Measuring openness to trade

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...

Full description

Saved in:
Bibliographic Details
Published in:Journal of economic dynamics & control 2016-11, Vol.72, p.29-41
Main Authors: Waugh, Michael E., Ravikumar, B.
Format: Article
Language:English
Subjects:
Gains from trade
Measurement
Openness
Sufficient statistics
Trade potential
Volume of trade
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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 correlate weakly with trade costs. Thus, our measure of openness is informative about the underlying trade frictions.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2016.03.009