Working Paper: CEPR ID: DP1183
Authors: Dan Bendavid; Michael B. Loewy
Abstract: What is the impact of movement towards free trade on output? Can this impact permanently affect output levels, and more importantly, will it have an impact on steady-state growth rates? This paper provides empirical evidence showing how countries have exhibited substantial increases in their growth rates over the past century while concurrently increasing the extent of their trade. The model developed here emphasizes the role that knowledge spillovers emanating from heightened trade can have on long-run growth rates. Among the results of the model, unilateral liberalization by one country will generate a positive impact on the steady-state growth of all its partners while at the same time inducing a level effect on the liberalizing country that reduces the income gap between it and other, wealthier, countries. In some cases, the liberalizing country may even leapfrog over initially wealthier countries.
Keywords: economic growth; international trade; trade liberalization; knowledge diffusion
JEL Codes: E60; F10; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization (F13) | increased economic output (O49) |
| trade liberalization (F13) | steady-state growth rates (O41) |
| unilateral liberalization by one country (F69) | steady-state growth of all trading partners (F10) |
| trade liberalization (F13) | economic growth (O49) |
| trade liberalization (F13) | closing income gap with wealthier countries (O57) |
| trade liberalization (F13) | surpassing wealthier countries in income levels (O57) |