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Measuring an economy’s openness

Comparing global trade for Canada, Mexico, and the U.S.

The more an economy trades with the rest of the world, the more open it is. Another way to put it: The more integrated an economy is in the world economy, the more open it is. So how do you measure openness? One way is to look at the ratio of imports plus exports to GDP.

By the way, the size of the economy matters. The U.S. is a large and well-diversified economy, so it doesn’t need to trade that much. The Bahamas are much smaller and much less diversified, and so it needs to trade more.

The FRED graph above shows what our measure of openness looks like for the three North American trading partners: Canada in blue, Mexico in green, and the U.S. in red. The vertical lines correspond to the Canada-U.S. free trade agreement in 1989 and NAFTA in 1994.

For a more nuanced (and complicated) graph, we could examine trade  among just these three countries and not their trade with the entire world. But looking at our particular measure here and considering our assertions above, it’s not surprising that the openness of the U.S. economy is lower than that of its neighbors. We also see that there’s a general trend of increasing openness, which we can associate with the general trend of globalization more than the impact of any particular trade agreements.

How this graph was created: Search FRED for “Canada exports” and take the nominal measure. From the “Edit Graph” panel, add the series for Canadian imports and GDP and apply formula (a+b)/c*100 (to get percentages). From the “Add Line” tab, repeat for the U.S. and Mexico. For the horizontal lines, use the “Add Line” tab again, but this time add 2 “user-defined” lines: the first with values 0.1 and 89.9 in 1989-01-01 and the second in 1994-01-01.

Suggested by Christian Zimmermann.

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