Author
Home > Business > What is the Difference Between Closed Economy and Open Economy?

Guilherme Mazui

•4 minutes to read

What is the Difference Between Closed Economy and Open Economy?

🆚 Go to Comparative Table 🆚

The main difference between a closed economy and an open economy lies in the degree of interaction and exchange of goods, services, and capital with other economies in the world. Here are the key differences between the two:

  • Closed Economy:
  • Does not interact with other economies.
  • No exports, no imports, and no capital flows.
  • Self-sufficient and relies on domestic production to meet the needs of its citizens.
  • Rigid, with limited flexibility in the economic system.
  • Minimal or no competition, as the market is not exposed to international trade.
  • Does not allow the movement of labor force for foreign employment.
  • Does not borrow or lend funds from or to other countries.
  • Open Economy:
  • Interacts freely with other economies around the world.
  • Buys and sells goods and services in world product markets, and buys and sells capital assets in world financial markets.
  • Flexible and open to international trade and capital flows.
  • Higher degree of competition, as the market is exposed to global trade.
  • Allows the movement of labor force for foreign employment.
  • Borrows and lends funds from or to other countries.

In summary, a closed economy is self-reliant and does not interact with other economies, while an open economy engages in international trade, investment, and capital flows, allowing for greater exchange and competition.

On this page
  • What is the Difference Between Closed Economy and Open Economy?
  • Comparative Table: Closed Economy vs Open Economy

    • Comparative Table: Closed Economy vs Open Economy

    Here is a table comparing the differences between a closed economy and an open economy:

    Feature Closed Economy Open Economy
    Definition An economy in which goods or services are not exchanged with other countries, and people and economic activities are self-sufficient. An economy that engages in international trade, allowing for the exchange of goods, services, investments, and capital flows with other countries.
    Trade Scope Only domestic output is traded inside the country, with a complete absence of international trade. Keeps trade associations with many countries of the world economy.
    Socio-economic Relationship No socio-economic relationship with the world economy. Has a socio-economic relationship with the rest of the world sector.
    Economic Guidance Follows the guidelines of the plans of the central government. Follows the principles and guidelines of the market economic system.
    Borrowing and Lending Neither borrows nor lends funds. Borrows and lends funds.
    Movement of Labor Force Limited or no movement of labor force across borders. Allows for the movement of labor force across borders.
    Technology Transfer Techniques of production are not transferred from one country to another. Transfers techniques and technology of production from one country to another.
    Degree of Competition Very little or no competition. Higher degree of competition.

    In summary, a closed economy is characterized by limited interactions with the outside world, restricted trade, and self-sufficiency, while an open economy engages in international trade, allows for the movement of labor and capital, and fosters competition.

    Read more:

    Guilherme Mazui

    Guilherme Mazui is graduated in journalism from the Federal University of Minas Gerais (UFMG) and a master's degree in Communication from the University of São Paulo (USP). In addition, he has experience in advertising writing and has worked as a content editor in several companies.