Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What characterizes a closed economy?

1. An economy with heavy government intervention

2. An economy comprised solely of firms and households

3. An economy engaged in international trade

4. An economy focused on agricultural production

The correct answer is: An economy comprised solely of firms and households

A closed economy is characterized by the absence of international trade; it does not engage in exports or imports. This means that the economy consists solely of domestic consumption and production, with all economic activities confined within its borders. In the context of the provided option, an economy comprised solely of firms and households accurately reflects the structure of a closed economy. In such a setting, all economic exchanges occur between these domestic entities, with no external influence from other countries. Other options do not align with the definition of a closed economy. Heavy government intervention might be a feature of various types of economies, both open and closed; however, it does not uniquely define a closed economy. An economy engaged in international trade clearly denotes an open economy, making it incompatible with the concept of a closed economy. Similarly, while the focus on agricultural production may occur in a variety of economic frameworks, it does not inherently characterize a closed economy either. The essence of a closed economy lies in the interplay solely between domestic firms and households, without external trading relationships.