Engine downsizing is one of the most effective means to improve the fuel economy of spark ignition (SI) gasoline engines because of lower pumping and friction losses. However, the occurrence of knocking combustion or even low-speed pre-ignition at high loads is a severe problem. One solution to significantly increase the upper load range of a 4-stroke gasoline engine is to use 2-stroke cycle due to the double firing frequency at the same engine speed. It was found that a 0.7 L two-cylinder 2-stroke poppet valve gasoline engine equipped with a two-stage serial boosting system, comprising a supercharger and a downstream turbocharger, could replace a 1.6 L naturally aspirated 4-stroke gasoline engine in our previous research, but its fuel economy was close to that of the 4-stroke engine at upper loads due to knocking combustion. Two promising approaches, including external exhaust gas recirculation (eEGR) and water injection (WI), were investigated to improve the fuel economy of the 2-stroke engine by means of a 1-D simulation. Knocking combustion is limited by elongated combustion process and suppressed decomposition of hydrogen peroxide (H2O2) into hydroxyl (OH) for eEGR approach, and by decreased in-cylinder temperature for WI approach. The latter approach is more effective for mitigating knocking combustion of the 2-stroke engine than the former approach. Injected water temperature has minor effect on knocking combustion, and its increase could be offset by slightly increased amount of water. Improved fuel economy with increased in-cylinder peak pressure is achieved by increased water quantity, and becomes more obvious at higher compression ratio. The fuel economy of the 2-stroke engine at upper loads is obviously improved at different engine speeds when WI approach is applied to suppress knocking combustion, and it is increased about 20% relative to that of the 4-stroke engine.