Trade raises income: a precise and robust result

Does international trade promote income? Earlier studies could not provide conclusive evidence. This paper re-examines this question. Following previous work, we treat trade as endogenous and use geography to instrument for trade. We use a richer data set that allows us to estimate the impact of trade on income with much greater precision. We also show that geographical controls must enter the income equation to avoid bias. We find that countries that trade more reach higher levels of income. This result is remarkably robust to a wide array of geographical and institutional controls. (c) 2004 Elsevier B.V. All rights reserved.