(Leamer 1988) or the trade share (Frankel and Romer 1999).<sup>8</sup> The ratio is an elegant measure of trade for three reasons. According to Tang (2011) normalizing trade with GDP controls for economic size and focuses the analysis on trade instead of the size of the economy. In addition, data on this metric is readily available (Fujii 2019).

Although the normalization of trade with GDP is advantageous, it introduces another challenge — the dominance of variability in GDP. According to Fujii (2019), the variability of trade openness can be decomposed into: the variability of trade, the variability of GDP, and the co-variability between trade and GDP. His variance decomposition reveals that heterogeneity in country size or size of GDP can be too influential in explaining observed variation in trade intensity, i.e., variations in the trade ratio from country to country can be attributed more to variations in GDP than trade.

Trade intensity also creates another challenge, the domestic economy size bias. According to Squalli and Wilson (2011), this bias emanates from the ratio’s singular focus on the relative position of a country’s trade performance compared with its domestic economy, imposing a ‘relative size penalty’ on larger economies and ranking them as relatively closed (see Figure A1 in the Appendix). Similarly, Tang (2011) observed that due to the size bias, the trade ratio tends to understate the degree of openness of large economies relative to small ones. For example, this measure ranks the U.S. way below Eswatini and Tajikistan, while China is similarly ranked behind Cambodia and the Lao People’s Democratic Republic — suggesting that the US and China are relatively closed economies. Tang (2011) associated the country size bias with the Balassa-Samuelson effect. He argued that the Balassa-Samuelson effect exaggerates the size of large economies through the prices of non-tradable goods and services which tend to be higher in high income countries than in low-income countries. The Balassa-Samuelson effect is consequential for the measurement of trade using the trade intensity ratio because the share of the non-tradeable sector in GDP generally tends to be larger in large economies than small economies. Some studies, for example, Alcalá and Ciccone (2004) and Dollar and Kraay (2003) use the Purchasing Power Parity (PPP)-based GDP in the denominator of the trade ratio to mitigate this. In doing so, they scrape off the part of the size bias associated with non-tradable price differentials. To remedy the underlying size bias more fully, Tang (2011) recommended adjusting the trade intensity ratio for each country by its share in global trade instead. This better manages the effect of changes in a country’s trade that are related to outside supply and demand versus their exclusive inclination to trade.

# 2.2.2 Control variables in the Trade-Growth Model

This study controls for important growth determinants, while also deploying country and time fixed effects. First, countries that invest in capital formation tend to grow faster. The more capital a country accumulates and deploys, the faster its economy grows (Hsieh and Lai 1994; Phetsavong and Ichihashi 2012; Ramirez and Nazmi 2003). Capital investment improves productivity by increasing infrastructure and equipment, as well as upgrading existing, and depreciating equipment.<sup>9</sup> The experience of the East Asian Tigers<sup>10</sup> demonstrated that increased domestic savings (in a stable, market-oriented environment) supports the accumulation of capital, given the relationship between savings and investment. In turn, this facilitates technology transfer and boosts productivity (Stiglitz and Yusuf 2001).

> 8 This measure of trade openness features frequently in a plethora of cross-country studies that investigate a variety of questions concerning trade openness (Cermeño, Grier, and Grier 2010; Fatás and Mihov 2001; Goldfajn and Valdéz 1999; Levine and Renelt 1992; Rodrik 1998; Yeyati and Panizza 2011).

> 9 Capital formation represents increases in capital goods, namely equipment, tools, transportation assets, and infrastructure.

> 10 For example, Hong Kong SAR, China; Singapore; the Republic of Korea; and Taiwan, China.

5