Measuring Product-Market Integration

Abstract

Globalization — the integration of national economies — has become one of the most widely used buzzwords of the late twentieth century. While many signs of globalization are quite obvious, it is hard to say whether market integration is more important for economic performance today than it was thirty years ago. This chapter presents some new price- and quantity-based measures of product-market integration in order to understand the link between countries' trade policies and their economic performance. Do countries grow faster as their product markets become more connected to those of other countries? Has product-market integration contributed to rising income inequality in countries? This chapter considers the behavior of deviations from the law of one price, as well as the behavior of relative prices, how “thick” product markets are in terms of breadth of trade flows, the geographic dispersion of production, and production fragmentation using evidence from value-added and gross output.

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