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 An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...

, or incomes. Thus, the countries with small open economies are

price taker In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In other words, market powe ...

s. This is unlike a

large open economy Large means of great size. Large may also refer to: Mathematics * Arbitrarily large, a phrase in mathematics * Large cardinal, a property of certain transfinite numbers * Large category, a category with a proper class of objects and morphisms (or ...

, the actions of which do affect world prices and income. For example, if the

U.S. economy The United States is a highly developed mixed-market economy and has the world's largest nominal GDP and net wealth. It has the second-largest by purchasing power parity (PPP) behind China. It has the world's seventh-highest per capita GDP ...

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 theory of a small open economy is used in the study of

macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and ...

to model a price-taking economy, allowing exogenous assumptions of the conditions in the rest of the world.

References

* Open economy macroeconomics {{international-trade-stub