Does International Trade Raise Income? Early Studies, Critiques, and Innovations

This article provides an overview of the literature examining the effects of international trade on countries’ average income levels. It reviews the seminal study by Frankel and Romer (1999), which uses geography as an instrumental variable to identify the causal effects of trade on income in a cross-country setting. It also discusses studies by Felbermayr and Gröschl (2013), Feyrer (2019), and Feyrer (2021), which exploit time-varying geographic shocks—natural disasters, air transport, and a canal closure, respectively—to identify the causal effects of trade on income in panel data. Along the way, this article discusses key empirical challenges and the methodological advances developed to address them. It concludes that the widely accepted answer to the question “Does trade raise income levels?†is “Yes,†at least for the period from the 1950s to the 2000s.