A closed economy is an economic system where a country produces all its own goods and services and does not participate in world trade. It does not allow imports or foreign investment from overseas and does not permit currency to be exchanged with any other currency. Generally, all production, consumption, and investment activities are restricted to citizens of the country and all tax, wage, and wage distribution policies are determined by the government. Closed economies are very rare today, but some countries are relatively closed off from world trade.

Under a closed economic system, a country’s economic production, consumption, and investment decisions are planned and implemented by the government. Resource allocation, distribution of income, technological advancements, and capital formation are all accomplished through state control, leaving very little control to the private sector or citizens. This also denotes heavy reliance on state-owned enterprises, as private companies are typically heavily regulated.

In a closed economy, foreign trade is heavily restricted, or even forbidden. The country does not exchange goods and services with other countries, and does not accept foreign investments. Its currency is not convertible with other currencies, meaning it cannot buy from or sell to other countries in the international market. As a result, economies operate with cash economies, where goods and services are provided and purchased using only domestic currencies.

While closed economies are relatively uncommon today, some countries do implement protectionist policies to still keep certain industries closed off from international trade. These include tariffs, subsidies, and quotas. For example, a country may use tariffs to make imports more expensive, making it more difficult for foreign firms to sell their products domestically. Subsidies are payments made by the government to support the domestic production of certain goods, while quotas limit the amount of goods imported from other countries.

Though a closed economy may be able to protect its citizens from the risks of a highly globalised world, the lack of unrestricted access to international markets often has a negative impact on the nation’s economic growth potential. It is also not sustainable over the long term, as the lack of imports and foreign investment makes it difficult for a closed economy to remain competitive. For these reasons, most countries today have adopted open economies that embrace international trade, investment, and currency exchange in order to remain competitive and grow their economic wealth.