Small Open Economy and Loanable Funds

Part 1: The Small Open Economy and Loanable Funds A small open economy is an economy that

trades goods, services, and financial assets with the rest of the world but is

too small to influence global economic conditions. Canada is a typical example.

Because it is small relative to the world economy, it takes the world interest rate as

given. The key identity that explains how resources flow in a small open economy

is: S = I + NCO This equation shows that national saving is used either to

finance domestic investment or to purchase foreign assets. Unlike in a closed

economy, where the interest rate is determined by the supply and demand for loanable