basswood and balsa are awesome for carving (balsa would be better if you're stuck using a knife).
my favorite carving tool is my dremel with a tungsten carbide structured tooth grinding bit. this thing takes off wood like nobody's business. after i do the rough carving with the tungsten carbide, i go back over it with a 150 grit sanding drum, then after that i do final shaping with sand paper by hand.
but a combination of a sharp knife, coarse file (for harder woods like basswood), and various grades of sandpaper will give you a good result too.
you could go to a craft store and buy a wood carving knife, which is basically a small sharp blade on a large wooden handle. this gives you a lot of control over the blade, versus a regular pocket knife where the blade is just as long as the handle. i've found one of those folding box cutter knives work great for a wood carving knife because they have big handles compared to the blade, and you can put in sharp razor blades and then flip them when they start getting dull and then just replace them when both ends are dull.
