Trade and Productivity

TLDR

The study uses a real‑openness trade measure (imports + exports/PPP GDP) and controls for institutional quality, geography, and trade endogeneity in its estimates. International trade significantly boosts productivity, with a robust positive aggregate scale effect that operates through total factor productivity.

Abstract

We find that international trade has an economically significant and statistically robust positive effect on productivity. Our trade measure is imports plus exports relative to purchasing power parity GDP (real openness), which we argue is preferable on theoretical grounds to the nominal measure conventionally used. We also find a significantly positive aggregate scale effect. Our estimates control for proxies of institutional quality as well as geography and take into account the endogeneity of trade and institutional quality. Our analysis of the channels through which trade and scale affect productivity yields that they work through total factor productivity.