Closed economy

economic-dictionary

A closed economy is one that does not carry out any exchange with other countries. In other words, it is an economy that does not interact with the rest of the world and only consumes what it produces internally.

In a closed economy, neither imports nor exports take place. Everything that is consumed must be produced internally. There are also no foreign investments or international companies since they cannot coordinate their activities with other companies outside the country.

Implications of the closed economy

In a closed economy, external flows are zero, so the following identities are fulfilled:

  • Gross domestic product = Private consumption + Domestic investment + Public spending
  • National investment = National saving = Private saving + Budget surplus

The first identity tells us that what is consumed by both private agents and the government, together with the resources that are destined for investment, come from internal production.

The second identity tells us that the investment must necessarily be financed with internal resources (private and / or public).

Advantages and disadvantages of the closed economy

There are very few advantages to this model, only artificial protection for internal producers, cultural identity and heritage.

For its part, the disadvantages are:

  • Little variety and availability of products or services: The inhabitants must resign themselves to consuming only the products and services that are produced within the country. There is no access to the wide variety of international production that exists in the world, which could perfectly complement or improve the local offer.
  • Little competitive pressure: In the absence of competition from external companies, domestic producers can become inefficient, abuse their dominant position and create monopolies that harm the consumer.
  • Investment limitation: By not being able to access external resources, investment is limited, which reduces the capacity for growth.
  • Low access to new technologies and ideas: By not exchanging with the outside, the opportunity to access better technologies and new ideas that promote the growth of the country is lost.
Advantages and disadvantages of capitalism Circular flow of income Open economy

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