Certification in Supplier Diversity Practice Exam

What does a closed economy rely on for production and trade?

1. Heavy tariffs to protect domestic goods

2. Severe limitations on trade with the outside world

3. Increased foreign investments

4. Open trade agreements with multiple partners

The correct answer is: Severe limitations on trade with the outside world

A closed economy primarily relies on severe limitations on trade with the outside world to facilitate its production and trade. This type of economy is characterized by minimal or non-existent imports and exports, meaning that all goods and services are produced domestically. By imposing restrictions on global trade, such economies aim to utilize local resources, labor, and technology, effectively aiming for self-sufficiency. The internal focus prevents dependency on external markets or foreign goods, fostering a reliance on local industries to meet all economic needs. This often leads to protective measures that prioritize domestic production over external competition, aligning with the principles of a closed economy. As a result, the economic activities in such a system are largely insulated from global market fluctuations, allowing for stability within its borders. Understanding this concept is crucial when discussing various economic models and their implications for trade and production strategies.