Question

Alternative ways to calculate openness other than using trade flows?

Answer 1

ANSWER

• A common measure is the openness index, which adds imports and exports in goods and services and divides this sum by GDP. The larger the ratio, the more the country is exposed to international trade. For small economies that cannot produce everything they need, more trade has to be external.
• Economic openness, in political economy, the degree to which nondomestic transactions take place and affect the size and growth of a national economy. The degree of openness is measured by the actual size of registered imports and exports within a national economy, also known as the Impex rate.
• We quantify our measure of openness using data on trade shares, endowments, and GDP di-rectly from the Penn World Tables .
• We find two important results. First, poor countries have greater trade potential relative to rich countries, while the welfare cost of autarky of poor countries is similar to that of rich countries.
• The feature of the data delivering this pattern is that home trade shares do not vary strongly with the level of GDP. This observation and our simple formula in (1) immediately imply greater trade potential for poor countries. An implication of this result is that relative to their potential, rich countries are more open.
• We formalize this by constructing a trade potential index that maps each country's observed position into the 0 — 1 interval, with 0 being autarky and 1 being frictionless trade. Because poor countries have greater trade potential, they are closer to autarky relative to rich countries.
• The U.S., the U.K, and Germany are not in the top 10 list of open countries when openness is measured by the welfare cost of autarky but they are in the top 10 according to our trade potential index
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