The relationship between government size and trade openness: An empirical analysis

After World War II, an increase in the size of international trade and government expenditures which is an indicator of government size has been observed. A relationship has been investigated between these two variables due to their similar trends and two hypothesis's have been developed. According to the compensation hypothesis an increase in trade openness results in economic volatility on a national scale because of international economic shocks which creates a perception of economic insecurity on individuals. The increase on economic insecurity induces the society to demand for more social security hence increasing government expenditures. The second hypothesis which is known as the efficiency hypothesis claims that increasing trade openness decreases the size of government. In this thesis I examine how much the government size is affected and what is the scale of it in Turkey. Within this scope time series had been used as method using government expenditure and trade openness data between 1974 and 2015. The results of the analysis shows that an increase in openness causes government size to increase thus validating the compensation hypothesis for Turkey. KEYWORDS: Government Size, Trade Openness, Government Expenditures