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Measuring Openness

Measuring Openness. Japanese Prices Before and After Opening to Trade. Law of one price For goods For factors: G N P vs. G D P ... Immigration Rates Volume of Trade Sachs-Warner 1 or 0 in each year Low Tariffs Effective rate<40% Imports hit<40% No currency controls

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Measuring Openness

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  1. Measuring Openness Japanese Prices Before and After Opening to Trade • Law of one price • For goods • For factors: GNP vs. GDP ... Immigration Rates • Volume of Trade • Sachs-Warner 1 or 0 in each year • Low Tariffs • Effective rate<40% • Imports hit<40% • No currency controls • No gov’t export board • Non-socialist • Geography

  2. Sachs – Warner Openness and Income

  3. Growth in (Sach-Warner) Closed Economies

  4. Growth in (Sach-Warner) Open Economies

  5. Free Capital Flows: A Common Marginal Productivity of Capital?MPK = rw • In Solow model, MPK = α A k(α – 1) = α A / k(1 – α) • If MPK = rw • Steady-state per worker output should be independent of a country’s own saving rate • Saving would flow to where returns were highest…until returns would be equal to rw

  6. Feldstein – Horioka: Saving Retention Coefficient Home Bias

  7. Openness: Contributions to Growth • Trade as technology • Transform what you have comparative advtg in to other stuff • Tech progress • Import existing technologies…copy the best • All countries do, except for US • Create new technologies for global market • “The division of labor is limited by the extent of the market” • Competitive pressure  efficiency

  8. Economic Growth “Once you start thinking about (growth), it’s hard to think about anything else.” Robert E. Lucas, Lectures on Economic Growth Solow framework: Growth through accumulation Constant returns to scale + Decreasing returns to capital  steady state Constant returns to scale + Decreasing returns to capital  convergence Augmenting Solow: Human capital Geography/Resources/Terms of trade Policies: Government consumption/Inflation/Openness/Aid Institutions: Property rights/Legal origin/Extractive institutions/ Inequality/Finance Convergence and conditional convergence Penn World Table (Heston and Summers): PPP measures of GDP Technological advance  exogenous force driving growth Solow residual

  9. Lucas: Trade and Diffusion of the Industrial Revolution(An Alternative Route to Convergence)

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