Trade and Income in the Long Run: Are There Really Gains, and are They Widely Shared?

37 Pages Posted: 1 Dec 2017

See all articles by Diego Cerdeiro

Diego Cerdeiro

International Monetary Fund (IMF)

Andras Komaromi

International Monetary Fund (IMF)

Date Written: November 2017

Abstract

In the cross section of countries, there is a strong positive correlation between trade andincome, and a negative relationship between trade and inequality. Does this reflect a causalrelationship? We adopt the Frankel and Romer (1999) identification strategy, and exploitcountries' exogenous geographic characteristics to estimate the causal effect of trade onincome and inequality. Our cross-country estimates for trade's impact on real income areconsistently positive and significant over time. At the same time, we do not find anystatistical evidence that more trade increases aggregate measures of income inequality.Heeding previous concerns in the literature (e.g. Rodriguez and Rodrik, 2001; Rodrik,Subramanian and Trebbi, 2004), we carefully analyze the validity of our geography-basedinstrument, and confirm that the IV estimates for the impact of trade are not driven by otherdirect or indirect effects of geography through non-trade channels.

Keywords: Income, Trade, Growth, Inequality, Gravity model, General

JEL Classification: F10

Suggested Citation

Cerdeiro, Diego and Komaromi, Andras, Trade and Income in the Long Run: Are There Really Gains, and are They Widely Shared? (November 2017). IMF Working Paper No. 17/231, Available at SSRN: https://ssrn.com/abstract=3079558

Diego Cerdeiro (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Andras Komaromi

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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