The Effect of Countries’ Geographical Characteristics on Income

:It is known that the countries’ geographic characteristics are not affected by their incomes, or by government policies and other factors that influence income and it is difficult to think of reasons that a country’s geographic characteristics could have effects on its income except through their impact on trade. Despite it seems there is no correlation with the other determinants of income. The object of this paper therefore is to examine the direct relationship between geographical variables and per worker income using a derived equation for this relationship based on Frankel and Romer (1999) model to determine the bilateral trade. The results provide that geographic variables have significant effects on income. Distance has a significant negative impact on income via its negative impact on bilateral trade; the estimated elasticity of income with respect to distance is less (in absolute value) than -1. Income of a country is increasing in its trading partner’s size. And if one of the countries is landlocked, income falls by about a tenth. The coefficients on the common border variable are estimated precisely as about third of country pairs share a border (European Union& Middle East countries). The estimates imply that sharing a border has a considerable impact on country income via its influence on bilateral trade with its trading partner. The presence of a common border alters, a little bit, the effects of the some variables and a lot for the others. For example, the estimated elasticity with respect to country’s trading partner population across a shared border is 0.43 rather than 0.40, and the estimated elasticity with respect to distance is 0.652 (with positive sign) rather than -0.223. The results obtained are quite interesting and draw a conclusion about the important role geographical variables play in explaining income per worker.