Empirical Investigation of the Impact of Multilateral Trade on Income Convergence Across Countries

Abstract

This paper investigates empirically the effects of established country-to-country trade on income convergence across countries. Using the β-convergence criterion we demonstrate that poorer economies grow faster than richer economies with international trade. Consequently, we find empirical evidence of a convergence in per capita income among richer and poorer countries. Monte Carlo models are estimated to simulate the characterization of β-convergence in randomly created trading groups of 8 to 23 member countries’ economies. Our results indicate that income convergence is less likely to occur in our randomly created trading partnerships than in those that are formed as part of existing trade relationships. This result reaffirms the argument that countries that have established trade relationships are more likely to experience income convergence than countries that lack such trade relationships. Additionally, our research provides new empirical evidence on the impact of international trade on economic growth in general. This information is particularly valuable for the current analyses of the costs and benefits of restricting international trade in the U.S. and elsewhere.