"I live in a small country."
Translation:Vivo in un piccolo paese.
I think it depends on if the adjective is a defining characteristic. In this case it doesn't matter a lot, but here is an example with dogs: "É un piccolo cane" = there are only small dogs around and I'm telling you about one of them "È un cane piccolo" = unlike (most of) the other dogs this one is small. It would be great if someone could tell me if that interpretation is correct! :-)
Probably somewhat like dwelling versus live I think. So you could use either one but i think as learners we should know that vivo refers to living and abito to dwell or reside or whatever other nuanced verb more closely resembles it. Certainly even in english the verb to live has wider meaning than to dwell or reside and i would think its the same with the italian verbs.
NEL = IN + IL... "nel piccolo paese" would translate "in the small country".
Maybe you should check a bit "preposizioni articolate" in Italian, when you feel ready for them!