A small open economy, abbreviated to SOE, is an
economy
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...
that participates in
international trade
International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. (see: World economy)
In most countries, such trade represents a significant ...
, but is small enough compared to its trading partners that its policies do not alter world prices,
interest rates, or
income
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. Fo ...
s. 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, 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
Norway, officially the Kingdom of Norway, is a Nordic country in Northern Europe, the mainland territory of which comprises the western and northernmost portion of the Scandinavian Peninsula. The remote Arctic island of Jan Mayen and the ...
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 to model a price-taking economy, allowing exogenous assumptions of the conditions in the rest of the world.
References
*
Open economy macroeconomics
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