What is a small open economy?
By definition, a small open economy is an economy which is both open and small. The character of openness refers to the fact that it exchanges goods and services with other economies and it is also involved in the international financial transactions. The feature of being small comes from the fact that, although it is an actor in the international trade, it cannot influence the key macroeconomic variables like the price of goods international traded or of the interest rate.
Classifying open economies
Open economies might be either low, mid income or high income economies. Examples of high income economies include the cases of the Netherlands, Austria, Belgium, etc. Traditionally, United States has been always considered as a large open economies. Other examples for large open economies might include Japan, United Kingdom or Germany. However, macroeconomic modeling assumes many times that only United States and the Euro Area as a whole are large open economies.
Although the assumption of closed economy is used many times in theoretical models for good reasons, in practice, in the present time, there are not real closed economies. An extreme example is that of North Korea. However, starting with 1980’s, it has started to slightly open its economy through the open door policy.