What Is a Closed Economy? 🤔
A closed economy typically refers to a country that seeks self-sufficiency and refrains from participating in international trade or financial exchanges. In this scenario, there are no imports, and no exports take place. The aim is to provide everything the domestic consumers need entirely from within the country’s borders. Although completely closed economies are more of a theoretical concept today, some nations come closer to this model than others.
Key Takeaways 🌟
- A closed economy does not engage in international trade and produces all goods and services domestically.
- Truly closed economies are nearly nonexistent in today’s globalized world, yet some countries are more closed than others.
- Governments may use protectionist measures, such as quotas, subsidies, and tariffs, to shield specific sectors from international competition.
The Reality of Closed Economies Today 🌍
The rise of globalization suggests that governments are increasingly participating in international trade. While closed economies counter the principles of modern economic theories advocating for international trade, maintaining genuine self-sufficiency in today’s global society is highly challenging.
The Organisation for Economic Co-operation and Development (OECD) highlights, “Relatively open economies grow faster than relatively closed ones, and offer better working conditions and wages in competitive industries.”
For example, many countries, despite being manufacturing powerhouses, need to import essential raw materials. In 2021, China, the United States, India, South Korea, and Japan were the largest importers of crude oil. Similarly, lithium crucial to electric vehicles production overwhelmingly comes from Australia, Latin America, and China.
Why Consider Partial Economic Closure? 🏛️🔒
Entirely closed economies don’t exist today, but governments sometimes choose to close off certain sectors. The chief argument for a partially closed economy is avoiding overreliance on imports, which can destabilize the balance of trade.
A prime example is the U.S. imposition of a 25% tariff on steel imports and a 10% tariff on aluminum imports in 2018 to curb unfair competition, especially from China.
Assessing the Degree of Economic Openness 📈🔢
One method to gauge how open or closed an economy is involves assessing the imports and exports as a percentage of the country’s GDP. For instance, Sudan’s economy is considered quite closed, with imports constituting only 1.9% and exports 2.3% of its GDP. In contrast, these figures for the U.S. stand at 13.3% and 10.2%, respectively.
Understanding Key Concepts: Balance of Trade, Tariffs, and Quotas 📋
Balance of Trade: This term refers to the difference between the value of a nation’s imports and its exports. A country facing a trade deficit imports more than it exports, while one with a trade surplus exports more.
Tariff and Quota: A tariff is a tax on specific imported goods, whereas a quota limits the quantity of such imports.
Trade Subsidy: This is a financial benefit granted by the government to domestic industries to make their products more competitive, both locally and internationally.
Conclusion 🏁
While no nation operates a completely closed economy today, some economies remain relatively more closed than others. Generally, economists believe that open economies offer significantly more benefits, in terms of prosperity and stability, both for individual countries and the global community.
Related Terms: tariffs, quotas, subsidies, balance of trade, gross domestic product (GDP).
References
- Organisation for Economic Co-operation and Development. “Why Open Markets Matter”.
- World’s Top Exports. “Crude Oil Imports by Country”.
- U.S. Energy Information Administration. “Oil and Petroleum Products Explained”.
- McKinsey & Co. “Lithium Mining: How New Production Technologies Could Fuel theGlobal EV Revolution”.
- Chicago Booth Review. “Will Americans Benefit from New Tariffs on Steel and Aluminum?”
- The White House. “A Proclamation on Adjusting Imports of Steel Into the United States”.
- The World Bank. “Exports of Goods and Services (% of GDP).”
- The World Bank. “Imports of Goods and Services (% of GDP)”.
