![]() ![]() There is evidence suggesting this is often the case. If trade is causally linked to economic growth, we would expect that trade liberalization episodes also lead to firms becoming more productive in the medium, and even short run. This body of evidence suggests trade is indeed one of the factors driving national average incomes (GDP per capita) and macroeconomic productivity (GDP per worker) over the long run. A key example is Alcalá and Ciccone (2004). Other papers have applied the same approach to richer cross-country data, and they have found similar results. ![]() ![]() Following this logic, Frankel and Romer find evidence of a strong impact of trade on economic growth. So if we observe that a country’s distance from other countries is a powerful predictor of economic growth (after accounting for other characteristics), then the conclusion is drawn that it must be because trade has an effect on economic growth. The idea is that a country’s geography is fixed, and mainly affects national income through trade. This is a classic example of the so-called instrumental variable approach. In this study, Frankel and Romer used geography as a proxy for trade, in order to estimate the impact of trade on growth. When it comes to academic studies estimating the impact of trade on GDP growth, the most cited paper is Frankel and Romer (1999). 2Īre these mechanisms supported by the data? Let’s take a look at the available empirical evidence. Is this statistical association between economic output and trade causal?Īmong the potential growth-enhancing factors that may come from greater global economic integration are: Competition (firms that fail to adopt new technologies and cut costs are more likely to fail and to be replaced by more dynamic firms) Economies of scale (firms that can export to the world face larger demand, and under the right conditions, they can operate at larger scales where the price per unit of product is lower) Learning and innovation (firms that trade gain more experience and exposure to develop and adopt technologies and industry standards from foreign competitors). This basic correlation is shown in the chart here, where we plot average annual change in real GDP per capita, against growth in trade (average annual change in value of exports as a share of GDP). In a similar way, if we look at country-level data from the last half century we find that there is also a correlation between economic growth and trade: countries with higher rates of GDP growth also tend to have higher rates of growth in trade as a share of output. Over the last couple of centuries the world economy has experienced sustained positive economic growth, and over the same period, this process of economic growth has been accompanied by even faster growth in global trade. The empirical evidence shows that comparative advantage is indeed relevant but it is not the only force driving incentives to specialization and trade. These theories postulate that all nations can gain from trade if each specializes in producing what they are relatively more efficient at producing, based on their strengths.
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