A closed economy is one that is entirely self-sufficient, in that it does not import or export goods and services from abroad. If a country is “closed” to trade, as is the case with a closed economy, it limits the availability of goods and services.
Learn more about how a closed economy works and the impact it may have.
Definition and Examples of a Closed Economy
A closed economy is an economy that does not participate in international trade, meaning it would not import or export goods and services from another country. In this situation, all goods and services are produced within the boundaries of a single economy.
Closed economies often grow slower than open economies, as they only consume goods and services produced within their own country.
The closest current example of a closed economy is Sudan. Sudan is not officially closed to trade but does not engage in much trade, as a percentage of its GDP. In 2020, it had the smallest percentage of goods and services imported and the third-smallest percentage of goods and services exported, as a percentage of GDP. This is due to South Sudan’s succession in 2011, which led to a 90% reduction in exports, massive unemployment, and low economic growth. Currently, Sudan’s share of exports in world trade is between 0.02% and 0.03%.
In contrast to a closed economy, an open economy is an economy that does import and export goods and services. While an open economy can import and export final goods, a majority of what is traded is intermediate goods—components of final goods—which account for about 70% of all traded goods. Raw materials, such as oil, are common intermediate goods and often are only found in certain countries and regions of the world.
How Does a Closed Economy Work?
Trading allows countries to specialize and allocate resources to sectors and areas where they are most efficient. Countries can grow faster when they produce goods and services that have a lower opportunity cost, and trade for goods and services that are less efficient for them to produce. When countries specialize, it can have an effect across the globe.
For example, as more manufacturing jobs have moved to China due to the lower cost of production, manufacturing jobs have decreased in the U.S. Politically, governments may feel pressure to save domestic jobs and protect them from outsourcing these jobs to other countries. A government may try to enact protectionist policies such as tariffs and quotas to restrict trade.
While these policies may stop or slow down trade with an individual country, in order to be a completely closed economy, the government would have to ban trading from all outside economies. The country would then only rely on its own consumption, investment, and government spending for economic growth. As a result, if a country was unable to produce a good, it would not be able to get it elsewhere.
Generally, it is difficult for an economy to remain closed, as not all materials are easily found in each country. For example, semiconductors are made from silicon, but only a handful of countries produce silicon. A country with no natural resource of silicon would need to trade with countries that have it, such as the U.S., China, and Russia. Without trade, that country would not have access to silicon, semiconductors, and, most importantly, the final goods that use semiconductors such as: cellphones, televisions, and computers.
Do Any Countries Have a Closed Economy?
While no country is officially closed to all trade, there are some countries that rely less on trade than others. In modern society, maintaining a closed economy is challenging, as raw materials such as crude oil, lumber, or natural gas play a key role in making final goods. Not every country has access to these raw, natural materials, thus forcing trade.
The United States is the world’s largest trading nation, as of 2019, with over $5.6 trillion in exports and imports of goods and services. Specifically, it is the world’s largest goods and services importer, by volume, in the world, and the second-largest goods exporter (and the largest service exporter) in the world.
|Table 1: Imports and exports as a % of GDP for the 10 largest economies, using 2020/2019 data|
|Country||Nominal GDP, in current U.S.$
|Imports of goods and services (% of GDP)||Exports of goods and services (%) of GDP|
|Republic of Korea||1,630,525.01||33.2%||36.9%|
*Data note: Some nominal GDP data are from 2019 and some are from 2020. This varies depending on the latest World Bank data.
- A closed economy is an economy that does not participate in international trade, meaning it does not import or export goods and services from another country.
- A closed economy grows slower than open economies, as all goods must be produced and consumed from within the single economy.
- There are no closed economies that exist today, but some countries use protectionist policies to restrict trade, making them more closed than others.
- The United States is the world’s largest trading nation, according to 2019 data.