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Does Trade Raise Income? Evidence from the Twentieth Century

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  • Douglas A. Irwin
  • Marko Tervio

Abstract

Efforts to estimate the effects of international trade on a country's real income have been hampered by the failure to account for the endogeneity of trade. Frankel and Romer recently use a country's geographic attributes - notably its distance from potential trading partners - as an instrument to identify the effects of trade on income in 1985. Using data from the pre- World War I, the interwar, and the post-war periods, this paper finds that the Frankel-Romer result is robust to different time periods, i.e., that instrumenting for trade with geographic characteristics raises the estimated positive effect of trade on income by a substantial margin and, in most of our cases, the precision of those estimates. These results suggest that the downward bias of OLS estimates is systematic and may be due to measurement error, a potential source of which is that trade is an imperfect proxy for a host of economically beneficial interactions between countries. However, the results are not robust to the inclusion of another geographic variable, latitude (distance from the equator).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7745.

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Date of creation: Jun 2000
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Publication status: published as Irwin, Douglas A. and Marko Terviö. "Does trade raise income?: Evidence from the twentieth century." Journal of International Economics 58, 1 (October 2002): 1-18.
Handle: RePEc:nbr:nberwo:7745

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  1. Rodríguez, Francisco & Rodrik, Dani, 1999. "Trade Policy and Economic Growth: A Sceptic's Guide to the Cross-National Evidence," CEPR Discussion Papers 2143, C.E.P.R. Discussion Papers.
  2. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September.
  3. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  4. Elhanan Helpman, 1997. "R&D and Productivity: The International Connection," NBER Working Papers 6101, National Bureau of Economic Research, Inc.
  5. Desmond McCarthy & Holger Wolf & Yi Wu, 2000. "The Growth Costs of Malaria," NBER Working Papers 7541, National Bureau of Economic Research, Inc.
  6. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
  7. Theil, Henri & Galvez, Janet, 1995. "On Latitude and Affluence: The Equatorial Grand Canyon," Empirical Economics, Springer, vol. 20(1), pages 163-66.
  8. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate Of The Effect Of Common Currencies On Trade And Income," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 437-466, May.
  9. Xavier X. Sala-i-Martin, 1997. "I Just Ran Four Million Regressions," NBER Working Papers 6252, National Bureau of Economic Research, Inc.
  10. Frankel, Jeffrey A & Rose, Andrew K, 2000. "An Estimate of the Effect of Currency Unions on Trade and Output," CEPR Discussion Papers 2631, C.E.P.R. Discussion Papers.
  11. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  12. Estevadeordal, Antoni, 1997. "Measuring protection in the early twentieth century," European Review of Economic History, Cambridge University Press, vol. 1(01), pages 89-125, April.
  13. Prados de la Escosura, Leandro, 2000. "International Comparisons of Real Product, 1820-1990: An Alternative Data Set," Explorations in Economic History, Elsevier, vol. 37(1), pages 1-41, January.
  14. Eichengreen, Barry & Irwin, Douglas A., 1995. "Trade blocs, currency blocs and the reorientation of world trade in the 1930s," Journal of International Economics, Elsevier, vol. 38(1-2), pages 1-24, February.
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