Does Trade Raise Income? Evidence from the Twentieth Century

28 Pages Posted: 20 Jul 2000 Last revised: 18 Oct 2010

See all articles by Douglas A. Irwin

Douglas A. Irwin

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Marko Terviö

Aalto University

Date Written: June 2000

Abstract

Efforts to estimate the effects of international trade on a country's real income have been hampered by the failure to account for the endogeneity of trade. Frankel and Romer recently use a country's geographic attributes - notably its distance from potential trading partners - as an instrument to identify the effects of trade on income in 1985. Using data from the pre- World War I, the interwar, and the post-war periods, this paper finds that the Frankel-Romer result is robust to different time periods, i.e., that instrumenting for trade with geographic characteristics raises the estimated positive effect of trade on income by a substantial margin and, in most of our cases, the precision of those estimates. These results suggest that the downward bias of OLS estimates is systematic and may be due to measurement error, a potential source of which is that trade is an imperfect proxy for a host of economically beneficial interactions between countries. However, the results are not robust to the inclusion of another geographic variable, latitude (distance from the equator).

Suggested Citation

Irwin, Douglas A. and Terviö, Marko, Does Trade Raise Income? Evidence from the Twentieth Century (June 2000). NBER Working Paper No. w7745. Available at SSRN: https://ssrn.com/abstract=233748

Douglas A. Irwin (Contact Author)

Dartmouth College - Department of Economics ( email )

6106 Rockefeller Hall
Hanover, NH 03755
United States
603-646-2942 (Phone)
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Marko Terviö

Aalto University ( email )

P.O. Box 21240
Helsinki, 00101
Finland

HOME PAGE: http://hse-econ.fi/tervio

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