"Large" vs. "Small" Country Assumption

Two cases are considered regarding the size of the policy-setting country in international markets.

If the country is "large" in international markets, then the countries imports or exports are a significant share in the world market for the product. Whenever a country is large in an international market, domestic trade policies can affect the world price of the good. This occurs if the domestic trade policy affects supply or demand on the world market sufficiently to change the world price of the product.

If the country is "small" in international markets then the policy-setting country has a very small share of world market for the product - so small, that domestic policies are unable to affect the world price of the good. The small country assumption is analogous to the assumption of perfect competition in a domestic goods market. Domestic firms and consumers must take international prices as given because they are too small for their actions to affect the price.

International Trade Theory and Policy - Chapter 90-3: Last Updated on 2/15/07