Trade, income and the Baltic Dry Index

Does trade improve the income levels of the poor and less developed nations? Focusing on the Least Developed Countries (LDCs) designated by the United Nations, we construct a new measure of trade cost, based on the Baltic Dry Index (BDI), as an instrument for trade. The BDI reflects the cost of utilizing dry bulk carriers, which are specially designed vessels for transporting primary goods internationally, where these goods dominate the output and export sectors of the LDCs. We find that a 1% expansion in trade raises GDP per capita by approximately 0.5% on average. This estimate is much larger than previously found in the literature and its quantitative significance emphasizes the importance of trade towards the economic development of low income countries.

► We study the impact that trade has on income of the Least Developed Countries (LDCs). ► To do so, an instrument for trade based on the Baltic Dry Index (BDI) is constructed. ► The BDI reflects the cost of shipping primary goods, which dominate the LDCs' output. ► We find that a 1% increase in trade raises GDP per capita by about 0.5% on average. ► Thus, trade is especially crucial for the development of low income countries.