The Relationship between Trade and Income: The Case of Developed Countries

Abstract

This paper focuses on developed OECD member economies to examine the impact of trade openness on per capita GDP. Cross-sectional data of the member economies for the year 2010 are used in the empirical analysis. The potential endogeneity problem associated with the measure of trade openness is handled through instrumentation strategy based on the gravity model of international trade. Results show that bilateral trade openness is significantly related with per capita GDP within the OECD organization. The impact of employment rate on per capita GDP is also substantial. Though both tertiary education and investment are statistically insignificant they importantly hold the expected coefficients in the analysis.

Keywords: Trade Openness, OECD, Endogeneity, GDP, Gravity Model

JEL Classification: F14