Measuring Openness 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 Japanese Prices Before and After Opening to Trade

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 = r w In Solow model, MPK = α A k (α – 1) = α A / k (1 – α) If MPK = r w 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 r w

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)