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Answer to Question #78920 in Macroeconomics for Evans Mwenje

Question #78920
given model specification for a closed economy with an economically active government, express the model in a differential matrix and solve for the national equilibrium
Expert's answer
A closed economy is one that has no trade activity with outside economies. A closed economy is self-sufficient, which means no imports come into the country and no exports leave the country. A closed economy's intent is to provide domestic consumers with everything they need from within the country's borders.
Maintaining a closed economy is difficult in modern society because raw materials, such as crude oil, play a vital role as inputs to final goods. Many countries do not have raw materials naturally and are forced to import these resources. Closed economies are counterintuitive to modern, liberal economic theory, which promotes the opening domestic markets to international markets to capitalize on comparative advantages and trade. By specializing in labor and allocating resources to their most productive, efficient operations, companies and individuals can increase their wealth.
There are no completely closed economies. As a proportion of GDP, Brazil imports the least amount of goods in the world and is the world's most closed economy. Brazilian companies face challenges in terms of competitiveness, including exchange rate appreciation and defensive trade policies. In Brazil, only the largest and most efficient companies with significant economies of scale can overcome barriers to export.

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