Trade and economic growth: Does the sophistication of traded goods matter?

Abstract

Since the appearance of the seminal paper of Frankel and Romer (Am Econ Rev 89(3): 379–399, 1999), ‘Does trade cause growth?’, the impact of aggregate trade openness on income has been controversial. This research shows that the type of product that is traded has first-order effects, while overall trade intensity has second-order effects on per capita income because of (i) the hierarchical structure of learning-by-doing in products with different levels of sophistication of the production processes; and (ii) the fertility and education effects of trade specialization following the quantity–quality tradeoff framework of Galor and Mountford (Am Econ Rev 96(2): 299–303, 2006). Using data on trade disaggregated by the level of technological sophistication of the production process for 223 countries over the period 1962–2019, we find that (1) the effects of foreign trade on income differ widely across technology categories; (2) high-tech trade has permanent growth effects; and (3) a significant fraction of the impact of trade on income is mediated through education and fertility.

Structural transformation and inequality: Does trade openness matter?

“…This means that five‐year averages of sectoral employment share data (which are available annually) are matched with inequality data for a year or the average for the year for which data are available within that five‐year period. An added average of using 5‐year averages is to reduce the influence of random and cyclical fluctuations (Baymul & Sen, 2020; Ekanayake et al., 2023; Jäntti et al., 2020; Lee, 2017). Other monetary or economic policies, which may have effects on price level developments and other variables for many years should be partially captured by the year fixed effect and the country fixed effect in the model.…”