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Trade and Per-Capita Income

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Kevin Brancato, at TruckandBarter, [2] just posted two illuminating graphs. One graph shows a significant positive correlation between the size of per-capita incomes within countries and countries’ openness to foreign trade.

One interpretation of this unmistakable correlation is that freer trade generates higher per-capita incomes. More openness to foreign trade promotes the wealth of nations. That’s my interpretation. Powerful support for this interpretation is found in Jeffrey Frankel & David Romer, “Does Trade Cause Growth?”, American Economic Review, June 1999.

However, Harvard economist Dani Rodrick [3] argues that causality runs in the opposite direction — namely, that high per-capita incomes cause countries to be more open to foreign trade.

Again, I believe that Rodrick’s hypothesis is mistaken. But let’s assume here that he is correct.

Even if Rodrick is correct that more trade does not so much cause higher incomes as it itself is caused by higher incomes, an important empirical finding must not be overlooked: more trade does not reduce per-capita incomes.

Dani Rodrick’s argument about the relationship between openness to trade and per-capita incomes does not amount to an argument against free trade.

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