08 Growth in the Open Economy Flashcards
International linkages
- Trade in goods and services
- Capital flows
- People flows
- Transfer of technology and ideas
Immigrant share of population (2013)
Norway 13.8%, U.S. 14.3%, Sweden 15.9%, Canada 20.7%, New Zealand 25.1%, Switzerland 28.9%, Hong Kong 38.9%, UAE 83.7%
Two common ways of measuring trade openness
- Trade relative to GDP.
- But trade can be free even if no trade occurs.
- Small vs large countries.
- Relative prices. If free trade, then law of one price should hold.
- Pros and cons?
GDP vs GNP
Gross Domestic Product (GDP) measures the income earned by all factors of production located in a country.
Gross National Product (GNP) measures the income earned by the factors of production owned by residents of a given country.
Makes a difference if e.g. large share of capital stock owned by foreigners.
Two waves of globalization
- Mid 1800s to WW1
- (Inter-war period: Protecionism)
- WW2 to today
World exports as a percentage of world GDP (1870 - 2010)
Openness in 1950 at same level as 1880!
Foreign Direct Investment (FDI)
A Foreign Direct Investment (FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country.[
Causes of globalization
- Lower transport costs
- Freer flow of information
- Trade liberalization
Causes of globalization: Transportation costs
New technologies:
- Railroads and steamship (1800s).
- Opening of Suez canal in 1869, Panama canal in 1914.
- Latest expansion of Suez in 2014-15 and Panama 2007-
- Container shipping (1950s-).
- 20-fold increase in the speed of loading.
- Containers can be shipped from truck → train → ship and back.
- Air freight (1950s-). Cost/ton fell by factor of 10 between 1955 and 2004.
→ Dramatic reduction in shipping costs. From $95 to $29/ton between 1920 and 1990 according to IMF (1990 dollars).
Causes of globalization: Information costs
New technologies:
- Transatlantic telegraph (1866)
- Transatlantic telephone (1927)
- The internet.
→ Dramatic reduction in communication costs. 3 minute phone call London-NYC $300 in 1930, $50 in 1960, $1 in 1996, $0 today (1996 dollars).
−→ enables trade in services.
Causes of globalization: Trade policy
- Average tariff rates in industrial countries fell from 40% after WW2 to 6% in 2000.
- Large reductions negotiated under the GATT and WTO.
- Tariffs still high today in many poor countries.
- .. as well as in agricultural trade:
- 250% tariff on wheat in Japan.
- x% tariff on beef in Norway
- x% tariff on milk in Norway
Empirics: Are open economies richer than closed ones?
(Sachs and Warner, 1995) Countries assigned 0 or 1 each year from 1965 to 2000 based on tariffs, exchange rate manipulation, government monopolies on exports etc.
Empirics: Does openness cause higher growth?
Case studies:
- Japan autarky ended in 1858 → Trade rose by 70x & rapid GDP growth & catch-up with Europe.
- South Korea 1960s: Sweeping liberalization → GDP doubled in 11 years
- China’s integration in world economy and joining the WTO in Dec 2001.
- U.S. protectionism in 1930s → contributing to the severity of the Great Depression
Other studies:
- Suez canal closed 1967-1975 in response to Egypt-Israel conflict => Increased shipping distance => Large effects
- The rise of air freight (1950 - 2000) meant that country-pairs with very long sea shipping distance would benefit more than other country pairs.
How does openness affect income?
- Factor accumulation
- Productivity
How can we extend the Solow model to study the relationship between openness and factor accumulation?
Extend the Solow model with perfect capital mobility.
Hm… (Perfect capital mobility : An empirical test)
____ is the main source of growth coming from openness.
Productivity is the main source of growth coming from openness.
