Question

a. How will you classify the following countries; Australia, China, US, India based on the definitions of a small and large open economies and why?

Answer 1

Australia and India are classified as small open economies while China and the U.S. are classified as large open economies.

The basic difference between the two is that, while a small open economy is an economy that does international trade with other countries but its policies and decision making has no effect on the international prices and international interest rates. On the other hand, large economies are the ones that do international trade with other countries and have a big impact on the international prices and international interest rates when there are policy changes within them.

Thus countries like Australia and India though being large in size in terms of population is considered as small open economies due to the fact that they are not strong enough to affect world prices and interest rates.

While countries like China and U.S. are considered as large open economies as they are stronger in terms of affecting the world prices and interest rate by the policy changes within them.