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:
“The thing is plain. All that men really understand, is confined to a very small compass; to their daily affairs and experience; to what they have an opportunity to know, and motives to study or practise. The rest is affectation and imposture.”
—William Hazlitt (1778–1830)
“Don: Why are they closed? They’re all closed, every one of them.
Pawnbroker: Sure they are. It’s Yom Kippur.
Don: It’s what?
Pawnbroker: It’s Yom Kippur, a Jewish holiday.
Don: It is? So what about Kelly’s and Gallagher’s?
Pawnbroker: They’re closed, too. We’ve got an agreement. They keep closed on Yom Kippur and we don’t open on St. Patrick’s.”
—Billy Wilder (b. 1906)
“Everyone is always in favour of general economy and particular expenditure.”
—Anthony, Sir Eden (1897–1977)