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TRADE OPENNESS, GOVERNMENT SIZE, AND FACTOR INTENSITIES

Published online by Cambridge University Press:  28 September 2015

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: mingming.jiang@sdu.edu.cn.

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.

Type
Articles
Copyright
Copyright © Cambridge University Press 2015 

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