Measuring Openness
• Law of one price
– For goods
Japanese Prices Before and After Opening to Trade
– 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
Sachs – Warner Openness and Income
Growth in (Sach-Warner) Closed Economies
Growth in (Sach-Warner) Open Economies
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
Feldstein – Horioka: Saving Retention Coefficient
 Home Bias
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
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
Lucas: Trade and Diffusion of the Industrial Revolution
(An Alternative Route to Convergence)