Trade and income at different stages of economic development

Recent research has found a strong positive effect of international trade on real income. We propose that this relationship may vary with the level of economic development. Using the instrument variable threshold regressions approach proposed by Caner and Hansen (2004), we find evidence that trade openness contributes to uneven development. Greater trade openness tends to have beneficial effects on real income for more industrialized countries. For less developed countries, however, trade openness appears to influence real income in a significantly negative way. The findings imply that greater international trade and integration may foster inequality of nations and hence contribute to more diverging economies.