Measuring Openness to Trade

Michael Waugh and B Ravikumar

No 22147, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E1 F11 F40 F62 F63 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-int and nep-mac
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Published as Michael E. Waugh & B. Ravikumar, 2016. "Measuring Openness to Trade," Journal of Economic Dynamics and Control, .

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Journal Article: Measuring openness to trade (2016)
Working Paper: Measuring Openness to Trade (2016)
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