Trade, growth, and welfare linkages in North America: An empirical analysis

Changes in welfare are computed as the combined effects of technological progress (TFP), and terms of trade for the NAFTA signatories. Nonparametric methods are used to derive indices of output, TFP, terms of trade, and welfare from aggregate time-series data. Results indicate the importance of both TFP growth and terms of trade to welfare in all three countries. An analysis of TFP growth suggest that increased openness of the Mexican economy augments this rate effect through, for example, the increased imports of more modern intermediate factors while, for the more open economies, the NAFTA trade effects are small. Hence, other Latin American countries joining the NAFTA agreement may experience gains in TFP growth similar to Mexico.