Small Open Economy

It’s important to understand a small open economy to cover all types of economies. It further facilitates a better understanding of large open economies. This lesson was covered under module 6 in the previous The middle Road website. The tutorial discusses small open economies with examples like Hungary, international capital flows, trade balance, saving, and investment in a small economy. SI model using world interest rates and look at fiscal policy behavior using the model (this to be posted under Applied Learning section.)

Data Source: The World Bank; Iran fig for 2017 | Graph The middle Road 

Small economies:  small compared to the world economy and do not affect world interest rates. Small economies have perfect capital mobility, i.e. residents of the economies have complete access to global/world  financial economies, i.e. full capital account convertibility

r=r*  i.e., residents borrow or lend at world interest rates

r= interest rates in a small economy; r*= world interest rates

Examples of small open economies are Canada, Hungary, and Singapore.

Benefits of an open economy 

Highly tuned to global economic cycles, especially recessions

High probability to default on debt due to higher external borrowing cost

Keep government debt low, for example Singapore

Good to have higher consumption component; Invest in technology & innovation and manufacturing as per cent of GDP

The online learning video covers Hungary as an example. Above, look at the new export data for Hungary in billions of dollars.

YouTube: The middle Road 

In an Open Economy NX not equal to zero

Output is fixed

Factors of production (K, L)

Production technology

Ignoring the effect of money and the concept that prices are sticky in the short run.

The video will introduce you to the concept of production function and take a look at a small economy.