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. Alternati vely, learning-by-doing models suggest that wealth will be more positively correlated with growth in open economies, because trade causes advanced eco nomies to specialize in products with more opportunities for learning. We e xamine 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 th e importance of the extent-of-the-market, and aggregate demand in fostering growth.