Download Summary Weil Openness

Karin Ljungh
Anna Bergström
Birgitta Arnesdotter
Chapter 11 – Growth in the Open Economy
The opposite of openness: the perfectly closed economy that has no interaction whatsoever with
other countries.
Autarky: The situation in which a country does not interact economically at all with the rest of the
world.
Two primary forms of economic integration among countries:
1. Trade: The exchange of goods and services across national borders.
2. Flow of factors of production: The movement of a factor of production (such as physical capital,
human capital, labor or land) from one country to another.
How to measure the openness of an economy?
Law of one price: The claim that if two economies are open to trade with each other then the same
good will sell for the same price in both of them.
We can measure the degree of integration between two economies by measuring the differences in
prices. The closer are the prices of the same goods (or factors of production) in two countries, the
more integrated are their markets for goods (or factors of production).
There are two different ways of defining income:
 Gross domestic product (GDP): The value of all final goods and services produced in a country in
a year.
 Gross national product (GNP): The value of all income earned by the factors of production
owned by the residents of a country.
What happens when an American invests her capital in a foreign country, say Italy?
Answer: The income of a piece of capital in Italy that is owned by a U.S. resident would count as part
of U.S. GNP and Italian GDP.
Globalization: The idea that the world is developing a single economy and culture.
Two major forces have driven globalization:
1. Technological advances  have eased the movement of goods and information.
 Transport costs have fallen and the composition of countries’ output has shifted towards
goods that are easier to transport, which has propelled economic integration.
 Transmission of information (communication): information flow faster and has also gotten
cheaper.
2. Changes in economic policies  have lowered barriers to trade.
 International agreements to reduce trade restrictions usually focus on the reduction of tariff
rates and the elimination of quotas.
 Tariff: A tax on the import of a good.
 Quota: A restriction on the total amount of a good that can be imported.
 Non-tariff barriers: Government-imposed limitations on international trade other than tariffs
and quotas.
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Karin Ljungh
Anna Bergström
Birgitta Arnesdotter
One of the oldest questions in economics is whether openness to foreign trade is good for a
country’s economy.
 Statistics show that the more open to the world economy countries are, the more likely they are
to be rich.
 Poor countries that are open to trade tend to grow faster than rich countries (and poor countries
that are closed to trade tend to grow more slowly than rich countries.)
Geography: Natural barriers to trade can play the same role as those imposed by governments.
Physical capital flows across national borders through several channels.
 Foreign direct investment: Investment that takes the form of a firm’s buying or building a facility
in another country.
 Portfolio investment: A form of international capital flow in which investors purchase stocks or
bonds issued in a foreign country.
What would happen if a country raised its saving rate?
 In the closed-economy model: it would raise the level of domestic investment and thus raise the
capital stock
 In the open-economy model: the increase in the capital stock would lower MPK and capital will
flow out of the country because the owners of capital would find that they could earn higher
returns abroad. The rise in saving would result in increased ownership of capital in other
countries.
Investment in a given country has no relationship to that country’s level of saving. But investment
does depend on the value of A (productivity coefficient). It is a positively correlated relationship
between I and s.
Savings retention coefficient: The fraction of every additional dollar of saving in a country that ends
up as additional domestic investment. It is an indicator of the degree of capital market openness.
Comparative advantages: Trade makes a country more productive by allowing it to produce the
things it is good at producing and then to sell them to other countries in return for things it is not as
good at producing.
Economic openness contributes to a higher level of technology:
 Countries that are open to trade are more able to import existing technologies from abroad.
 Interactions among countries also allow for the transfer of “softer” technologies such as
innovative organizational techniques.
 Technological progress in one country often comes from ideas from abroad.
Why are some people opposed to openness?
 What is good for a country on average is often bad for one particular group (self-interest), e.g.
domestic firms that will lose their monopoly positions with the opening of trade oppose
openness.
 Cost of an open economy: Low-educated workers earn lower wages when open up for trade.
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Karin Ljungh
Anna Bergström
Birgitta Arnesdotter
The most important effect of openness is on productivity (technology transfer, competition,
innovation).
Anti-globalization: Some people see globalization as harmful to developing countries.
Anti-globalization issues:
 Exploitation of workers (low wages, poor working conditions and employment of children) in
developing countries. What are their alternatives?
 Inability of poor countries to compete with large multinational companies. But when countries
exchange, a country that is weak stands to gain just as much as a country that is strong.
 Environmental exploration e.g. trade in pollution-producing industries can be harmful. But from
local or multinational companies?
 Loss of national sovereignty. Openness imposes constraints on how governments behave. Firms
will shop around for the most profitable country in which to operate (fewest restrictions on
environmental pollution, weakest laws).
 The hidden price of foreign capital. Capital inflows create several problems for a developing
country, e.g. macroeconomic instability and allow governments in developing countries to go
irresponsibly into debt.
 Hypocrisy on the part of rich countries. Protectionism in richer countries harms developing
countries (e.g. common agricultural policy in EU) but rich and poor countries would benefit from
non-protectionism.
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