Closed economy

Closed economy

The term refers to an economic system where there is no international trade, implying that all consumption and trade occurs with locally produced goods and services. 

Practically, it means that the country is completely isolated, economically, as it does not engage in trade with any other country. Today there are no such instances, as every country imports something produced abroad – whether it would be gas, energy or food. In a similar manner, today, every country exports at least something abroad. 

For this reason, in today’s world it is possible to discuss degrees of closeness or openness, rather than completely closed economies. For example, North Korea is significantly more closed than South Korea or Japan that extensively engage in international trade. 

The idea of closed economies has been linked to the concept of protectionism, which represents the practice of shielding a country’s domestic industries from foreign competition by taxing imports.

Historically, ruling regimes of various kinds have opted for putting foreign products at a disadvantage, by making them more expensive via import tax. The expectation for such policies has been that by temporarily shielding domestic producers from foreign competition will provide them with an opportunity to improve their efficiency and competitiveness. 

Moreover, the idea of a closed economy is generally perceived to be economically inefficient, because it means that the country has to produce everything itself. Today, countries, businesses and individuals alike, establish their positions by specialising and obtaining competitive advantages by having particular skills or knowledge.

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