Economic Openness and the Behaviour of Great Ratios in G20 Countries

Most of the macroeconomic models suggest that great ratios of economics should be stable in the long term. Keeping the theoretical consequences in mind, the present study investigates the order of integration of two great ratios, viz. consumption–output and investment–output ratios. The study employs both mean shift and trend shift unit root tests with a structural break to examine the stationarity property of great ratios. This article attempts to analyse the relationship between economic openness and the behaviour of great ratios. Results of the study indicate a balanced growth path for 10 out of 18 G20 countries considered in our analysis. Findings show that countries that have a deficit trade balance with surplus foreign direct investment are more likely to demonstrate a balanced growth path. The multivariate analysis shows evidence in support of the balanced growth hypothesis in 13 of the 18 G20 countries. Of the 18 countries analysed, 8 internationally open and 6 financially open countries provide support for the balanced growth path. JEL: C20, E20, O50