Trade Openness And Economic Growth--theory And China Experience

It is widely acknowledged among economists that the economic growth is a very complicated process. There are a number of factors which have impact on the economic growth, such as physical capital, human capital, trade, price fluctuations, political stability, income distribution and geographic features. Since the reform and opening-up driving in the late 1970s, China has begun to reclaim its share of global GDP. Many scholars tend to believe that the thriving trade has contributed a lot to the economic achievement of China. To what extent it is true and through which channel trade promotes growth have been the main research objective of this paper.The effect of trade on economic growth and social welfare has long been a hot issue in economics. This paper firstly surveys the relevant researches both home and abroad, and constructs an endogenous growth model based on the newly-developed heterogeneous firm theory. The model suggests that there are two channels through which trade has an impact on growth:the price of knowledge and the expected quantity of knowledge of developing a new variety. The different enactment of marginal cost function matters in this model. The micro model also suggests the effect of trade on welfare, and concludes that trade increases the welfare as a whole. Following the model, this paper investigates the relationship between trade openness and growth by using China data, and finds empirical evidence supporting what the model predicts.The contribution of this paper is threefold. Firstly, this paper combines the theoretical model and empirical analysis. The micro model investigates the channel through which trade has an impact on economic growth. The analysis is based on the firm's behavior rather than industry level. Taking firm's heterogeneity into consideration allows this paper to further demonstrate the mechanism of trade promoting growth.Secondly, by using the latest data, this paper provides a new perspective of the relationship between trade openness and economic growth. The paper applies the econometric techniques such as cointegration, vector error correction model, impulse response function and variance decomposition into the empirical analysis, and both the static and dynamic effects are considered.Thirdly, the data used draw from the latest sources and researches. For example, the fixed investment index and thus the physical capital stock are not consistent in the previous relevant papers. This paper employs the consistent data and finds some interesting results which are different from most of the previous Chinese researches.