Similarly, the linear interaction term on (relative) capital intensity is always negative and the quadratic term always positive. Therefore, if a country has a sufficiently high capital to labor ratio relative to the rest of the world, then the impact of further openness must be to make this country dirtier. Capital-scarce countries would be made cleaner with trade. This sign pattern may reflect the ceteris paribus factor-endowment hypothesis where factor abundance differences alone determine the composition effect of trade.
Together these results indicate that scale, technique and composition effects are still at work determining pollution concentrations but open economy considerations also matter. But while the sign and statistical significance of the estimates in table 3 are supportive of our approach it is important to investigate whether the magnitude of the coefficient estimates are in some sense plausible.
Scale, Composition and Technique Elasticities
There are several ways to evaluate these results. One method is to examine whether the implied elasticity estimates for scale (GDP/km ), technique (income per capita), composition (capital to labor ratio), and trade intensity (exports plus imports divided by GDP) lead to implausible conclusions regarding income growth or technological progress. In table 4 below we present the elasticities implied by our estimates in table 3. All elasticities are evaluated at the sample means and therefore can be interpreted as those applying to an “average country” in our sample. In calculating the technique and composition elasticities we have assumed that our “average” country’s relative position in the world remains constant when it undergoes either income growth or capital accumulation.
The results in table 4 are largely supportive of our theory. The estimated elasticities are not implausibly high, and all elasticity estimates are significantly different from zero. Moreover the signs for the scale, technique and composition elasticities are as predicted by theory. cash advance payday loans