Monday, March 3, 2014

Convergence and Free trade

Free trade is universally promoted by economists of all stripes (except for Marxists, but they aren't really economists). According to New Keynesian economist Jeffery Sachs:

"On average, open economies [economies engaging in free trade] can be expected to grow 2.45% faster than closed economies. Investment-to-income ratios were higher as well for open economies, by an average of 5.4% compared to closed economies, thereby boosting growth indirectly. These findings confirm a basic truth of economics, one dating back two centuries to Adam Smith: open trade promotes growth."

According to Dr. Sach's study, real GDP growth per capita of developing countries that are not open to trade is 0.7% per year as opposed to the 4.5% per year of developing countries which are open to trade. 

He also notes that economic convergence only occurs in countries which are open to trade: 

"When we examined the subset of closed economies, growth in income per person was, indeed, the same in both developing and developed economies (about 0.7%). This suggests that poor countries are not catching up. In the group of open economies, however, income growth in developing countries was almost twice that of developed countries(4.5% versus 2.3%) Such sustained differences in growth rates work as powerful engines to diminish, over time, the existing gaps in income across countries. The key, it seems, is to adopt and stick with open trade policies."


No comments:

Post a Comment