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I was wondering if it is possible to run a country based only on domestic economy and not to enter the world economy. Basically, if certain economy of a certain country fails and poses threat to world economy, can other countries seal off their economies and still function with sustained growth and flourishing markets based on domestic economy itself?

I know this a naive question, but I tried to find an answer on on the internet and didn't get a satisfactory answer.

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    $\begingroup$ The United States and Japan have <0.2 of import/GDP ratio, which makes them pretty much closed. International trade is not critical. $\endgroup$ – Anton Tarasenko Jul 7 '16 at 10:21
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    $\begingroup$ @AntonTarasenko is that <0.2% or <20%? I would say the latter is non-negligable. $\endgroup$ – Giskard Aug 5 '16 at 19:17
  • $\begingroup$ @denesp Below 20%. Welfare losses in a big closed economy can be partly compensated with domestic production. $\endgroup$ – Anton Tarasenko Aug 5 '16 at 23:00
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    $\begingroup$ @AntonTarasenko Sure, but I would not call that "pretty much closed". $\endgroup$ – Giskard Aug 5 '16 at 23:51
  • $\begingroup$ @AntonTarasenko plus there is a lot of foreign direct investment, tourism, labour mobility, inflow of ideas, international cooperation in standards, and a long list of interdependencies in so many dimensions that are not reorded by "imports". $\endgroup$ – luchonacho Aug 22 '17 at 6:09
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It depends on what you mean by "sustained growth" and "flourishing markets".

Clearly the Earth as a whole is a big market. If you do not look at human made borders: the global economy is currently growing and some would say it is flourishing. There is no physical reason why this could not be done without the borders.

There are areas where the current technology cannot support the current population without outside help. An example is the heavily industrialized North Korea (which seems to motivate your question) which gets large amount of aid in food from the UN.

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  • $\begingroup$ Not sure if this answers the question. There are two components of trade: international and international. If the earth becomes one country, then there is no "international" trade. Now, there is as close a consensus as economists can get that trade is good for growth, starting from Frankel and Romer (99, AER)), the entire new gravity literature (AvW , 2001) which estimates the gains from trade, and they are always positive (distributional effects aside). Empircally, the answer is "no, an economy cannot flourish under autarky." $\endgroup$ – ChinG May 12 at 13:38
  • $\begingroup$ @ChinG "trade is good for growth" I did not dispute this anywhere. As to "no, an economy cannot flourish under autarky": this is in my opinion clearly false, but feel free to write an alternate answer based on your comment. $\endgroup$ – Giskard May 12 at 14:29
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    $\begingroup$ I suggest the autarkic closed economy border must enclose the sun. The border is an ellipse that is just a little bigger than the orbit of the Earth. When asteroid mining and moon and Mars tourism happen we can redefine the border of the closed economy. $\endgroup$ – H2ONaCl May 13 at 21:21
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Yes. Sort of. A closed economy can theoretically flourish. But not as much as if were more open. The more trade that occurs, the more prosperous the trading partners will be. Approaching the square of the total amout of available trade.

Metcalfe's Law quantitatively models this answer:

$$ \Theta(n) = \frac {n(n-1)}{2} $$

where $\Theta$ is the number of connections within a network and $n$ is the number of nodes. The total value of the network can be thought of as the aggregate combined real GDP of the included sub economies.

So the more economies that trade with the subject economy, the value of the entire network asymptotically approaches $n^2$.

$$ \lim_{n \to \infty } \frac{\Theta(n)}{n^2} = 1 $$

A network modeled by Metcalfe's Law

A network modeled by Metcalfe's Law

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  • $\begingroup$ The "value of the network" seems ill defined here. The network of a single country has no value, but a single country can probably have some sort of value creating economy. $\endgroup$ – Giskard Jul 6 '16 at 7:38
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    $\begingroup$ This is a very abstract approach. Surely it matters how much the economies differ in their factor endowments? $\endgroup$ – Adam Bailey Jul 6 '16 at 8:46
  • $\begingroup$ @AdamBailey: Agreed. One feature of this approach is that it is a simplified (some might argue oversimplified) theoretical first order approximation only. This approach simplifies the answer enough for the average person to understand quantitatively. $\endgroup$ – FreeMarketUnicorn Jul 6 '16 at 14:51
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    $\begingroup$ @denesp: I agree about the abstractness. But the tradeoff is a reasonably accurate yet relatively simple quantitative model. I agree and will try and edit to clarity. $\endgroup$ – FreeMarketUnicorn Jul 6 '16 at 17:58
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    $\begingroup$ @denesp: Also, the granular nature of the node approach allows the model to factor into account the difference in relative sizes of economies. And to AdamBailey's point, one could conceivably augment the Metcalfe model to take into account other factors as well. $\endgroup$ – FreeMarketUnicorn Jul 6 '16 at 18:00
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The US and Japan rely heavily on other countries for their economy, as does every single economy on Earth. Say you put a wall around a flourishing city; nothing in, nothing out. Everyone will die. It's that simple. Expand this any way you like. It is basic physics. An organism can only maintain itself via material from outside itself, whether that is sunlight and soil or imported consumer goods. Even the ground we walk on is replenished by volcanic activity. And an organism must expel waste, whether this waste is gas or a glut of government-subsidised soy beans or even the trillions of tons of garbage that "First World" countries have polluted their own and poorer countries with. The cold hard fact is, no country can succeed unless

1) it is small or lucky enough to have a large amount of unused land/resources which are not being used by the population.

2)it has something that people in other countries want.

3) other countries are willing to supply that country with (at the very least) raw materials

Even in the early days of e.g. Europeans' colonisation of North America, the home countries were fundamental for currency and goods. Millions of animals in Canada were slaughtered for money from outside. The Gold Rush would have meant nothing if there was no-one to give it to in exchange for products. Human culture is now so large and so voracious that we will eventually (and much sooner than we think) get to the stage where we are basically living in one, sealed town called The Earth. Life managed to survive for billions of years because it never ran out of resources. Humans are not that efficient.

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  • $\begingroup$ (-1) The closed in "closed economy" is not the same as the closed in physical "closed system". $\endgroup$ – Giskard May 4 '20 at 19:43

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