This paper develops a small open economy model that incorporates a services sector and explores the consumption and welfare effects of deregulation of that sector. Our model is an extension of the new open economy macroeconomics model, which allows us to analyze the macroeconomic effects of deregulation more clearly. The study shows that deregulation in the services sector increases long-run service production and consumption and lowers the consumer price index in the long run, yet has no impact on short-run service production, consumption, and prices. Regarding welfare, deregulation in the home country always benefits that country.