Question

A "closed economy" is an economy in which

1. the money supply is fully controlled.
2. deficit financing takes place.
3. only exports take place.
4. neither exports nor imports take place.

Answer 1

Correct Answer - Option 4 : neither exports nor imports take place.

The correct answer is neither exports nor imports take place.

• Closed economy :
  • A closed economy is one that has no trading activity with outside economies.
  • The closed economy is therefore entirely self-sufficient, which means no imports come into the country and no exports leave the country.
  • The goal of a closed economy is to provide domestic consumers with everything they need from within the country's borders.
  • The need for raw materials produced elsewhere that play a vital role as inputs to final goods makes closed economies inefficient.
  • A government may close off a specific industry from international competition through the use of quotas, subsidies, and tariffs.
  • In reality, there are no nations that have economies that are completely closed.

• Why There Are No Real Closed Economies? 
  • Maintaining a closed economy is difficult in modern society because raw materials, such as crude oil, play a vital role as inputs to final goods.
  • Many countries do not have raw materials naturally and are forced to import these resources.
  • Closed economies are counterintuitive to modern, liberal economic theory, which promotes the opening of domestic markets to international markets to capitalize on comparative advantages and trade.

• Example of a Closed Economy :
  • In practice, there are no completely closed economies.
  • Brazil imports the least amount of goods—when measured as a portion of the gross domestic product (GDP)—in the world and is the world's most closed economy.
  • Brazilian companies face challenges in terms of competitiveness, including exchange rate appreciation and defensive trade policies.
  • In Brazil, only the largest and most efficient companies with significant economies of scale can overcome barriers to export.