Evidence on growth, increasing returns, and the extent of the market

If economic growth relies upon the extent-of-the-market, then openness will decrease the connection between initial income and later growth. Alternatively, learning-by-doing models suggest that wealth will be more positively correlated with growth in open economies, because trade causes advanced economies to specialize in products with more opportunities for learning. We examine twentieth century less developed countries and nineteenth century U.S. states. In both data sets, there is a much stronger correlation between growth and initial wealth among closed economies. These findings support the importance of the extent-of-the-market, and aggregate demand in fostering growth.