Growth, Size, and Openness: A Quantitative Approach

Abstract

It seems reasonable to argue that countries enjoy substantial gains from their interactions with the rest of the world. These gains from openness take place through several different channels. In this paper we focus on trade, multinational production (MP), and the diffusion of ideas. Our aim is to get some sense about the magnitude of these gains. Quantifying the gains from diffusion represents a significant challenge because, in contrast to the case for trade and MP, it is quite difficult to measure diffusion in the data. Here we pursue an indirect approach based on a simple application of the semi-endogenous growth (SEG) model developed by Charles I. Jones (1995), Samuel S. Kortum (1997), and in particular by Jonathan Eaton and Samuel S. Kortum (2001). Semi-endogenous growth theory postulates that growth is possible in the long run thanks to the ever expanding set of nonrival ideas associated with a growing population. The central equation in this theory is that the steady state growth rate of labor productivity is proportional to the growth rate of population, g = egL. The cross-section implication of this dynamic relationship is that, if countries were in isolation, large countries would be more productive than small countries. In this paper we perform a simple calibration of the critical parameter e using Economic Growth and opEn-Economy macroEconomics