Hostname: page-component-586b7cd67f-r5fsc Total loading time: 0 Render date: 2024-11-24T17:28:36.208Z Has data issue: false hasContentIssue false
  • English
  • Français

TRADE OPENNESS, GOVERNMENT SIZE, AND FACTOR INTENSITIES

Published online by Cambridge University Press:  28 September 2015

Mingming Jiang
Mingming Jiang*
Affiliation:
Shandong University
*
Address correspondence to: Mingming Jiang, School of Economics, Shandong University. 27 Shanda Nanlu, Jinan City, Shandong 250100, People's Republic of China; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the long-run relationship between trade openness and government size in a two-country dynamic general equilibrium model. We analytically show that different factor intensities in the production of tradable and nontradable sectors affect the government's response to changes in trade openness. Specifically, if the production of the nontradable sector is more capital-intensive, a positive relationship between trade openness and government size will be observed. In contrast, if the production of the tradable sector is more capital-intensive, a negative correlation between trade openness and government size will arise. This theoretical prediction is robust to both utility-enhancing and productive government expenditures. The differentiated factor intensities therefore provide a potential explanation to the mixed empirical findings in the literature about the long-run relation of trade openness and government size.

Keywords

Trade OpennessGovernment SizeFactor Intensities
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 6 , September 2016 , pp. 1581 - 1599
Copyright
Copyright © Cambridge University Press 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Adsera, Alicia and Boix, Carles (2002) Trade, democracy, and the size of the public sector: The political underpinnings of openness. International Organization 56, 229–262.Google Scholar
Alesina, Alberto and Perotti, Roberto (1997) The welfare state and competitiveness. American Economic Review 89, 921–937.Google Scholar
Alesina, Alberto and Wacziarg, Romain (1998) Openness, country size and government. Journal of Public Economics 69, 305–321.Google Scholar
Andrle, Michal, David, Antonio C., Espinoza, Raphael, Mills, Marshall, and Zanna, Luis-Felipe (2012) As You Sow So Shall You Reap: Public Investment Surges, Growth, and Debt Sustainability in Togo. IMF working paper WP/12/127.Google Scholar
Arellano, Cristina, Bulir, Ales, Lane, Timothy, and Lipschitz, Leslie (2009) The dynamic implications of foreign aid and its variability. Journal of Development Economics 88, 87–102.Google Scholar
Balle, Frank and Vaidya, Ashish (2002) A regional analysis of openness and government size. Applied Economics Letters 9, 289–292.Google Scholar
Baumol, William J. and Blinder, Alan (2011) Macroeconomics: Principles and Policy, 12th ed. Mason, OH: South-Western.Google Scholar
Bergin, Paul R., Glickb, Reuven, and Taylor, Alan M. (2006) Productivity, tradability, and the long-run price puzzle. Journal of Monetary Economics 53, 1771–1796.Google Scholar
Bhagwati, Jagdish N. (1984) Why are services cheaper in the poor countries? Economic Journal 94, 279–286.Google Scholar
Bretschger, Lucas and Hettich, Frank (2002) Globalization, capital mobility and tax competition: Theory and evidence for OECD countries. European Journal of Political Economy 18, 695–716.Google Scholar
Busemeyer, Marius R. (2009) From myth to reality: Globalisation and public spending in OECD countries revisited. European Journal of Political Research 48, 455–482.Google Scholar
Cameron, David R. (1978) The expansion of the public economy. American Political Science Review 72, 1243–1261.Google Scholar
Creedy, John, Li, Shuyun, and Moslehi, Solmaz (2010) Inequality aversion and the optimal composition of government expenditure. Macroeconomic Dynamics 14, 290–306.CrossRefGoogle Scholar
De Gregorio, Jose, Giovannini, Alberto, and Wolf, Holger C. (1994) International evidence on tradables and nontradables inflation. European Economic Review 38, 1225–1244.Google Scholar
Economides, George, Park, Hyun, and Philippopoulos, Apostolis (2011) How should the government allocate its tax revenues between productivity-enhancing and utility-enhancing public goods? Macroeconomic Dynamics 15, 336–364.Google Scholar
Epifani, Paolo and Gancia, Gino (2009) Openness, government size and the terms of trade. Review of Economic Studies 76, 629–668.Google Scholar
Falvey, Rodney E. and Gemmell, Norman (1991) Explaining service-price differences in international comparisons. American Economic Review 81, 1295–1309.Google Scholar
Falvey, Rodney E. and Gemmell, Norman (1995) Explaining international differences in the share of services in real expenditure. Economics Letters 47, 53–58.Google Scholar
Falvey, Rodney E. and Gemmell, Norman (1996) A formalisation and test of the factor productivity explanation of international differences in service prices. International Economic Review 37, 85–102.Google Scholar
Falvey, Rodney E. and Gemmell, Norman (2014) Explaining International Differences in the Prices of Tradables and Non-tradables. Working papers in public finance, Victoria University of Wellington, New Zealand.Google Scholar
Gali, Jordi (1994) Government size and macroeconomic stability. European Economic Review 38, 117–132.Google Scholar
Garen, John and Trask, Kathleen (2005) Do more open economies have bigger governments? Another look. Journal of Development Economics 77, 533–551.CrossRefGoogle Scholar
Garrett, Geoffrey (2001) Globalization and government spending around the world. Studies in Comparative International Development 3, 3–29.Google Scholar
Garrett, Geoffrey and Mitchell, Deborah (2001) Globalization, government spending and taxation in the OECD. European Journal of Political Research 39, 145–177.Google Scholar
Gemmell, Norman, Kneller, Richard, and Sanz, Ismael (2008) Foreign investment, international trade and the size and structure of public expenditures. European Journal of Political Economy 24, 151–171.Google Scholar
Goldstein, Morris and Lardy, Nicholas R. (2005) China's Role in the Revived Bretton Woods System. Institute for International Economics working paper 05-2.Google Scholar
Guillaumont Jeanneney, Sylviane and Hua, Ping (2004) Why do more open Chinese provinces have bigger governments? Review of International Economics 12, 525–542.Google Scholar
Hanslin, Sandra (2008) The Effect of Trade Openness on Optimal Government Size under Endogenous Firm Entry. SOI working paper 0802, University of Zurich.Google Scholar
Hoon, Hian Teck and Phelps, Edmund S. (2002) Asset prices, the real exchange rate, and unemployment in a small open economy: A medium-run structuralist perspective. In Arnon, Arie and Young, Warren (eds.), The Open Economy Macromodel: Past, Present and Future, pp. 275–286. New York: Springer.Google Scholar
Islam, Muhammad Q. (2004) The long run relationship between openness and government size: Evidence from bounds test. Applied Economics 36, 995–1000.Google Scholar
Islam, Roumeen (1997) Devaluation, asymmetric money demand, and investment in a small open economy. Review of International Economics 5, 107–117.Google Scholar
Kaufman, Robert R. and Segura-Ubiergo, Alex (2001) Globalization, domestic politics, and social spending in Latin America: A time-series cross-section analysis 1973–1997. World Politics 53, 553–587.Google Scholar
Kravis, Irving B., Heston, Alan W., and Summers, Robert (1982) The share of services in economic growth. In Adams, F. Gerard and Hickman, Bert G. (eds.), Global Econometrics: Essays in Honor of Lawrence R. Klein, pp. 188–218. Cambridge, MA: MIT Press.Google Scholar
Liberati, Paolo (2007) Trade openness, capital openness and government size. Journal of Public Policy 27, 215–247.Google Scholar
Meza, Felipe and Urrutia, Carlos (2011) Financial liberalization, structural change, and real exchange rate appreciations. Journal of International Economics 85, 317–328.Google Scholar
Ni, Shawn (1995) An empirical analysis on the substitutability between private consumption and government purchases. Journal of Monetary Economics 36, 593–605.Google Scholar
Obrizan, Maksym (2013) Exploring cross-country variation in government shares: What can we learn from relative productivities? Macroeconomic Dynamics 17, 356–372.Google Scholar
Obstfeld, Maurice and Rogoff, Kenneth (2001) The six major puzzles in international macroeconomics: Is there a common cause? In Bernanke, Ben S. and Rogoff, Kenneth (eds.), NBER Macroeconomics Annual 2000, Vol. 15, pp. 339–412. Cambridge, MA: MIT Press.Google Scholar
Povoledo, Laura (2013) A note on the volatility of the tradeable and nontradeable sectors. Macroeconomic Dynamics 17, 1158–1168.Google Scholar
Ram, Rati (2009) Openness, country size, and government size: Additional evidence from a large cross-country panel. Journal of Public Economics 93, 213–218.Google Scholar
Rodrik, Dani (1998) Why do more open economies have bigger governments? Journal of Political Economy 106, 997–1032.Google Scholar
Turnovsky, Stephen J. (1999) On the role of government in a stochastically growing open economy. Journal of Economic Dynamics and Control 23, 873–908.Google Scholar
Valentinyi, Akos and Herrendorf, Berthold (2008) Measuring factor income shares at the sectoral level. Review of Economic Dynamics 11, 820–835.Google Scholar
Supplementary material: PDF

Mingming Jiang supplementary material S1

Technical Appendix

Download Mingming Jiang supplementary material S1(PDF)
PDF 165 KB