t is important to recognize that a fall in trade frictions or change in world prices alters both the scale of economic activity and income per capita in addition to those changes mentioned above. As a result, the full impact of a reduction in trade frictions is not captured by the coefficient on b . The b term is a trade-induced composition effect, holding scale and per capita income fixed. A full accounting of the impact of further openness would have to take into account the induced scale and technique effects as well as any trade-induced composition effect. Totally differentiating (2.17) with respect to b, holding all else except trade frictions constant yields: z = g1S – g3I + g7b.
A fall in trade frictions results in an increase in economic activity and this scale effect increases pollution. There will also be an increase in real per capita income creating a technique effect. And finally, there is the composition effect discussed previously. We will not attempt to measure how a reduction in trade frictions alters either the scale of economic activity or income per capita in our empirical work.
The scale of the economy and real per capita income are influenced by many factors in addition to openness to trade. Identifying the separate influence of trade on growth and on static income levels is the subject of an already voluminous, and somewhat controversial, literature. Our strategy is to provide a direct estimate of the composition effect created by an increase in openness by controlling for scale and per capita income. We also provide estimates linking the scale of economic activity and income levels to pollution concentrations. We then use economic theory to tell us how to combine our estimates of scale, technique and (trade-induced) composition effects in order to assess the environmental consequences of freer trade.