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What is a closed economy?

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Quick Answer

A closed economy refers to an economic system which does not have business relations with any economies outside its own system. Closed economies employ barriers to the trade of goods and services, monies and intellectual property to and from their economic system.

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Full Answer

Economic openness is determined by individual governments or states by the use of policy controls like tariffs, import and export quotas, and exchange rate limits, explains to Reference for Business. These controls determine how much financial interaction takes place between an economy and outside economies. Despite these controls no economy is completely open or closed, due to the actions of individuals crossing borders, and the activities of the black market.

Countries with low economic openness tend to have lower economic productivity by capitalist standards, and often are associated with strong authoritarian governments. Some economies are open to trade with just a few other economies within an economic bloc. These economies can be nominally referred to as open, but the economic trading blocs themselves are often closed to all other trading partners. The trend today among world economies is the elimination of barriers to trade via trade agreements such as the North American Free Trade Agreement between the United States, Canada and Mexico.

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