Openness is defined here as the difference between the actual average ratio of exports to GDP during 1965-1998 and the export ratio predicted by country size. This adjustment is made to reflect the fact that large countries are less dependent on foreign trade than smaller ones that need to extend their home markets beyond their national borders to make up for their small size. The adjustment is made by first regressing the the ratio of exports to GDP on the logarithm of the population (in thousands), both measured as averages over the years 1960-1998 and then computing the difference between the actual export ratio and the export ratio predicted by the regression. This regression (not shown here) indicates a significant negative relationship between the export propensity and population. The slope of the regression line means that each doubling of the population from one country to another reduces the export ratio by 4 points. The indicator of openness thus obtained is above zero for countries that are more open to trade than their size predicts, and below zero for countries that are less open to trade than their size predicts. 

For more, see my paper "Exports, inflation, and economic growth" (World Development, 1999). 


 

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