Trade and Growth in Europe, Evidence from a Panel of 18 Countries

One of the main advantages of EU membership is increased trade, which both current and prospective EU members expect to boost growth. While economic theory predicts that trade openness raises income levels and may even promote long-run economic growth, the empirical evidence has been mixed. This paper investigates the issue using a panel data set of eighteen European countries covering the period 1951-2000. The results show that the effect of trade on economic growth in Europe is positive, permanent, statistically significant, and economically sizable. This effect is robust across two measures of trade openness and a number of different estimation methods and lag lengths. Specifically, it is shown that increasing trade (exports plus imports) as a fraction of GDP by 10 percentage points, permanently increases the average European country=s real growth rate of GDP per capita by 0.4 to 0.6 percent.