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By Charles Jones, N. Gregory Mankiw, Maurice Obstfeld, Glenn Rudebusch, Paul Ruud, James Stock and Shangjin Wei


Examining the correlation between trade and income cannot identify the direction of causation between the two. Countries ’ geographic characteristics, however, have important effects on trade, and are plausibly uncorrelated with other determinants of income. This paper therefore constructs measures of the geographic component of countries ’ trade, and uses those measures to obtain instrumental variables estimates of the effect of trade on income. The results provide no evidence that ordinary least-squares estimates overstate the effects of trade. Further, they suggest that trade has a quantitatively large and robust, though only moderately statistically significant, positive effect on income. (JEL F43, O40) This paper is an empirical investigation of the impact of international trade on standards of living. From Adam Smith’s discussion of specialization and the extent of the market, to the debates about import substitution versus exportled growth, to recent work on increasing returns and endogenous technological progress, economists interested in the determination of standards of living have also been interested in trade. But despite the great effort that has been devoted to studying the issue, there is little persuasive evidence concerning the effect of trade on income. To see the basic difficulty in trying to estimate trade’s impact on income, consider a cross-country regression of income per person on the ratio of exports or imports to GDP (and other variables). Such regressions typically find a moderate positive relationship. 1 But this relationship may not reflect an effect of trade o

Year: 2013
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