Closed Economy

Published Dec 27, 2022

Definition of Closed Economy

A closed economy is an economic system in which all transactions take place within the domestic economy. That means it does not involve any international trade or capital flows. In other words, a closed economy is a self-contained economic system that does not interact with other economies in any way, shape, or form.

Example

To illustrate this, let’s look at an imaginary country called the Kingdom of Isolation. The Kingdom of Isolation is a closed economy, meaning it does not engage in any international trade with other countries or economies. All the goods and services it produces are consumed within the country with local resources. That means the Kingdom of Isolation does not import any goods or services from other countries, nor does it export any of its own.

Why Closed Economy Matters

Closed economies are important for understanding the global economy. On the one hand, they provide a useful baseline for comparison. That means they can be used to measure the effects of international trade and capital flows on an economy. On the other hand, closed economies are also useful for understanding the effects of government policies on an economy. That’s because, in a closed economy, all economic decisions are made by the government, and the government has complete control over the economy.