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Trade and Income -- Exploiting Time Series in Geography

Establishing a robust causal relationship between trade and income has been difficult. Frankel and Romer (1999) use a geographic instrument to identify a positive effect of trade on income. Rodriguez and Rodrik (2000) show that these results are not robust to controlling for omitted variables such as distance to the equator or institutions. This paper solves the omitted variable problem by generating a time varying geographic instrument. Improvements in aircraft technology have caused the quantity of world trade carried by air to increase over time. Country pairs with relatively short air routes compared to sea routes benefit more from this change in technology. This heterogeneity can be used to generate a geography based instrument for trade that varies over time. The time series variation allows for controls for country fixed effects, eliminating the bias from time invariant variables such as distance from the equator or historically determined institutions. Trade has a significant effect on income with an elasticity of roughly one half. Differences in predicted trade growth can explain roughly 17 percent of the variation in cross country income growth between 1960 and 1995.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14910.

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Date of creation: Apr 2009
Date of revision:
Handle: RePEc:nbr:nberwo:14910
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  1. Souleymane Coulibaly & Lionel Fontagné, 2006. "South--South Trade: Geography Matters," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 15(2), pages 313-341, June.
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  12. Francisco Rodriguez & Dani Rodrik, 1999. "Trade Policy and Economic Growth: a Skeptic's Guide to the Cross-National Evidence," Working Papers 9912, Economic Research Forum, revised Apr 1999.
  13. Dollar, David, 1992. "Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-1985," Economic Development and Cultural Change, University of Chicago Press, vol. 40(3), pages 523-44, April.
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  16. Anne-Célia Disdier & Keith Head, 2008. "The Puzzling Persistence of the Distance Effect on Bilateral Trade," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 37-48, February.
  17. Richard Baldwin & Daria Taglioni, 2006. "Gravity for Dummies and Dummies for Gravity Equations," NBER Working Papers 12516, National Bureau of Economic Research, Inc.
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