In macroeconomics, which of the following best describes a closed economy?

Introduction / Context:
In macroeconomics, economists often classify economies as open or closed depending on their interaction with the rest of the world. Understanding the definition of a closed economy is fundamental for interpreting many economic models and exam questions. This question asks you to identify the description that correctly captures what a closed economy means in standard economic theory.

Given Data / Assumptions:
- The focus is on the macroeconomic concept of a closed economy, not on specific countries.
- Four different descriptions of economic behaviour are given as options.
- The correct option should capture the idea of an economy that does not trade with other countries.
- The terms include trade in goods, services, and financial assets, all of which are relevant to openness or closedness.

Concept / Approach:
By definition, a closed economy is one that does not engage in international trade. That means it neither exports nor imports goods and services, and it does not allow free flows of capital in the form of cross border borrowing, lending, or investment. In contrast, most real world countries today are open economies to varying degrees. In theoretical models, a closed economy is used to simplify analysis by removing the external sector. Therefore, the correct description must stress the absence of international trade and cross border financial transactions.

Step-by-Step Solution:
Step 1: Read option A, which states that the economy does not engage in international trade in goods, services, or financial assets. Step 2: Recognise that this matches the textbook definition of a closed economy, which excludes the external sector. Step 3: Consider option B, which allows only exports and bans imports. This still involves international trade and is not fully closed. Step 4: Examine option C, which mentions no taxes and no government intervention. This refers to a different concept, sometimes linked with laissez faire policies, and has nothing to do with trade openness. Step 5: Evaluate option D, which allows trade only with neighbouring countries. This is still an open economy, although with limited partners, and therefore does not fit the closed economy definition. Step 6: Conclude that option A is the only option that correctly describes a closed economy.

Verification / Alternative check:
In many macroeconomics textbooks, the national income identity for a closed economy is written without terms for exports and imports. For example, domestic output is expressed as a function of consumption, investment, and government spending only. This reinforces that no international trade takes place. Since option A is the only one that explicitly excludes international trade and financial flows, it aligns with the standard treatment of closed economies in theory.

Why Other Options Are Wrong:
An economy that allows only exports but completely bans imports: Such an economy is still open because it trades with other countries, even if trade is one sided.
An economy that has no taxes and no government intervention: This describes a hypothetical free market economy but says nothing about whether the country trades internationally.
An economy that trades only with neighbouring countries: This is a restricted open economy but clearly not closed, since cross border trade exists.

Common Pitfalls:
Students sometimes confuse closed economy with other concepts like self sufficiency, autarky, or a tax free system. While there can be overlap, the precise macroeconomic definition focuses on international trade and financial flows. Another pitfall is to think that partial restrictions make an economy closed, when in fact many countries with trade restrictions still count as open because they do engage in trade. Remember that a closed economy means zero trade with the rest of the world in the model.

Final Answer:
Thus, in macroeconomics a closed economy is An economy that does not engage in international trade in goods, services, or financial assets.