A “closed economy” is an economy in which

[UPSC Civil Services Exam – 2011 Prelims]

(a) the money supply is fully controlled

(b) deficit financing takes place

(c) only exports take place

(d) neither exports nor imports take place

Answer: (d)        

Explanation:

• A closed economy is characterized by the absence of trade with other economies.
• It is self-sufficient, meaning there are no imports coming into the country and no exports leaving the country.
• The objective of a closed economy is to fulfill the needs of domestic consumers solely from within its own borders.
• However, closed economies can be inefficient due to the lack of access to raw materials produced elsewhere that are essential inputs for final goods.
• Governments may protect specific industries from international competition using measures like quotas, subsidies, and tariffs.
• It’s important to note that in practice, there are no nations with completely closed economies.