Working Paper: NBER ID: w22147
Authors: Michael E. Waugh; B. Ravikumar
Abstract: In this paper we derive a new measure of openness—trade potential index—that quantifies 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 correlate weakly with trade costs. Thus, our measure of openness is informative about the underlying trade frictions.
Keywords: Openness to Trade; Welfare Gains; Trade Potential; Trade Costs
JEL Codes: E1; F1; F4; F6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade potential (F10) | home trade share (F10) |
| trade potential (F10) | GDP (E20) |
| lower GDP (E20) | higher potential gains from trade (F11) |
| poorer countries (F63) | greater potential gains from trade (F10) |
| GDP (E20) | trade potential (F10) |