Small open economy
Definition. A small open economy is one that engages heavily in international trade and capital flows but is too small relative to world markets to influence world prices or the world interest rate, which it therefore takes as given. Singapore is a textbook example of such an economy.
Being a price taker means external conditions strongly shape domestic outcomes, and exchange rate policy becomes a more effective tool than interest rate policy. The economy is highly exposed to global demand and to imported inflation.
This term belongs to The Singapore Economy in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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