Large countries are better off in a closed economy and small countries are better off in an open economy - with empirical evidence

Abstract

Abstract

The fundamental political and economic phenomena of the last century have been more decentralized countries (the break up of nations into smaller states) and the increased economic integration of international markets. Taking into consideration these facts this dissertation tends to empirically prove that, large countries are better off in a closed economy and small countries are better off in an open economy, by investigating the relationship of size with trade openness and its impact on government consumption. Basically economic integration and political secessions are positively correlated with each other. In a closed economy (trade restricted) large countries enjoy economic benefit due to the fact of being politically integrated and being formed into a larger market. Whereas in open economy, small countries get benefitted from each other by economic integration amongst them and by forming homogenous political jurisdictions that trade peacefully. The empirical findings of this dissertation state that, open economy are positively and statistically significant and are economically sizable for small countries and there exists an inverted U-curve relationship between size and government consumption. The inverted U-curve relationship implies that both larger and smaller countries have lower public spending provision and thus we can say that, smaller countries are better off in an open economy because they enjoys larger market and lower tax at the same time and larger countries are better off in an closed economy.