Abstract—Studies revealing the positive relationship between trade and income are often criticized with the argument that “development should mean more than rising incomes”. Taking this argument as a base and utilizing panel data, Davies and Quinlivan [1] have demonstrated that increases in trade are positively associated with future increases in social welfare as measured by the Human Development Index (HDI). The purpose of this study is twofold: Firstly, utilizing an income based country classification; it is aimed to investigate whether the positive association between foreign trade and HDI is valid within all country groups. Secondly, keeping the same categorization as a base; it is aimed to reveal whether the positive link between trade and HDI still exists when the income components of the index are excluded. Employing a panel data framework of 106 countries, this study reveals that the positive link between trade and human development is valid only for high and medium income countries. Moreover, the positive link between trade and human development diminishes in lower-medium income countries when only non-income components of the index are taken into consideration. Keywords—HDI, foreign trade, development, panel data. I. INTRODUCTION S free trade a desirable objective of policy for a country? This issue has kept its importance and remained at the centre stage of major debates among economists ever since the times of Adam Smith, Stuart Mill, and David Ricardo [2]. Although there are controversies about the impact of trade on income, a great majority of research on the issue reports that there is a positive association between free trade and income [1], [3], [4] [5]. On the other hand, studies revealing the positive relationship between trade and income are often criticized with the argument that “development should mean more than rising incomes” [2]. Taking this argument as a base and utilizing panel data, Davies and Quinlivan [1] have demonstrated that increases in trade are positively associated with future increases in social welfare as measured by the Human Development Index (HDI)- a multi-component measure of income, education, and literacy conducted by United Nations Development Programme. Umut Gündüz is with the Management Engineering Department, Istanbul Technical University, 34367 Macka Istanbul, Turkey (corresponding author to provide phone: +90 212 2931300-2789; fax: +90 212 2407260; e-mail: gunduzu@itu.edu.tr). Mehtap Hisarciklilar is with the Management Engineering Department, Istanbul Technical University, 34367 Macka Istanbul, Turkey (e-mail: hisarciklilar@itu.edu.tr). Tolga Kaya is with the Management Engineering Department, Istanbul Technical University, 34367 Macka Istanbul, Turkey (e-mail: kayatolga@itu.edu.tr). The purpose of this study is twofold: Firstly, utilizing an income based country classification; it is aimed to investigate whether the positive association between foreign trade and HDI is valid within all country groups. Since income is an essential component of HDI and it is widely accepted that there is a positive link between trade and income, one can come up with the question whether the positive link between trade and human development still exists when the income components of the index are excluded. The second purpose of this study is, keeping the same country categorization as a base, to investigate whether the positive association between foreign trade and HDI still exists when only life expectancy, literacy, and enrollment components of the index are taken into account. The rest of the paper is organized as follows: In section two, debates over the relationship between trade, growth and income are summarized. Section three includes the introduction of HDI and HDI*. In section four, the modeling approach is briefly introduced. Data structure, variables and the country categorizations used in this study are introduced in section five. Finally, section six contains the findings of the study. II. TRADE AND INCOME Although Ricardo’s notion of comparative advantage was both simple and profound, debates on the payoffs of international trade had been one of the touchstones of professionalism in economics for about two centuries [6]. According to advocates of free trade, by channeling resources into more efficient industries, free trade increases world output. As a result, although gains from trade are shared unequally among countries, world per-capita income increases, both domestic and world welfare improve [1]. According to another view, trade is a zero sum game where the rich countries get richer and the poor countries get poorer. Even if trade is positively associated with growth, this does not necessarily imply a causality as it is difficult to differentiate between the effects of trade and those other policies on economic growth [7]. It is believed that, after mid-1980’s, advocates of free trade started experiencing harder times than any time since the publication of Ricardo’s Principles of Political Economy [8], [9], [6]. This was mostly due to two theoretical challenges: First challenge was based on the demands for fair trade as a precondition of free trade. Second came from the concern that free trade makes the unskilled labor poorer in the developed countries [2], [9]. For example, in the United States, the The Impact of Trade on Social Development Umut Gunduz, Mehtap Hisarciklilar, and Tolga Kaya I World Academy of Science, Engineering and Technology International Journal of Economics and Management Engineering Vol:3, No:6, 2009 1231 International Scholarly and Scientific Research & Innovation 3(6) 2009 scholar.waset.org/1307-6892/13274 International Science Index, Economics and Management Engineering Vol:3, No:6, 2009 waset.org/Publication/13274