Measuring Openness to Trade

26 Pages Posted: 31 Mar 2016 Last revised: 6 Mar 2019

See all articles by Michael E. Waugh

Michael E. Waugh

New York University (NYU), Leonard N. Stern School of Business, Department of Economics

B. Ravikumar

Federal Reserve Bank of Saint Louis

Multiple version iconThere are 2 versions of this paper

Date Written: 2016-07-21

Abstract

In this paper we derive a new measure of openness—trade potential index—that quantifies the potential gains from trade as a simple function of data. Using a standard multicountry trade model, we measure openness by a country’s potential welfare gain from moving to a world with frictionless trade. In this model, a country’s trade potential depends on only the trade elasticity and two observable statistics: the country’s home trade share and its income level. Quantitatively, poor countries have greater potential gains from trade relative to rich countries, while their welfare costs of autarky are similar. This leads us to infer that rich countries are more open to trade. Our trade potential index correlates strongly with estimates of trade costs, while both the welfare cost of autarky and the volume of trade exhibit correlate weakly with trade costs. Thus, our measure of openness is informative about the underlying trade frictions.

Suggested Citation

Waugh, Michael E. and Ravikumar, B., Measuring Openness to Trade (2016-07-21). FRB St. Louis Working Paper No. 2016-3. Available at SSRN: https://ssrn.com/abstract=2756952 or http://dx.doi.org/10.20955/wp.2016.003

Michael E. Waugh (Contact Author)

New York University (NYU), Leonard N. Stern School of Business, Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

B. Ravikumar

Federal Reserve Bank of Saint Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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