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Measuring Openness

This study explores the impact of trade liberalization on Japan's prices and economic growth, highlighting the Law of One Price for goods and factors, GNP vs. GDP comparisons, and immigration's influence on trade volume. We examine the Sachs-Warner openness indicators, including tariffs, currency controls, and government export boards. The research delves into the Solow model and the Marginal Productivity of Capital, investigating the roles of saving rates, technological advancements, and the division of labor in fostering economic growth through openness and competitive pressure.

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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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