Products Heterogeneity, Elasticity of Substitution, Openness and Government Size

First, this text uses 189 countries' and regions' panel data for 1950 2007 year to examine the relationship between trade openness and government size. We find no matter adopt the data of the perind or data lagging of the same period to come back, the relationship between trade opening and government's scale is prominently positive. Subsequently, we find there are two kinds of mechanism which influence government through outside of trade scale; expenditure trade opening and trade insurance effect. We set up a proxy of the elasicity of substitution between domestic and foreign goods, and add the interaction between openness and the test model. The evidence suggests that openness is positively correlated with the size of government only for countries exporting differentiated goods. Then we show that the correlation is contingent on a low elasticity of substitution between domestic and foreign goods.