Information for Forex traders. What is a closed market.
A market as an economic category is a theoretical expression of certain social relations and a collection of existing and potential buyers of the goods. In general, a market refers to the sphere of commodity circulation where demand, supply and price for goods and services are being formed. The market consists of various elements, the mechanisms of their interaction and motivations. Formation and development is due to the social division of labor and the freedom of action to producers and buyers in the process of their exchanges.
What is a closed market? It is a market in which sellers and buyers are bound by non-commercial relationships, legal and administrative dependence, financial control, agreements on specialization and cooperation, contractual arrangements (for example, trade, economic, credit agreements) that do not have a clear commercial origin. Various measures and forms of regulation prevail in this market and you can see that prices are relatively stable. Its main feature is that suppliers and buyers are connected by non-commercial relations, subsequently, in such a market there is no competition and prices remain the same for a long time.
Legal relations and economic activity in a closed market:
- The equity system.
- System of economic control.
- Agreements on cooperation.
- Agreements on specialization.
- Loan agreements.
- Special trade and economic conditions of cooperation.
- Operations with currencies and securities.
- Political interests.
- Military supplies.
- Other forms of legal dependence.
The main characteristic of the closed market and all markets in general is that it acts as an independent regulator and coordinator of human labor aimed at manufacturing goods and providing services since it is the market that gives a true and unbiased evaluation of the manufacturer's. This evaluation forces the manufacturer to produce what the consumer wants, to offer them products in the most convenient form, at the right time, at an acceptable place, etc. Ability to research, understand, evaluate and predict the problems of the buyer, the consequences and prospects of scientific and technological progress, the state and trends of economic development determines the position of the enterprise in the market. Often, large companies form their own market to make settlements with subsidiaries more convenient. This makes it possible to control the prices and quality of products.
Financial and economic characteristics of a closed market:
- Insignificant influence of external factors.
- Independence from open market monopolies.
- Stable intra-market prices.
- Small volumes of turnover.
- Absence of competition.
- Systemized economic operations, market stability.
- Companies work based on a long-term cooperation strategy.
Depending on the degree to which the market is considered closed, you can distinguish four types of closed markets. The first type is the commodity circulation within the international monopolies between their enterprises located in different countries. The goods here move through closed intra-company channels. The prices for those are calculated or transferable. The price assessment mainly reflects the financial policy of the monopolies; they establish transfer prices that would ensure maximum profit and would not undermine their competitive positions in open markets.
The second kind of closed markets is the trade between monopolies and small/medium-sized outsiders, who are their subcontractors in terms of specialization and co-production. Being technically independent, they actually depend on monopolies; the trade between them and monopolies is closed and prices are of a monopolistic nature. The third type is the trade between various regional economic associations and member countries of such associations and third countries under special agreements. This type of markets is protected from third countries by customs duties and non-customs barriers. Prices in these markets are relatively stable and weakly reflect fluctuations in the market situation as a whole. The fourth type refers to transactions with payment in a non-convertible currency, partly under long-term contracts, barter and compensatory transactions, under programs of economic and military assistance and other non-commercial special operations, loan agreements for export financing, etc.
To illustrate the difference, an open market is characterized by the usual commercial activities of an unlimited number of independent counterparties. Such a market has short-term transactions thanks to exchanges and it also features frequent and sharp fluctuations in prices. The intermediate position of these forms is allocated to a special preferential zone, which includes trade transactions under long-term contracts, trade of regions and third countries under agreements, etc. All in all, classification of commodity markets makes it possible to deepen the nature of research of a particular commodity market on the basis of the specific features of the commodity itself, the nature of its production, the end user, territorial affiliation, the organizational structure of sales, conditions that ensure the fullest satisfaction of the demand for goods, etc.