In the graduate-level macro, I often see a Small Open Economy (SOE) setting, e.g., in the textbook of Gali. Yet when I read papers, authors sometimes use the term Emerging Market Economy (EME).

I would like to know differences between SOE and EME, in terms of both technical or computational aspects and verbal descriptions especially in the macro literature.

My thought: SOE does have some approximations. The Foreign country will be viewed as a closed economy; SOE has no influence on the Foreign. What about EME?

  • $\begingroup$ If, in the SOE case, the Foreign country has a closed economy, who is the small open economy trading with? $\endgroup$
    – Giskard
    Jun 1 at 14:37
  • $\begingroup$ Hi @Giskard, thank you for the comment! In the (symmetric) two-country model, both countries have a sizable export term. Yet, when the Home country becomes an SOE, its export to the rest of the world (Foreign country) is negligible, such that for the Foreign country, ROUGHLY Y* = C* + I* $\endgroup$
    – Royun
    Jun 1 at 15:59
  • $\begingroup$ Though for the Foreign, SOE's (Home's) export is so small, for the Home itself, Home's export must be taken into account. $\endgroup$
    – Royun
    Jun 1 at 16:01

These are not synonyms and actually the terms have different meanings (with small overlap), but it is true that many emerging market economies in many settings just happen to be small open economies.

Small Open Economy

First, open economy is any economy that is open to international trade (see the usage through various textbooks such as Blanchard et al Macroeconomics).

Second small here means economically small, that is the economy is a small economy if it cannot affect world prices (in the relevant problem). Small country here is an opposite of 'large' country which is a country that can affect international prices (note this has nothing to do with geographical size of a country). This is pretty standard use of small country in international trade (see Krugman et al International Economics pp 197 for examples of this terminology in use).

Emerging Market Economies

Emerging market economies are (see the Economist explainer):

broadly speaking, an economy that is not too rich, not too poor and not too closed to foreign capital.

This term was originally coined by Antoine van Agtmael in 1981, it was supposed to serve as better term for economies that are in between being under-developed and being developed economies.

Now note there is an overlap between these terms as many emerging markets happen to be small and open economies, but there might be exceptions. For example, China is likely sufficiently large producer of many goods and services that it could affect world prices and thus be a large country in many industries yet it is classified as emerging market by IMF. However, the both definition partially overlap in that emerging market economy definition also requires certain level of oppennses.

  • $\begingroup$ Thank you for your very patient answer. Is "it cannot affect world prices" the only technical condition for SOE setting? For example, as I commented under the question, for the Foreign country, we can approximate Y* = C* + I*, without the EX* term. I'm not sure what are special technical treatments in EME setting? $\endgroup$
    – Royun
    Jun 1 at 16:07
  • $\begingroup$ @Royun note size of exports does not really determine whether country is small or large per se. What matters is relative size to world market. If country is a price taker on a world market it is a small country no matter what the absolute size of EX is. For example, OPEC (all OPEC together) was sufficiently big to move market prices, but many large oil producers like UK, Norway or Indonesia, while supplying enormous quantities of oil and earning a lot of export revenue from that would likely not be sufficiently big to move market prices. What matters is typically how big country's $\endgroup$
    – 1muflon1
    Jun 1 at 16:12
  • $\begingroup$ Another example, in SOE, we may have the approximation like $P^*_{Ft}=P^*_t$, as if the Foreign country equals the Rest of the World (RoW). So when I'm drafting my paper, I happen to realize that such kinds of approximation are unnecessary, does it mean EME is interchangeable to SOE under this circumstance? BTW, my target country is indeed China. I found scholars view it as EME, but still many treat it as SOE. $\endgroup$
    – Royun
    Jun 1 at 16:13
  • $\begingroup$ exports of a good/commodity are relative to the whole world supply $\endgroup$
    – 1muflon1
    Jun 1 at 16:13
  • 1
    $\begingroup$ @Royun EME is just broad term, in fact different institutions such as IMF world bank etc do not even always agree on which country is EME and which is already developed especially in corner cases such as South Korea or Singapore that some nowadays consider developed countries $\endgroup$
    – 1muflon1
    Jun 1 at 16:23

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