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Measuring Openness to Trade

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  • B. Ravikumar
  • Michael E. Waugh

Abstract

In this paper we derive a new measure of openness?trade potential index?that quantifies the potential gains from trade as a simple function of data. Using a standard multicountry trade model, we measure openness by a country?s potential welfare gain from moving to a world with frictionless trade. In this model, a country?s trade potential depends on only the trade elasticity and two observable statistics: the country?s home trade share and its income level. Quantitatively, poor countries have greater potential gains from trade relative to rich countries, while their welfare costs of autarky are similar. This leads us to infer that rich countries are more open to trade. Our trade potential index correlates strongly with estimates of trade costs, while both the welfare cost of autarky and the volume of trade exhibit correlate weakly with trade costs. Thus, our measure of openness is informative about the underlying trade frictions.

Suggested Citation

  • B. Ravikumar & Michael E. Waugh, 2016. "Measuring Openness to Trade," Working Papers 2016-3, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2016-003
    DOI: 10.20955/wp.2016.003
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ravikumar, B. & Santacreu, Ana Maria & Sposi, Michael, 2019. "Capital accumulation and dynamic gains from trade," Journal of International Economics, Elsevier, vol. 119(C), pages 93-110.
    2. Jean Imbs & Laurent L. Pauwels, 2020. "High Order Openness," Working Papers 20200047, New York University Abu Dhabi, Department of Social Science, revised Jun 2020.
    3. Claudius Gräbner & Philipp Heimberger & Jakob Kapeller & Florian Springholz, 2018. "Measuring Economic Openness," wiiw Working Papers 157, The Vienna Institute for International Economic Studies, wiiw.
    4. Luca Salvatici & Silvia Nenci, 2017. "New features, forgotten costs and counterfactual gains of the international trading system," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 44(4), pages 592-633.
    5. Ajayi, Patricia & Ogunrinola, Adedeji, 2020. "Growth, Trade Openness and Environmental Degradation in Nigeria," MPRA Paper 100713, University Library of Munich, Germany.
    6. Ibhagui, Oyakhilome & Olarewaju, Favour, 2020. "Broad Dollar Shocks and Economic Activity in Trade-Heavy Countries: The Role of Government Size," MPRA Paper 100944, University Library of Munich, Germany.
    7. Auer, Raphael A., 2016. "Comments on “Measuring openness to trade” by M.E. Waugh and B. Ravikumar," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 42-44.

    More about this item

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development

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