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Closed loop is used by Tides factions, based on my memories.
Where it does matter is in other parts. Drones and missiles have already been mentioned. But turrets and shield generators also have the closed loop option. But only the Argon versions. Closed loop will allow you to build a defense platform with argon turrets and argon shields using the same claytronics and hull parts that the station structure itself is built out of, which makes things simpler. Try to add a Paranid turret (for example) and you would then need to import turret components and advanced electronics. Once you are at a point where you are building ships, you can only use closed loop to create Argon engines. So if you want to use the superior Split engines, then there is no choice but to import or manufacture engine parts and antimatter converters.
Also, the destroyer (and battleship) main guns don't have a closed loop option. So you can build most of a Behemoth out of hull parts and claytronics, you will still need advanced electronics and weapon components to complete the thing.
For example, my first station is always a Claytronics/Hull Parts/Energy Cell station. That's because 90% of the time, Claytronics and Hull Parts are too scarce to supply large-scale building. Without defenses, that station is constantly under attack by raiders/pirates.
Eventually, I can make my own ships using the Closed loop but, like Konril says, it only works for Argon and only for limited ships and equipment.
Once this main complex is complete and I can reliably provide my own building materials, I can begin to expand. Which means I have to build and maintain modules that make every other shipyard component. These can be made with closed loop as well but, like before, it will only effect drones and turrets. A full shipyard or wharf requires Universal in order to function in any real capacity to fully build and equip ships beyond a few fighters, escorts or mining ships.
And remember, closed loop only works for the Argon equipment. Except for a small excerpt in another storyline, the Argon don't have a major story. In order to complete the storylines in the game, you *will* need universal-built stations.
Think of Closed Loop as a way to get your feet under you in the beginning and, when you're ready, leave it behind.
As for the galaxy economy, you could certainly sell your hull parts, claytronics and energy cells from that initial station but the prices you'll have to sell for after the economy stabilizes won't be much. Claytronics don't sell well after a while (no need since few stations need to be built other than your own) and hull parts just go into a queue of shipbuilding/launching/losing in battle to be repeated infinitely.
You will not be buying stuff from other stations often, because they often have low supply. Additionally when you build shipyards, it'll become possible to make ships for sale which is a money printer basically. So galaxy will be fine.
Closed loop only allows you to build (IIRC) argon tech, and simplifies stuff like construction drones, so you'll no longer need drone parts when you decide to get more cargo/repair drones. In general, it is a good idea to have terran or closed loop as a default. It makes thing simpler.
You can recycle the raw scrap into scrap and them the scrap into hull parts and claytronics.
Then you build new ships from those, then they get killed become sources if scrap.
Hence the term "closed loop".
It only really obsoletes drone parts, smart chips and missile components. And to some extent scanning arrays (they are still needed as input for turret components).
The other component types are still required to build stuff that does not use ARG equipment