Closed economy is an economy, which does not have any sort of economic relation with rest of the world but is confined to itself only. A closed economy does not enter into any one of the following activities.
(i) It neither exports goods and services to the foreign countries nor imports goods and services from the foreign countries.
(ii) It neither buys shares, debentures, bonds etc. from foreign countries nor sells shares, debentures, bonds etc. to foreign countries.
(iii) It neither borrows from the foreign countries nor lends to the foreign countries.
(iv) It neither receives gifts from foreigners nor sends gifts to foreigners.
(v) Normal residents of a closed economy cannot go to other countries to work in their domestic territory. No foreigner is allowed to work in the domestic territory of a closed economy.
Due to all these seasons, Gross Domestic Product and Gross National Product are the same in a closed economy.
On the other hand, an open economy is one, which is not only involved in the process of production within its domestic territory but also can participate in production anywhere in the rest of the world. An open economy involves itself in the following activities.
It buys shares, debentures, bonds etc. from foreign countries and sells shares, debentures, bonds etc. to foreign countries.
It borrows from foreign countries and lends to foreign countries.
It can send gifts and remittances to foreigners and can receive the same from them.
Normal residents of an open economy can move or be employed and are allowed to work in the domestic territory of other economies.
Due to these reasons, Gross Domestic Product and Gross National Product are not same in an open economy. It is to be noted that at present all economies of the world are open economies.