Trade and Income Convergence: Sorting Out the Causality

35 Pages Posted: 19 Jan 2009 Last revised: 9 Jul 2009

See all articles by Xuepeng Liu

Xuepeng Liu

Kennesaw State University - Department of Economics and Finance

Date Written: May 1, 2007

Abstract

This paper studies the linkage between international trade and income convergence across countries. Different theories offer conflicting predictions regarding how they might affect each other. In the existing empirical literature estimating the trade impact on income convergence, a long-lasting problem is the reverse causality from income convergence to trade. This paper provides a disaggregated bilateral trade data analysis to solve this problem. The results show that the reverse causality from income convergence to trade exists in differentiated product sectors, but not in homogeneous product sectors. Trade in homogeneous sectors reduces the income gaps among trade partners, but it is not significantly affected by their income difference. Therefore the negative effect of trade in homogeneous sectors on income gap is free from the reverse causality problem. It can be taken as the pure evidence of trade-induced income convergence. This result is robust to various econometric methods.

Keywords: Trade, income convergence, causality

JEL Classification: F1, F4, O4

Suggested Citation

Liu, Xuepeng, Trade and Income Convergence: Sorting Out the Causality (May 1, 2007). Journal of International Trade and Economic Development, Vol. 18, No. 1, pp. 169-195, April 2009, Available at SSRN: https://ssrn.com/abstract=1330050

Xuepeng Liu (Contact Author)

Kennesaw State University - Department of Economics and Finance ( email )

United States

HOME PAGE: http://ksuweb.kennesaw.edu/~xliu6/

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