Trade Openness: An Australian Perspective

Simon Guttmann and Anthony Richards
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Simon Guttmann: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: Australia’s external trade is relatively low compared with the size of its economy. Indeed, Australia’s openness ratio (exports plus imports as a proportion of GDP) in 2002 was the third-lowest among the 30 OECD countries. This paper seeks to understand Australia’s low openness by analysing the empirical determinants of aggregate country trade. We begin by estimating a standard gravity model of bilateral trade. Although the model appears to fit the bilateral data very well, it does a relatively poor job at fitting countries’ aggregate trade levels, with different methodologies sometimes providing highly conflicting results. The focus of the paper is an equation for country openness. Our equation explains a substantial amount of the variation in how much countries trade using a small number of explanatory variables. We find that the most important determinants of openness are population and a measure of distance to potential trade partners. Countries with larger populations trade less, as do countries that are relatively more remote. Furthermore, after controlling for trade policy there is little evidence of a positive correlation between openness and economic development. While gravity models suggest Australia trades much more than expected, the openness equation suggests that its level of trade is relatively close to what would be expected. The most important factors in explaining Australia’s low openness ratio are its distance to the rest of the world, and to a lesser extent its large geographic size.

Keywords: trade; outward orientation; economic geography; trade liberalisation (search for similar items in EconPapers)
JEL-codes: F10 F13 O1 (search for similar items in EconPapers)
Date: 2004-12
New Economics Papers: this item is included in nep-dev
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: TRADE OPENNESS: AN AUSTRALIAN PERSPECTIVE (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2004-11

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