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Why are some societies still poor? Recent research suggests that a country’s “genetic distance”—a measure of the time elapsed since two populations had common ancestry—from the United States is a significant predictor of development even after controlling for an ostensibly exhaustive list of geographic, historical, religious and linguistic variables. We find, by contrast, that the correlation of genetic distance from the US and GDP per capita disappears with the addition of controls for geography, including distance from the equator and a dummy for sub-Saharan Africa.

Commonly used trade-weighted real exchange rate indices are computed as indices-of-indices, and thus do not adequately account for growth in trade with developing countries. Weighted Average Relative Price (WARP) indices solve this problem but do not control for productivity differences, as developing countries are observed to have lower price levels via the Balassa-Samuelson effect. In this paper, we remedy these problems in two ways. First we propose a Balassa-Samuelson productivity adjustment to Weighted Average Relative Price indices (BS-WARP). Secondly, we introduce a Weighted Average Relative Unit Labor Cost index (WARULC) for manufacturing and show that this measure does a much better job predicting trade imbalances and declines in manufacturing employment than the IMF's Relative ULC measure created as an index-of-indices. Our series reveal that for many countries currently mired in liquidity traps, relative prices reached historic highs heading into the financial crisis of 2008. We document that in 2002 -- during the surprisingly sudden collapse in US manufacturing -- US relative prices had not been that high relative to trading partners since the worst year of the Great Depression.

This paper revisits the early time series estimates of currency unions on trade from an historical perspective using a dynamic gravity equation and by conducting in-depth case studies of currency union breakups. The early large estimates were driven by omitted variables, as many currency union exits were coterminous with warfare, communist takeovers, coup d'etats, genocide, bloody wars of independence, various other geopolitical travesties, or were predated by trade collapses. Static gravity estimates are found to be sensitive to controlling for these omitted variables, while a dynamic gravity specification implies that currency unions do not increase trade.

What determines trade patterns? Habit persistence in consumer tastes and learning-by-doing in production imply that history and culture are key determinants. Deriving a dynamic gravity equation from a simple model, it is shown that cultural similarity is a product of history, so that trade patterns are a function of bilateral GDP, current trade costs, and the past history of trade costs. Using a trade data set which spans from 1870 to 2000, it is shown that many gravity variables operate via lagged trade, that historical trade shocks matter, and that trade patterns are persistent, even across centuries.