Cognitive Skills, Openness and Growth

A significant positive relationship exists between the ratios of trade and educational spending to gross domestic product, implying that countries which are more open on the trade front also spend more on education. An open economy endogenous growth model with human capital is developed to understand this stylised fact. The model predicts that countries with greater cognitive skills spend more on education, and grow faster. These countries open up on the trade front to finance importation of raw materials for investment goods production, which becomes scarce due to the diversion of resources to education. The model highlights the importance of the productivity of human capital or cognitive skill as an important economic fundamental determining the cross-country correlation between growth, trade share and education share. © 2011 The Economic Society of Australia