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December 1986

The United States as an Open Economy

by Richard N. Cooper

The author examines the reasons, effects, and implications of art increasingly open U.S. economy. He notes that a major factor explaining increased foreign interaction is technological advances in communications and transportation. As lower transactions costs are realized, the volume of transactions correspondingly rises. Because of this, there is evidence of a loss of insulation of the economy to external events, such as the OPEC oil price shocks of the 1970s. More recently, the author notes, increased openness has broadened the base of competition that domestic firms must face, thus influencing wage and price developments in some sectors. He comments that greater interdependence allows foreign events to impact the domestic economy, but also that domestic events have results much faster in the rest of the world. These factors may influence not only domestic policy multipliers, but also the usefulness of policy recommendations once followed under a more closed economy.