March 21, 2018 

AmosWEB means Economics with a Touch of Whimsy!

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OMO: The abbreviation for open market operations, which is the Federal Reserve System's buying and selling of government securities in an effort to alter bank reserves and subsequently the nation's money supply. These actions, under the direction of the Federal Open Market Committee, are the Fed's number one, most effective, most often used tool of monetary policy. If, for example, the Fed wants to increase the money supply (termed easy money) it buy's government securities. If the Fed chooses to reduce the money supply (called tight money) it sells some government securities.

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An economy that does not engage in international trade or other forms of interaction with other countries. That is, a closed economy neither exports goods and services to, nor imports goods and services from, other economies that make up its foreign sector. It is "closed" to the flow of goods and services into or out of the country. The alternative to a closed economy is an open economy, one that does engage in international trade.
A closed economy is an economy that is "closed" to the flow of goods and services across its political boundaries. Such an economy does not engage in trade with other economies. The key phrase for a closed economy is self sufficiency. All of the resources used in production and domestically owned and controlled. All goods and services consumed by the citizens of the economy are domestically produced.

Closing the Borders

An economy is closed when it does not trade with other economies. The lack of trade might could exist for a number of reasons.
  • Isolation: The economy might be physically isolated from potential trading partners or have other natural barriers that prevent trade. A small island in the middle of the ocean far removed from shipping lanes offers an example. A country surrounded by enormous mountains and burning deserts offers another.

  • Transit Cost: Physical isolation is actually one example of trade limitations imposed by high transportation costs. An economy might be closed simply because the transit cost of trade with other economies are higher than any benefits gained from trade. The high transit costs might arise because the economy has no transportation systems connecting to other economies.

  • Government Decree: The ruling government might close off borders to other economies through taxes, regulations, military, or other coercive actions. That is, the government might decree that trade with other economies is NOT allowed. PERIOD. Violations are then severely punished.

  • Cultural Preferences: Citizens of the economy might prefer to interact and trade ONLY with members of the economy. Perhaps the citizens are somewhat xenophobic and distrust or dislike "foreigners," thus choosing to remain isolated and closed.
While economies that are completely and entirely closed are virtually non-existent in the modern world, examples populate the historical landscape. And those that have existed were usually due to a combination of several reasons -- cultural distrust, government decree, isolated access, and high transit costs.

Self Sufficient

A closed economy is necessarily self sufficient. The economy must produce ALL goods and services consumed within the economy and do so using ONLY resources owned and controlled by citizens of the economy. Let's consider this notion of self sufficiency.
  • First, note that no economy can be absolutely self sufficient. At the very least it must import "sunshine." Even the global economy, which is the penultimate in self sufficiency, relies on daily "imports" of solar energy to keep the wheels of production running. Cosmic radiation and meteorites are also imported, albeit with fewer productive uses.

  • Second, in light of modern international trade, self sufficiency might seem to be something of an impossibility (solar energy notwithstanding). How would an economy grow and prosper without trade? Growth, prosperity, and increasing living standards are the result of using resources to produce wants-and-needs satisfying goods and services. This can be accomplished by a single, self-sufficient person. Trade with others eases the task, but is not absolutely needed. However, to the extent that trade transpires, it can occur entirely among members of a given economy. While the individuals are not self sufficient with trade, the collective group can be. The entire economy can be self sufficient.

  • Third, this raises the question: What exactly is "the economy?" An economy is a system of production, consumption, distribution, and exchange. Usually an economy is designated based on national or political boundaries. Be such designations are somewhat arbitrary, often based on historical accidents. In fact, if fully and completely identified, an economy is almost by definition self-sufficiency. If all production, consumption, distribution, and exchange activities are included in the designation of THE economy, then THE economy is necessarily self sufficient. Of course, what this means is that the global economy, the entirety of production, consumption, distribution, and exchange on the planet, has assumed the modern self sufficiency mantle.

The Open Alternative

The alternative to a closed economy is an open economy. An economy that engages in international trade, especially one that exports goods and services to, and imports goods and services from, other economies that make up its foreign sector. It is "open" in the sense that goods and services flow into and out of the country.

Virtually all economies in the modern world are open and engage in assorted forms of international interaction, particularly international trade. The question is not so much one of open versus closed, but the degree of openness. Some open economies engage in only limited interaction with their foreign sector and are largely self-sufficient. Others engage in a great deal more international interaction.

Large economies, like that in the United States, tend to be more self sufficient that smaller economies, such as Denmark, and thus engage in relatively less international trade. For this reason smaller economies tend to be relatively more open than larger economies.


Recommended Citation:

CLOSED ECONOMY, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2018. [Accessed: March 21, 2018].

Check Out These Related Terms...

     | open economy | domestic sector | terms of trade | gains from trade | foreign trade policies |

Or For A Little Background...

     | international trade | foreign trade | comparative advantage | absolute advantage | law of comparative advantage | exports | imports | net exports | economy |

And For Further Study...

     | balance of trade | balance of trade surplus | balance of trade deficit | balance of payments | international market | foreign exchange market | international market | tariffs | import quotas | export subsidies | protectionism | gross domestic product | net foreign factor income |

Related Websites (Will Open in New Window)...

     | World Trade Organization | North American Free Trade Agreement | General Agreement on Tariffs and Trade | European Union |

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