Does Trade Cause Growth?
By JEFFREY A. FRANKEL AND DAVID ROMER*
THE AMERICAN ECONOMIC REVIEW

Examining the correlation between trade and income cannot identify the direction
of causation between the two. Countries’ geographic characteristics, however, have
important effects on trade, and are plausibly uncorrelated with other determinants
of income. This paper therefore constructs measures of the geographic component
of countries’ trade, and uses those measures to obtain instrumental variables
estimates of the effect of trade on income. The results provide no evidence that
ordinary least-squares estimates overstate the effects of trade. Further, they suggest
that trade has a quantitatively large and robust, though only moderately statistically
significant, positive effect on income. (JEL F43, O40)