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Trade Openness, Government Size, And Factor Intensities

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  • Jiang, Mingming

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.

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  • Jiang, Mingming, 2016. "Trade Openness, Government Size, And Factor Intensities," Macroeconomic Dynamics, Cambridge University Press, vol. 20(6), pages 1581-1599, September.
    • Handle: RePEc:cup:macdyn:v:20:y:2016:i:06:p:1581-1599_00
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    Cited by:

    1. Ma, Yong & Yao, Chi, 2022. "Openness and government size: Revisiting the relationship using a large cross-country panel," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 448-465.
    2. Jiang, Mingming, 2016. "By force of demand: Explaining cyclical fluctuations of international trade and government spending," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 249-267.

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