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Trade and Growth Nexus in South Korea: Analysis Using Vector Error Correction Model and Granger Causality Test

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Name of the Asset | Trade and Growth Nexus in South Korea: Analysis Using Vector Error Correction Model and Granger Causality Test
Type of Asset | Working Paper
Date | November 2015

Summary

Most economists agree that greater openness to international trade has been the basis for sustained and rapid economic growth. This study examines the connection between trade and economic growth in South Korea, where trade has been an important sector of the country’s economy. It estimates a VAR model of a Cobb Douglas production function that expresses each variable as a linear function of its own past values, the past values of all other variables considered, and a serially uncorrelated error term, using time series data between 1960 and 2010. The results show a unidirectional causality running from exports to economic growth in Korea, and that causality for imports in Korea was bi-directional with economic growth. This displays robust evidence that both imports and exports play a significant role in promoting economic growth in Korea, and may be attributable to the fact that a resource-scarce Korea must import raw materials. These results imply a singular trade policy that focuses only on exports might not be effective in stimulating economic growth.

Authors | Denu Lemma Tsegaye, Adama Science and Technology University, Ethiopia
Country and/or Region | South Korea
Name of the Program | KOICA Development Research Award 2014-15, a research competition held on the theme of the ‘Relevance of Korean Development Experience in Developing Countries
Funder(s) | Korea International Cooperation Agency (KOICA)

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