), South Korea at $86.2 billion (6.3%), and Japan at $81.1 billion (6%). The U.S. itself imports about 6.28 million barrels a day while exporting 3.58 million (as of 2022).
Looking ahead, lithium for electric vehicle batteries is another case. The U.S. and other industrialized countries have limited reserves and depend on imports. In 2020, Australia, Latin America, and China produced 98% of the world's lithium.
Why Close Off an Economy?
Even though fully closed economies don't exist, governments sometimes shut off specific industries from international competition. For instance, some oil-producing countries ban foreign petroleum companies from operating inside their borders.
The reasoning for a partially closed economy is to avoid over-dependence on imports, which can create a big trade imbalance. Domestic producers might struggle against cheap foreign prices, so governments step in with tariffs, subsidies, and quotas to help them. This is protectionism in action.
The U.S., with generally low tariffs, put a 25% tariff on steel imports and 10% on aluminum in 2018 to protect local producers from unfair competition, especially from China. Those were updated in 2022.
Measuring How Closed an Economy Is
If you want to gauge how closed an economy is, look at imports and exports as a percentage of GDP. By this metric, Sudan has one of the most closed economies, with imports at 1.0% of GDP and exports at 1.2%. Compare that to the U.S., where imports are 15.4% and exports 11.6%.
What Does Balance of Trade Mean?
Balance of trade is simply how a country's import values stack up against its exports. If you import more than you export, that's a trade deficit; export more, and it's a surplus.
What Is the Difference Between a Tariff and a Quota?
A tariff is a tax on goods coming from another country, while a quota sets a limit on how much of those goods can enter.
What Is a Trade Subsidy?
A trade subsidy is financial support from the government to a company or industry, making its products more competitive both domestically and abroad.
The Bottom Line
No country has a completely closed economy today, but some are more closed than others. These economies try to produce what they need internally and rely less on trade. Economists generally agree that open economies are better for citizens and the global community than closed ones.
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