Cross-Country Heterogeneity and the Trade-Income Relationship

SummaryWe examine the relationship between trade and income using heterogeneous panel cointegration techniques to account for the potential cross-country heterogeneity in the effects of trade. Our main results are: (i) trade has, on average, a statistically significant, but relatively small positive effect on income, (ii) there is considerable heterogeneity in the effects of trade on income across countries, and (iii) the effect of trade on income tends to be greater in countries with higher levels of education, with a lower share of primary commodities in total exports, less business and labor market regulations, higher institutional quality, and higher development levels.