Reference no: EM131945417

Assignment -

Methodology - How can trade openness be measured in terms of economic growth?

To measure trade openness in relation to economic growth there are several methods which are viable. This Proposal will focus on an equation which was first brought forward by Solow in 1956 and later altered appropriately by Mankiw in 1992. It consists of economic growth and factors which influence the growth; these can vary according to the time period and economy in topic.

lnY_it = a₀ + slnY_(it-1) + B'lnX_it + U_i + u_t + e_it  ...

Y_it is represented as a symbol for real GDP per capita of economy/nation I for the year t. Y_(it-1) represents initial GDP per capita. X_it is a representation of the factors which d'12etermine growth, as defined by the altered Solow model. U_i represents the unobserved economy particular effect. u_t represents the unobserved time particular effect that embraces significant changes in the economy. Lastly e_it represents the error term.

In terms of trade openness this formula can be altered accordingly to provide the following equation:

lnY_it = B₀ + B₁ lnY_(it-1)  +  B₂lnOpenness_it + B₃(lnOpenness_it* ln Y_(it-1)) +  B₄lnHcap + B₅lnGFCF + B₆lnlabourforce + B₇lnFDI +  U_i +  u_t  +  e_it

Original capital stock is substituted by the log of GDP per capita of nation i at the start of each given time period.

Trade openness is included in the equation and is measured by the sum of exports and imports in proportion to GDP. Various studies demonstrate a positive connection between trade openness and ]#=economic growth, such as Smith and Ricardo (1973), as mentioned previously.

Original income vs trade openness is incorporated to show how development stages of the nations may result in different figures. It concludes whether economic growth is conditioned by the economies original income level, impacted by trade openness and which nations benefit are have been positively impacted than others.

Enrolment figures for secondary schools can be substituted as the variable for human capital. Mankiw (1992) mentions that secondary school enrolment figures has a positive connection in regards to economic growth. Controversially, Bills and Klenow (2000) state that the connection amongst economic growth and secondary school enrolment figures is unreliable as there is a possibility that the variables have a correlation to other omitted variables and displaying a case of multicollinearity.

According to Solow physical capital accumulation has a strong relation with economic growth (solow, 1956).Capital accumulation aids companies in gathering beneficial knowledge and skills, therefore investment have the potential to help accumulate returns and aid economic growth. Physical capital accumulation can be and has been substituted by the gross fixed capital formation.

Labour force is used as a variable as studies such as one by Muhammad Shahid (2014) show that the size of it can be a determinant of economic growth.

Foreign direct investment (FDI) is used as a variable as studies show that it can impact economic growth, positively or negatively. A study by Leonid Melnyk, OleksandrKubatko, SerhiyPysarenko(2014) show that it's positively related.

Attachment:- Assignment Files.rar