Openness of the economy, terms of trade, and arms

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Abstract

It is estimated that world military spending in 2011 amounted to over 2.5% of the world's Gross Domestic Product (GDP). This corresponds to a spending of 233 per person in the world at 2010 constant prices, an amount close to the GDP per capita of the poorest country in the world. Therefore, it is important for economists to understand the allocation of resources to this sector of the economy. I present a model that explores the determinants of a country's level of military spending. I show how greater gains from trade can lead to greater military expenditures to protect them. It is also found that expansion in the demand for a country's tradable commodities, that is, an improvement in that country's terms of trade, will impact defense spending. Several other propositions emerge from the model which are then empirically testedusing both pooled and time series data. The statistical results support the model's propositions.

Original languageEnglish (US)
Pages (from-to)748-759
Number of pages12
JournalSouthern Economic Journal
Volume82
Issue number3
DOIs
StatePublished - Jan 1 2016

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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