CLOSED ECONOMY

 

CLOSED ECONOMY

Closed economy is a type of economy where the import and export of goods and services doesn’t happen. Such economy has no trade activity from outside economics. Closed economy is self-sufficient economy, the sole purpose of the economy is to meet all the domestic consumers’ needs within country’s border. No trade activity is conducted outside the national borders in a closed economy.

In practical there are no countries with closed economies at present. Brazil has the closest to the closed economy. It has the least import of goods compared to the countries from rest of the world. It is impossible to meet the all the goods and service demands with in the domestic boundary. With the globalization and technology dependency building and maintaining such economies can be a herculean task. It can be considered that India was a closed economy till 1991 and so are the other countries across the globe. At present it is not quite possible to run a closed economy.

The need for raw materials are important and play a vital role in final product, this makes the closed economy inefficient. Government can shut down any particular sector from international competition through the use of quotas, subsidies, tariffs and making it illegal in the country. The closed economy has no or limited economic relation with other economies.

 

Examples of closed economy

·       Morocco and Algeria (excluding oil sales)

·       Ukraine and Moldova (Despite late export sector)

·       Most of Africa, Tajikistan, Vietnam (closest to closed economy)

·       Brazil (if imports are to be neglected)

Income calculation in closed and open economy

Closed economy

Y = C+I+G

Where

Y-àNational income

C-àtotal consumption

I--àTotal investment

G-àTotal government expenditure

 

 

 

Open economy

Y= Cd+Id+Gd+X

Where

Y-àNational income

Cd-àTotal domestic consumption

Id--->Total investment in domestic goods and services

Gd-àGovernment purchases of domestic goods and services

X--àexports of domestic goods and services

Importance of closed economy

With the globalisation and international trade, it is impossible to establish and maintain a closed economy. Open economy has no restrictions on imports. Open economy carries the risk of depending too much on imports. The domestic players will not be able to compete with the international players. To tackle this the governments use quotas, tariffs and subsidies.

Resource availability across the globe vary and are never constant. Thus depending this availability an international player will find out best place to procure particular resource and come up with the best price. Domestic players who have constraints to globalize will not be able to produce same product at a price at par or discount compared to an international player. Thus domestic player will not be able to compete with the foreign players and government uses above options to provide to support to domestic players and also reduce dependency on imports.

Reasons for closed economy

There are few reasons a country might chose to have a closed economy or other factors which will facilitate the maintenance and building of closed economy. It is assumed that the economy is self-sufficient and doesn’t require any import outside domestic border to meet all of its demand from consumers.

1.      Isolation- An economy might be physically isolated from its trading partners (consider an island or a country surrounded by mountains). Natural boundaries of a country will factor this reason and lead economy towards closed one.

2.      Transit cost- Due to physical isolation the transportation cost of goods will be highest leading to high transit cost. It doesn’t make sense in trade if the price of goods is increased due to high overheads of transport and thus economy tends to close in such cases.

3.      Government decree- Governments might closed down borders for taxes, regulations purposes. Thus they will decree the trade with other economies. Violations will be punished. Government will try to support its domestic producers and tax international players to generate revenue.

4.      Cultural preferences- citizens might prefer to contact and trade only with citizens, this will lead to another barrier and facilitate closed economy. For examples when McDonalds came to India, people opposed the outlets claiming they use beef in their dishes and it was against culture.

Limitations of a closed economy

·       Economy will not grow if they are short of resources like oil, gas and coal.

·       Consumer will not get the best price for commodity compared to global prices.

·       In case of emergencies economy will be hit severely as most of its production is only domestic.

·       Closed economy must be able to meet all of its domestic demand internally, which is a difficult task to accomplish.

·       Closed economy will have restrictions on goods and services to be sold and thus opportunity for the consumers in such markets is more.

·       Isolated economies can be looked down by the developing nations and globally such economy can expect a limited aid when the need comes.

Advantages of a closed economy

·       Closed economy is isolated from neighbours, so there is no fear of coercion or interference.

·       Transit cost will be usually very less in closed economy

·       Taxes on goods and products will be less and controlled by government, less burden for consumers.

·       Domestic players need not compete with the outside players and price competition is less.

·       Self-sufficient economy will create proper demand for domestic products and agricultural products and producers will be compensated appropriately.

·       Price fluctuations and volatility is easily controllable

 

CONCLUSION

No doubt closed economy has its advantages but in today’s era where the world is converging to one, with the degree of globalizations, dependency on resources and technology it is highly impossible to have a closed economy and still grow. On the other hand a completely open economy is also highly volatile as its dependency on imports is high. It is advisable to build a hybrid of two economies such that the dependency is moderate and domestic players also get the support from the government. Both open and closed economy are theoretical concepts in today’s world , a country to should adopt accordingly to tilt towards either of them depending on its current situation and keeping in mind the prevailing factors. For a economy to grow, the government should design a hybrid economy aptly to help its domestic producers without exploiting its consumers