Correcting the Size Bias in Trade Openness and Globalization Measures

The trade intensity index, constructed as exports plus imports divided by GDP, is the most commonly used measure for trade openness and globalization. The index tends to indicate small countries are more open than large countries. We show that it is the inconsistence of two implicit assumptions in the index that leads to a size bias in the openness measurement. We use a combination of axiomatic and parametric methods to derive an unbiased, generalized index that embodies the conventional index as a special case. Correcting the size bias leads to very different results in relative openness measures between countries and in the estimates of the growth effect of trade openness.