What is a closed economy?
Closed economies shut their doors to other economies across the border; it doesn’t participate in international trade. I.e., Import and export are just a theory for them. Products and services are produced within the border. It aims to be completely self-reliant and meet all the needs of its domestic consumers from its own resources. However, in the modern world, where countries are interdependent, closed economies are more of a theoretical idea than a practical one, although some economies are more isolated than others.
How do closed economies work?
Trade with other economies allows countries to use their resources in an efficient manner. Countries produce goods and services that they have a comparative advantage and then exchange them for other goods and services that are more expensive or difficult for them to produce. Trade allows countries to increase their productivity and growth potential.
But to be a closed economy is not a practical idea, and it can backfire and hurt the economy in the long run. To be completely isolated from the world market, a company would have to restrict trade with other countries. I.e., an isolated country would have to rely upon its own production, resources, and government spending to drive its economy. So the country would miss out on the benefits of trade, for instance, access to a variety of goods and services, lower prices, and innovation.
For example, A country that does not have any natural source of silicon, which is crucially important for making semiconductors. Semiconductors are used in vehicle manufacturing, phone and computers, and more electronic devices. An isolated country that shuts its doors to other economies would not be able to import silicon or semiconductors from other countries that produce them, such as U.S., Russia, and China. This would limit the country’s ability to develop and use technology, which could affect its economic and social progress