A private closed economy will expand when its consumption, investment, and government spending rise relative to its national savings. Consequently, its inventories will decline, and its GDP will increase. This is a good thing because it increases the production of goods, and it also reduces the need to import these goods.
In a closed economy, the only items imported are raw materials that are not produced locally. These include natural resources like crude oil. In theory, it is possible for a country to be completely closed, but it would have to ban all trade with other nations and use only domestic sources of supply for all goods. A private closed economy will have a hard time surviving without access to raw materials, since raw materials are the building blocks of final products.
Economies with more open markets typically trade both final products and the intermediate goods that are used to make them. In fact, a majority of the world’s trade is in these intermediate goods. Despite this, some countries choose to close off a particular industry from international competition through the use of quotas, subsidies, and tariffs–a practice known as protectionism.
In a private closed economy that excludes government interventions and foreign trade, the equilibrium GDP is determined by changes in consumption and investment. Shifts in these two components directly affect the GDP level. For example, if consumers decide to spend less on consumer goods, the consumption schedule will shift downward and the GDP will decrease. This decision could be based on many factors, including higher interest rates, decreased business expectations, or technological advancements that make consumer goods obsolete.