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Trade Openness: An Australian Perspective

Author

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  • Simon Guttmann

    (Reserve Bank of Australia)

  • Anthony Richards

    (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.

Suggested Citation

  • Simon Guttmann & Anthony Richards, 2004. "Trade Openness: An Australian Perspective," RBA Research Discussion Papers rdp2004-11, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2004-11
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    References listed on IDEAS

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    Cited by:

    1. Dejan Romih, 2014. "Australia’S Trade In Goods With Slovenia And The Western Balkan," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 5, pages 17-19, October.
    2. Keskinsoy, Bilal, 2017. "Lucas Paradox in the Short-Run," MPRA Paper 78783, University Library of Munich, Germany.
    3. Ilya Bolotov & Kateřina Gajdušková, 2013. "Srovnání otevřenosti trhů Brazílie, Ruska, Indie a Číny a zemí střední a východní Evropy," Současná Evropa, University of Economics, Prague, vol. 2013(3), pages 9-34.
    4. Michael Bleaney & Abelardo S. Neaves, 2013. "Declining Distance Effects in International Trade: Some Country-Level Evidence," The World Economy, Wiley Blackwell, vol. 36(8), pages 1029-1040, August.
    5. Michael Bleaney & Håvard Halland, "undated". "The Resource Curse and Fiscal Policy Volatility," Discussion Papers 09/09, University of Nottingham, CREDIT.
    6. Liudmila Popova & Ehsan Rasoulinezhad, 2016. "Have Sanctions Modified Iran’s Trade Policy? An Evidence of Asianization and De-Europeanization through the Gravity Model," Economies, MDPI, Open Access Journal, vol. 4(4), pages 1-15, October.
    7. Michael Bleaney & Abelardo Salazar Neaves, "undated". "Declining Distance Effects in International Trade: Some Country-Level Evidence," Discussion Papers 11/02, University of Nottingham, CREDIT.
    8. Mustafa, Ghulam & Rizov, Marian & Kernohan, David, 2017. "Growth, human development, and trade: The Asian experience," Economic Modelling, Elsevier, vol. 61(C), pages 93-101.
    9. Cortes, Maria, 2007. "Composition of Trade between Australia and Latin America: Gravity Model," Economics Working Papers wp07-19, School of Economics, University of Wollongong, NSW, Australia.

    More about this item

    Keywords

    trade; outward orientation; economic geography; trade liberalisation;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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