A closed economy is an economic system in which a country does not engage in international trade, meaning it does not import or export goods and services. The goal of a closed economy is to achieve complete self-sufficiency, providing domestic consumers with everything they need from within the countrys own borders. Closed economies are more of a theoretical concept than a reality in todays interconnected world, although some economies are more closed than others. Even in countries with relatively open economies, governments may close off a specific sector or industry from international competition through the use of quotas, subsidies, and tariffs, a practice often referred to as protectionism.
In a closed economy, consumers are required to consume domestic products without any expectation of import of goods from foreign countries. A closed economy is difficult to sustain because many countries lack raw materials essential for finished products, and modern economic theory strongly supports countries taking advantage of comparative advantage and trades between countries, making the theory opposed to a closed economy.
Gross Domestic Product (GDP) is a measure of the total income and total expenditure on the output of goods and services in an economy. In a closed economy, there are no exports or imports, and as a result, there is no Net Exports (NE) term in the GDP equation. The four components of GDP in a closed economy are consumption (C), investment (I), government spending (G), and net exports (NE), which is zero in a closed economy.
