Growth, Size, and Openness: a Quantitative Approach

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Growth, Size, and Openness: a Quantitative Approach Natalia Ramondo Andr´ es Rodr´ ıguez-Clare UT-Austin and Princeton PSU and NBER ASSA Meetings, 2010

Transcript of Growth, Size, and Openness: a Quantitative Approach

Growth, Size, and Openness:a Quantitative Approach

Natalia Ramondo Andres Rodrıguez-ClareUT-Austin and Princeton PSU and NBER

ASSA Meetings, 2010

Growth and the Size of Countries

I In Quasi Endogenous Growth Models (QEGM), growth isdriven by aggregate economies of scale(Jones, 95; Kortum, 97; Eaton and Kortum, 01)

gy = ε · gL

I Basic calibration reveals ε = 0.21

I gy = 0.01 is growth rate of real output per worker in theOECD over the last four decades (K-RC, 05)

I gL = 0.048 is growth rate of R&D employment over the lastdecades in the top five R&D countries (Jones, 02)

The Income-Size Elasticity: Data

I The dynamic relationship gy = ε · gL implies aggregateeconomies of scale,

log yn ∼ ε log Tn

where Tn ≡ φnLn is “equipped labor” in the R&D sector

I We use data on a cross-section of nineteen OECD countries

I Ln is “equipped labor” from K-RC (05), avg. over 90’sI φn is share of R&D employment from WDI, avg. over 90’sI yn is real GDP per worker from PWT, avg. over 90’s

The Income-Size Elasticity: QEGM and Data

0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4

0.4

0.5

0.6

0.7

0.8

0.9

1

L as share of total OECD(19)

rea

l in

com

e p

er

wo

rke

r (a

s sh

are

of

US

)

implied by QEGM

data

The Income-Size Elasticity: The “Belgium Puzzle”

elasticity ybelgium/yus

Quasi Endogenous Growth 0.21 0.45

Data OECD(19) 0.084 0.89

The Gains from Openness and the “Belgium Puzzle”

I Of course, countries are not in isolation; they gain frominteracting with the rest of the world through various channels

I We focus on gains arising from Trade, MultinationalProduction (MP), and Diffusion of Ideas

I while trade and MP are directly observable, diffusion is not

I We present an indirect approach to identify diffusion in thedata

I we reconcile the income-size elasticity observed in the data andthe one implied by the quasi-endogenous growth model

Overview of the Model

I Eaton and Kortum’s (02) Model of Trade

I MP: Technologies can be used for production abroad at a cost(R-RC, 09)

I n sources for technologies, n locations for production

I Diffusion: some foreign technologies can be used for nationalproduction at no cost

I ideas are first “national”, then diffuse and become “global”

I if all ideas were “global”, then no trade, no MP, and sametechnology everywhere

Overview of the Model

I Eaton and Kortum’s (02) Model of Trade

I MP: Technologies can be used for production abroad at a cost(R-RC, 09)

I n sources for technologies, n locations for production

I Diffusion: some foreign technologies can be used for nationalproduction at no cost

I ideas are first “national”, then diffuse and become “global”

I if all ideas were “global”, then no trade, no MP, and sametechnology everywhere

Overview of the Model

I Eaton and Kortum’s (02) Model of Trade

I MP: Technologies can be used for production abroad at a cost(R-RC, 09)

I n sources for technologies, n locations for production

I Diffusion: some foreign technologies can be used for nationalproduction at no cost

I ideas are first “national”, then diffuse and become “global”

I if all ideas were “global”, then no trade, no MP, and sametechnology everywhere

Overview of the Model

I Eaton and Kortum’s (02) Model of Trade

I MP: Technologies can be used for production abroad at a cost(R-RC, 09)

I n sources for technologies, n locations for production

I Diffusion: some foreign technologies can be used for nationalproduction at no cost

I ideas are first “national”, then diffuse and become “global”

I if all ideas were “global”, then no trade, no MP, and sametechnology everywhere

Overview of the Model

I Eaton and Kortum’s (02) Model of Trade

I MP: Technologies can be used for production abroad at a cost(R-RC, 09)

I n sources for technologies, n locations for production

I Diffusion: some foreign technologies can be used for nationalproduction at no cost

I ideas are first “national”, then diffuse and become “global”

I if all ideas were “global”, then no trade, no MP, and sametechnology everywhere

Overview of the Model

I Eaton and Kortum’s (02) Model of Trade

I MP: Technologies can be used for production abroad at a cost(R-RC, 09)

I n sources for technologies, n locations for production

I Diffusion: some foreign technologies can be used for nationalproduction at no cost

I ideas are first “national”, then diffuse and become “global”

I if all ideas were “global”, then no trade, no MP, and sametechnology everywhere

Multinational Production (MP)

I Start by assuming that countries interact only through MP -intradable intermediates (T) and non-tradable final goods (N)

I We use MP data to compute (R-RC, 09)

GMPn =(

ZNnn

Y Nn

)−εN

×(

ZTnn

Y Tn

)−εT

where Z snn is expenditure in goods produced in country n with

technologies from n, in sector s = N, T

I ε = 0.21 = εN + εT = 0.14 + 0.07 (AL, 07; R-RC, 09)

I We calculate the implied income under isolation ydatan /GMPn

Multinational Production (MP)

I Start by assuming that countries interact only through MP -intradable intermediates (T) and non-tradable final goods (N)

I We use MP data to compute (R-RC, 09)

GMPn =(

ZNnn

Y Nn

)−εN

×(

ZTnn

Y Tn

)−εT

where Z snn is expenditure in goods produced in country n with

technologies from n, in sector s = N, T

I ε = 0.21 = εN + εT = 0.14 + 0.07 (AL, 07; R-RC, 09)

I We calculate the implied income under isolation ydatan /GMPn

Multinational Production (MP)

I Start by assuming that countries interact only through MP -intradable intermediates (T) and non-tradable final goods (N)

I We use MP data to compute (R-RC, 09)

GMPn =(

ZNnn

Y Nn

)−εN

×(

ZTnn

Y Tn

)−εT

where Z snn is expenditure in goods produced in country n with

technologies from n, in sector s = N, TI ε = 0.21 = εN + εT = 0.14 + 0.07 (AL, 07; R-RC, 09)

I We calculate the implied income under isolation ydatan /GMPn

Multinational Production (MP)

I Start by assuming that countries interact only through MP -intradable intermediates (T) and non-tradable final goods (N)

I We use MP data to compute (R-RC, 09)

GMPn =(

ZNnn

Y Nn

)−εN

×(

ZTnn

Y Tn

)−εT

where Z snn is expenditure in goods produced in country n with

technologies from n, in sector s = N, TI ε = 0.21 = εN + εT = 0.14 + 0.07 (AL, 07; R-RC, 09)

I We calculate the implied income under isolation ydatan /GMPn

The Income-Size Elasticity: still the “Belgium Puzzle”

elasticity ybelgium/yus

Quasi Endogenous Growth 0.21 0.45

Data OECD(19) 0.084 0.89

MP 0.089 0.84

Trade

I Now, assume that countries interact through MP and Trade

I We use trade data to compute (R-RC, 09)

GTn =(

Xnn

Y Tn

)−εT

where Xnn is expenditure in domestic intermediate (tradable)goods and εT = 0.07 (R-RC, 09)

I We calculate the implied income under isolationyn/(GTn × GMPn)

Trade

I Now, assume that countries interact through MP and Trade

I We use trade data to compute (R-RC, 09)

GTn =(

Xnn

Y Tn

)−εT

where Xnn is expenditure in domestic intermediate (tradable)goods and εT = 0.07 (R-RC, 09)

I We calculate the implied income under isolationyn/(GTn × GMPn)

Trade

I Now, assume that countries interact through MP and Trade

I We use trade data to compute (R-RC, 09)

GTn =(

Xnn

Y Tn

)−εT

where Xnn is expenditure in domestic intermediate (tradable)goods and εT = 0.07 (R-RC, 09)

I We calculate the implied income under isolationyn/(GTn × GMPn)

The Income-Size Elasticity: Closing the Gap

elasticity ybelgium/yus

Quasi Endogenous Growth 0.21 0.45

Data OECD(19) 0.084 0.89

MP 0.089 0.84

MP + Trade 0.095 0.75

Diffusion: Reconciling the “Puzzle”

I Countries interact through MP, Trade and Diffusion of Ideas

I We use data on equipped labor and R&D employment, andε = 0.21 to compute

GDn =(

1− κ + κ∑i Ti

Tn

I Key parameter is κ = share of “global”, or diffused, ideas

I κ = 6.6% calibrated to match ε = 0.21

I We calculate the implied income under isolation yn/GOn

where GOn = GDn × GMPn × GTn

Diffusion: Reconciling the “Puzzle”

I Countries interact through MP, Trade and Diffusion of Ideas

I We use data on equipped labor and R&D employment, andε = 0.21 to compute

GDn =(

1− κ + κ∑i Ti

Tn

I Key parameter is κ = share of “global”, or diffused, ideas

I κ = 6.6% calibrated to match ε = 0.21

I We calculate the implied income under isolation yn/GOn

where GOn = GDn × GMPn × GTn

Diffusion: Reconciling the “Puzzle”

I Countries interact through MP, Trade and Diffusion of Ideas

I We use data on equipped labor and R&D employment, andε = 0.21 to compute

GDn =(

1− κ + κ∑i Ti

Tn

I Key parameter is κ = share of “global”, or diffused, ideas

I κ = 6.6% calibrated to match ε = 0.21

I We calculate the implied income under isolation yn/GOn

where GOn = GDn × GMPn × GTn

Diffusion: Reconciling the “Puzzle”

I Countries interact through MP, Trade and Diffusion of Ideas

I We use data on equipped labor and R&D employment, andε = 0.21 to compute

GDn =(

1− κ + κ∑i Ti

Tn

I Key parameter is κ = share of “global”, or diffused, ideasI κ = 6.6% calibrated to match ε = 0.21

I We calculate the implied income under isolation yn/GOn

where GOn = GDn × GMPn × GTn

Diffusion: Reconciling the “Puzzle”

I Countries interact through MP, Trade and Diffusion of Ideas

I We use data on equipped labor and R&D employment, andε = 0.21 to compute

GDn =(

1− κ + κ∑i Ti

Tn

I Key parameter is κ = share of “global”, or diffused, ideasI κ = 6.6% calibrated to match ε = 0.21

I We calculate the implied income under isolation yn/GOn

where GOn = GDn × GMPn × GTn

The Income-Size Elasticity: Adding Diffusion

0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.40.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

size (as share of OECD L)

real i

nco

me p

er

work

er

(as

share

of U

S)

implied by QEGM

adjusted by GO

The Income-Size Elasticity: the “Belgium Puzzle”Reconciled

elasticity ybelgium/yus

Quasi Endogenous Growth 0.21 0.45

Data OECD(19) 0.084 0.89

MP 0.089 0.84

MP + Trade 0.097 0.75

MP + Trade + Diffusion (κ = 6.6%) 0.21 0.50

The Gains from MP, Trade, and Diffusion

0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.41

1.5

2

2.5

size (as share of OECD L)

Gain

s

GOGMPTGMP

Figure: Gains and Size. OECD(19).

The “Belgium Puzzle”: More Countries (prelim.)

real income per worker (relative to U.S.)data y/GMP y/GTMP y/GO T 0.21

Belgium 0.89 0.80 0.73 0.47 0.45

Chile 0.38 0.38 0.37 0.16 0.29

Mexico 0.39 0.38 0.38 0.20 0.37

China 0.08 0.08 0.08 0.07 0.66

I GO = GT × GMP × GD

I diffusion calculated with κ = 6.6%

Final remarks

I Gains from Openness for a country arise from many possiblechannels

I We focus on Trade, Multinational Production, and Diffusion ofIdeas

I We show that to reconcile key facts about Growth, Size, andOpenness we need to include diffusion of ideas acrosscountries

I even if a small country is closed to trade and MP, the datasuggest that this country is much richer than implied by itssmall size

I Next step: extension to many countries with different diffusionrates

Final remarks

I Gains from Openness for a country arise from many possiblechannels

I We focus on Trade, Multinational Production, and Diffusion ofIdeas

I We show that to reconcile key facts about Growth, Size, andOpenness we need to include diffusion of ideas acrosscountries

I even if a small country is closed to trade and MP, the datasuggest that this country is much richer than implied by itssmall size

I Next step: extension to many countries with different diffusionrates

Final remarks

I Gains from Openness for a country arise from many possiblechannels

I We focus on Trade, Multinational Production, and Diffusion ofIdeas

I We show that to reconcile key facts about Growth, Size, andOpenness we need to include diffusion of ideas acrosscountries

I even if a small country is closed to trade and MP, the datasuggest that this country is much richer than implied by itssmall size

I Next step: extension to many countries with different diffusionrates

Final remarks

I Gains from Openness for a country arise from many possiblechannels

I We focus on Trade, Multinational Production, and Diffusion ofIdeas

I We show that to reconcile key facts about Growth, Size, andOpenness we need to include diffusion of ideas acrosscountries

I even if a small country is closed to trade and MP, the datasuggest that this country is much richer than implied by itssmall size

I Next step: extension to many countries with different diffusionrates

Final remarks

I Gains from Openness for a country arise from many possiblechannels

I We focus on Trade, Multinational Production, and Diffusion ofIdeas

I We show that to reconcile key facts about Growth, Size, andOpenness we need to include diffusion of ideas acrosscountries

I even if a small country is closed to trade and MP, the datasuggest that this country is much richer than implied by itssmall size

I Next step: extension to many countries with different diffusionrates