Neoclassical Growth Theory for a Small Open Economy
This paper is a continuation of the Neoclassical Growth Model (Solow Model) for a closed economy and builds up, through rigorous economic argument, a graphical model of growth in a small open economy as a solution to this unsolved problem. This graphical model is simple to use and easy to understand, once the foundations of the model have been worked through. Key assumptions in the mathematical models, namely the assumption governing the steady-state and the rate of convergence, are shown to be flawed. The model shows that open economies should grow more quickly, though not instantaneously, and implicates a different emphasis on policies for growth, based on the degree of openness of the economy.