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What Is a Small Open Economy?

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  • Written By: Jim B.
  • Edited By: M. C. Hughes
  • Last Modified Date: 07 November 2016
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A small open economy takes place in a country whose decisions about how to conduct its own economy will have little bearing on the overall economic conditions in the world. Even in an increasingly global economy, such countries do not have the capital on hand to make much of a difference on a large scale. Instead, a small open economy will be affected by the actions of some of the larger players on the world markets. As a result, such countries are described as price takers, which means they must accept the economic conditions imposed upon them in transactions with other countries.

One of the most momentous occurrences in the latter half of the 20th century and the beginning of the new millennium has been the development of a global economy. What this means is that the countries in the world are interconnected in terms of their financial dealings. Large-scale economic turmoil will likely affect them all, just as widespread periods of good fortune will be shared by every country. This does not necessarily hold true, however, for some of the countries whose economies are relatively small. Such countries have what's known as a small open economy.

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Those countries that have small open economies can make decisions that will likely affect the overall financial health of their own countries. For example, the government of such a country might make decisions about interest rates or economic regulation that can affect the overall finances of its citizens. By and large though, those decisions will not cause any kind of a ripple outside of the country in question.

As a matter of fact, a small open economy will be affected by the decisions made by some of the larger economic powers. In the same manner, these smaller countries will likely feel the economic turmoil of one of these powers. The fortunes of larger countries will have a domino effect on the small open economies sharing the globe with them.

One other characteristic of a small open economy is that it is generally a price taker in transactions across the globe. This means that it doesn't have the power, through its own economic policies, to dictate any changes in price on the worldwide open market. Instead, such an economy is largely at the mercy of the market as a whole and the larger countries in it. These large countries are known as price makers, because their policies and economic conditions often are reflected in prices around the world.

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burcidi
Post 3

Just to clarify, a small, open economy doesn't mean that a country is geographically small. It just means that the country's market has a small share in the global market.

Many developing, third-world countries are in this situation. It may be because they don't have much to trade in or because there is instability in that economy or country. Sometimes, international trade organizations don't accept developing countries as trade partners. So it may not be their choice either.

stoneMason
Post 2

@literally45-- That's a good question but I'm not sure about the answer.

I think that there are advantages and disadvantages to both systems. If a small country is not an open economy, it won't be able to participate in international trade. International trade promotes economic growth as well as development. So that would be something that they miss out on. But if some of the larger open economies do experience economic problems, small open economies will be hit much harder. It's definitely a risk.

literally45
Post 1

If small, open economies are so affected by economic turmoil in large, open economies, is it better for them to be command economies then?

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