Trade Openness and Income Inequality

This paper investigates the impact of trade openness on country’s income distribution or income inequality on both developing and developed countries during the years 1960-2005. The data are grouped into 5 year (10 periods) with 86 countries in the sample. Also, I group countries into 8 regions to observe the changes in trade openness and income inequality during the study period. Using OLS regressions, the results show that increases in trade openness leads to a greater income inequality in overall countries. By running the regressions separately for developing and developed countries, the results indicate an interesting fact: while increases in trade openness increases income inequality in developing countries, it actually decreases income inequality in developed countries though the result is not significant.