Measuring the Dynamics Gains from Trade

Abstract

This article investigates the links between trade policy and economic growth in a panel of 57 countries between 1970 and 1989. It develops a new measure of trade policy openness based on the policy component of trade shares, using it in a simultaneous equations system to identify the effect of trade policy on several determinants of growth. The result suggests a positive impact of openness on economic growth, with the accelerated accumulation of physical capital accounting for more than half the total effect; for smaller effects. This decomposition is robust with respect to alternative specifications and time periods. The article also successfully tests whether the model exhaustively captures the effects of trade policy on growth.