Question

1. What is a small open economy, and what is a large open economy? How are they different?

Answer 1

Small open economy (SOE)  is the economy that participates in international trade via import and exports, but it does not affect the world prices, interest rates or other variables. Though, large open economy (LOE) is the economy that affects the worlld prices, interest rate and income as well as it participates in international trade. So, the difference between these two economies are the ability to affect the variables at the world market. SOE cannot affect world prices, but LOE can affect world prices and can make these prices to increase or decrease. It means that LOE has the macroeconomic policies that affects the international trade, but it cannot be done by the small open economy. Further, SOE is smaller in comparison to the size of trading partners, but LOE is bigger than or equivalent to the trading partners in the size as well as economic strength.