Does the Dollar Index Really Measure Outward Orientation?
This paper assesses an important attempt to measure 'trade orientation' by a World Bank economist, David Dollar. Recognising the difficulties in measuring trade openness, Dollar (1992) produced an index of outward orientation. He adjusted national price levels with factor endowments, and used the difference between actual and predicted price levels as a measure of real exchange rate distortion. Although the 'Dollar index' was produced almost ten years ago and has been subject to various criticisms, it still remains the most popular measure of trade openness. First, this paper argues that the critics have not been entirely successful in discrediting the index. It goes on to produce alternative theoretical and empirical evidence that suggests that the Dollar index has fundamental flaws, and thus has no relevance to the debate on trade orientation and should be abandoned.
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Volume (Year): 17 (2003)
Issue (Month): 3 ()
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