ABSTRACT
The degree of openness of any national economy is an important issue for international economic theory and policy. For example, in the 1960's, it was typically assumed that the U.S. was sufficiently large, and its economy sufficiently protected, that exogenous economic shocks from other countries did not have an important effect on U.S. macroeconomic performance. Most macroeconomic models reflected this view by representing the U.S. as a closed economy. By the early 1980's, most observers considered the U.S. to be no longer sufficiently isolated to merit this closed-economy assumption. But there has remained disagreement about the degree to which shocks originating outside the U.S. affect U.S. output and terms of trade.
