UPSC Prelims 2011 Q17: Indian Economy – International Trade & WTO
“A closed economy” is an economy in which
- (a) the money supply is fully controlled
- (b) deficit financing takes place
- (c) only exports take place
- (d) neither exports nor imports take place
Answer: (d) neither exports nor imports take place
Explanation
What is a 'closed economy'?
A closed economy has no trade with the rest of the world at all.
| Option | Verdict | Reason |
|---|---|---|
| (a) Money supply fully controlled | Incorrect | This describes monetary policy control, not openness to trade |
| (b) Deficit financing takes place | Incorrect | Deficit financing is a fiscal tool, unrelated to trade openness |
| (c) Only exports take place | Incorrect | A one-sided flow (exports only) is still trade with the outside world, so it is not 'closed' |
| (d) Neither exports nor imports take place | Correct | By definition, a closed economy has zero external trade |
Open vs closed economy:
| Type | Trade with rest of world |
|---|---|
| Closed economy | None — self-sufficient, no exports or imports |
| Open economy | Engages in both exports and imports |
In practice, almost no modern economy is fully closed; the term is mostly theoretical, used to isolate domestic effects in economic models.
Answer: (d) neither exports nor imports take place.
Why each option is right or wrong
- (a) Incorrect. Controlling the money supply is a monetary-policy feature, unrelated to trade with other countries.
- (b) Incorrect. Deficit financing is a fiscal tool used by both open and closed economies.
- (c) Incorrect. An economy with only exports still trades with the outside world, so it is not closed.
- (d) CORRECT. A closed economy has no exports and no imports at all.
Key point
Closed economy = zero trade with the rest of the world (no exports, no imports). Nearly all real economies are open to some degree.
Remember
Closed economy = no exports AND no imports.
Common mistakes
- Confusing a closed economy with one that controls its money supply or runs a fiscal deficit.
- Thinking 'closed' just means limited trade, rather than none at all.
- Assuming a country that only exports counts as closed.
Exam tip
'Closed' in economics always means zero trade, not just restricted or one-sided trade.
Sources
- NCERT Class XII Economics — Introductory Macroeconomics — Open Economy Macroeconomics
- Olivier Blanchard — Macroeconomics (Pearson): the open economy