NCPA - National Center for Policy Analysis

Trading Nations Grow Faster

June 14, 2000

Larger nations with bigger economies have faster growth than smaller ones according to one study. By utilizing increasing returns to scales and the division of labor, larger economies spur higher income levels which leads to further growth. This puts smaller economies at a disadvantage however. This study finds that smaller economies can tap into the economic robustness of larger economies by engaging in trade.

  • The degree of initial wealth has a minimal role in determining the rate of Gross Domestic Product (GDP) growth in trading nations.
  • The degree of initial wealth has a larger role for a relatively closed economy, one in which trade accounts for less than 22 percent.

The study concludes that contrary to protectionists' beliefs, free trade benefits poorer nations. But it warns developing nations not to become too specialized, because this will cause problems for future growth.

Source: "Larger Economies Grow Faster," Economic Intuition, Winter 2000. Based on: Alberto F. Ades and Edward L. Glaeser, "Evidence on Growth, Increasing Returns, and the Extent of the Market," The Quarterly Journal of Economics, August 1999.

 

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