The Open Economy

Keith Griffin
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Keith Griffin: Economics University of California

Chapter Chapter 4 in Alternative Strategies for Economic Development, 1999, pp 68-99 from Palgrave Macmillan

Abstract: Abstract One of the oldest propositions in economics is that unrestricted international trade is beneficial to all participating countries1. Indeed, it has been argued in the Heckscher-Ohlin theory that trade is a partial substitute for international mobility of labour and capital and under very restrictive assumptions it has been shown that factor prices (wage rates and the rate of profit) will become equal in all countries under a free trade regime2. International trade in such conditions acts as a powerful engine of growth, raising real incomes everywhere and narrowing the difference in incomes between rich countries and poor. Trade alone cannot eliminate inter-country differentials in per capita income - that would require a fully open world economy in which labour and capital were free to move without restrictions - but it could go a long way towards reducing world poverty and international inequality. Even under seemingly unrestrictive assumptions it can readily be demonstrated that a country is better off when participating in world trade than under a closed economy.

Keywords: Foreign Direct Investment; Open Economy; World Trade; Real Interest Rate; Foreign Capital (search for similar items in EconPapers)
Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-59991-8_4

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DOI: 10.1057/9780230599918_4

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