A small open economy, abbreviated to SOE, is an economy that participates in international trade, but is small enough compared to its trading partners that its policies do not alter world prices, interest rates, or incomes. Thus, the countries with small open economies are price takers. This is unlike a large open economy, the actions of which do affect world prices and income.
For example; if the U.S. economy is in recession then the world economy is likely to suffer. On the other hand, a recession in a small open economy like Norway will likely not impact the world economy to a great extent.
The assumption of a small open economy is used in the study of macroeconomics to model a price-taking economy, allowing exogenous assumptions of the conditions in the rest of the world.
Famous quotes containing the words small, open and/or economy:
“Reduce big troubles to small ones, and small ones to nothing.”
—Chinese proverb.
“Philosophy is written in this grand book—I mean the universe—
which stands continually open to our gaze, but it cannot be understood unless one first learns to comprehend the language and interpret the characters in which it is written. It is written in the language of mathematics, and its characters are triangles, circles, and other geometrical figures, without which it is humanly impossible to understand a single word of it.”
—Galileo Galilei (1564–1642)
“Even the poor student studies and is taught only political economy, while that economy of living which is synonymous with philosophy is not even sincerely professed in our colleges. The consequence is, that while he is reading Adam Smith, Ricardo, and Say, he runs his father in debt irretrievably.”
—Henry David Thoreau (1817–1862)