The word "it" loosely refers to the world. It's used as an introductory word.
We say it's a small world when we meet someone who lives near us far from home. It's also used when we discover that an acquaintance has the same friend or relative as we do.
It is a small world.
(What is the meaning of this sentence? When do we use this expression? And what does "It" refer to? What is the meaning/use of "It"?)
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