ABSTRACT
This chapter focuses on the crucial role of the external balance of payments as the key economic constraint, reviews the process of specialisation into divergent economic 'species', and presents a taxonomy built around the available balance of payments statistics. The defining elements of small island economies are three: isolation, small size, and economic openness. Trade opportunities become fewer the higher are trading costs; and per-unit trading costs tend to be higher for smaller traded volumes. This has been documented by an abundance of econometric literature on the 'gravity equation': trade between any two countries has been repeatedly shown to increase with their respective economic mass (GDP) and to decrease with the distance separating them. The gravity equation applied to tourism on a sample of 211 countries has shown that when the distance between any country pair doubles, the flow of tourists between them decreases by about two-thirds, ceteris paribus.
