Business, Legal & Accounting Glossary
A closed economy is a self-sustained economic unit with no trading or business relations with any other unit outside it. The term usually refers to a particular nation or an area with a common currency and is used to denote little or no economic exposure to the outside world. Instead of importing and exporting goods, a closed economy needs to be entirely self-sustaining.
The theoretical construct of a closed economy helps in developing certain types of macroeconomic theories and models. A closed economy is easier to understand and to model than an open economy, also known as a market economy or free-market economy, or than a mixed economy.
The implementation of closed economic conditions in a country is known as autarky. Generally associated with low levels of development in the economic sector or authoritarian domination over the country, a closed economy in the real world means no trade relations with any other country.
There are not many examples of truly closed economies in today’s increasingly globalised world. The most closed economy today is probably North Korea, but since relies heavily on external aid to feed its people, it cannot be described as a ‘functioning’ closed economy.
There are various reasons a nation would opt for a closed economy. Some of them may include:
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This glossary post was last updated: 29th March, 2020 | 2 Views.