Trade efficiency and economic development: evidence from a cross country comparison

Abstract

Economic theory suggests that development is enhanced through income growth, which is driven through increased trade. However, the empirical evidence of such a relationship most of the times is proved to be weak. In this study we try to determine the factors influencing this relationship by measuring “trade efficiency”. Using the Data Envelopment Analysis (DEA) window method for a sample of 16 OECD countries, we obtained the efficiency scores and the optimal output levels for the inefficient countries for a time period of five years under consideration. Results drawn from the broadly used ratio analysis were also compared to the results derived from the DEA model. Our empirical findings show that “trade efficient” countries have clear characteristics like low exchange rates for exports, low R&D intensity, high value intra industry trade and positive impact of net trade on their GDP.