The trade openness is measured as the sum of exports and imports to GDP ratio. It not only
measures the degree of an economy‟s openness to international trade, but also reflects some
of the macroeconomic policies that could be relevant for the long-run current account
developments. For examples, trade openness could be indicative of attributes such as
liberalized international trade, receptiveness of technology transfers, and ability to service
external debt through export earnings.
Moreover, this variable also measures the degree of various trade restrictions, which are
likely to impede a flow of goods and services from abroad. An economy with more trade
restrictions is likely to send an adverse signal to foreign investors. On the other hand, an
economy with less trade restrictions and more exposure to international trade tends to be
relatively more attractive to foreign capital (Chinn and Prasad, 2003). Consequently, trade
openness is likely to be associated negatively with the current account balance.
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In general, the common empirical literature usually expects a negative relationship between
trade openness and current account balance