Impacts of imports on US Economic Growth

Introduction

Exports play an important role in in influencing the economic growth rate in any country. An increase in export is associated with increase in domestic income because domestic producers are able to produce more and sell to other countries. An increase in domestic production increases domestic employments levels which translates into a lower inflation level. The role of export plays in determining economic growth is universally agreed upon. However, there is no consensus on the impact on imports on economic growth. While others argue imports have a negative impact on economic growth, others argue that increasing imports has a positive influence on economic growth. Supporters of protectionist policies often argue that imports create a decline in economic performance. They argue that imports have a negative impact on domestic firms because they reduce their market share by competing with them locally. This causes them to reduce production or in some cases shut down. This has always been the argument for supporting protection of certain industries from foreign competition in the domestic market. An increase in imports always raises concerns as it is interpreted as if the economy is worse off than before. However, free trade proponents often argue that in fact the contrary is true. Free trade proponents argue that, just like exports, imports are central in creating economic growth. They argue that imports consists of capital goods that are used in production of other goods and services. Therefore, they improve the production capacity of the economy consequently creating both economic growth and reducing employments. In addition, competition created by foreign firms is good in ensuring that domestic firms become competitive as only the competitive firms will survive. Therefore, the domestic firms will be better placed in competing with other firms in the global market. Lastly, trade creates mutual relationships as different parties and countries interact. It should be appreciated that US exports are imports in another country. If the US does not allow goods from other countries, the other countries may react and also block US goods from their markets creating lose-lose situations.

There are numerous studies that have been conducted on the impact of the imports on the gross domestic product. Zestos and Tao performed a comparative study for US and Canada to evaluate the impact of both the exports and imports on the economic performance for the two countries. Their study was conducted for the 1946 and 1996. Their study revealed that there is a significant positive relationship between imports and economic growth in both countries. However, the impact was bigger in Canada compared to the US. Another study by Ugur on the relationship between imports and economic growth in Turkey revealed a unidirectional relationship between imports and the GDP. The study used multivariate VAR analysis. A study Ghazali also revealed that there is a positive relationship between imports and exports in relation to economic growth of Malaysia. He recommended that the government should promote free trade in both exports and imports. A study conducted by Li, Greenway and Hin on the impact of import of services on the economic growth provided interesting results. The study revealed there is positive relationship between the two variables in developed countries. However, in developing countries importing services has a negative impact on the economic growth of those countries. It also showed that import of transport and travel services does not have any significant impact on the economic growth of both developed and developing countries. The study used cross sectional data for 82 countries. This study intend to use more recent data in testing the relationship between economic growth and imports. In addition this test will also control for the consumer price index to control for the effect of change in prices over time.

Objective of the Study

Several valid arguments have been passed by both free trade proponents and free trade opponent either supporting or rejecting free trade. This study is interested in empirically testing the nature impact of imports on the economic growth of the US

Research question

The question that this study seeks to answer is whether imports create a positive impact or a negative impact on economic growth. The research question is as follows

What is the nature of the impact of imports on economic growth?

Hypothesis

This study believes that imports supplements domestic capital stock thus improving domestic production capability. In addition, free trade improves production and operational efficiency of domestic firms through competition. Consequently, imports create economic growth. Therefore, this study predicts that there is a positive relationship between imports and economic growth. The null hypothesis and alternate hypotheses were as follows;

H_o: There is no relationship between imports and the economic growth in the US

H_a: There is a positive relationship between imports and the economic growth in the US

Methodology

The study will use times series data from 1960 to 2006. The duration has been selected because it is adequate to provide an estimation of the relationship of imports and the economic growth rate. The variables of interest for this study will be the annual GDP, the annual US imports and the annual US exports and Consumer Price Index. Annual US data will be used because it eliminates variations as a result of seasonality that may influence the results. Gross domestic product was used as a measure of economic growth. Data on the gross domestic product will be obtained from US Department of Agriculture Economic Research Service. Consumer price index will be used to isolate the effect of increase in gross domestic product as a result of the increase in general prices over time. The base year for the consumer price index is the year 2000. Data on US imports and US exports for the years of consideration was obtained from the US Census Bureau Department of Commerce.

Model

The study seeks to determine the relationship between US economic growth and US imports. GDP is a proxy for economic growth. Therefore, the independent variable is the US gross domestic product. Economic growth is explained by imports. Therefore, imports is the independent variables. Others factors that influence gross domestic product that were included in the equation are exports and the consumer price index. Therefore, the model will have three explanatory variables. The study will use ordinary least squares in estimating the model. The model specification will be as follows;

Y_t = β₁ + β₂X_t + β3 M_t +B4C_t

Y_t is the US gross domestic product for a given year

X_t is the US exports for a given year

M_t is the US imports for a given year.

C_tis the consumer price index for a given year.

Data Analysis

Descriptive Statistics

The study will use descriptive statistics to provide an overview of the data analyzed. The mean as well as standard deviation of gross domestic product, US imports, US exports and the US consumer price index will be provided. In addition, the maximum value, minimum value and ranges for the data will be provided.

Trend Analysis

A line graph will be used to visualize movements of the US gross domestic product, US imports, US exports and US CPI to show their changes for over the years of interest for this study.

Correlation Analysis

Correlational analysis will be performed as a preliminary test before performing the regression analysis. The intention will be to determine whether there is any correlation between the dependent variable and the individual independent variables. It will also be used to evaluate the nature and the strength of that relationship.

Regression Analysis

Regression analysis will be conducted using ordinary least squares method to determine the coefficients that best fit the model for this study. The R-square from the results will provide the explanatory power of the model. In addition, the individual coefficient will be assessed to determine the direction of the relationship between gross domestic product and the individual independent variables. The coefficients will also be tested for significance at 5 percent to determine whether there is any relationship between the variables and the gross domestic product.

ANOVA

Analysis of variance will used to evaluate wether all the variables are jointly significant in explaining the gross domestic product. The significance level is 5 percent.

T-test for individual variables

T-test for regression individual co-efficient will be used to assess whether they are individually significant.

Works Cited

Li, Xiaoying , David Greenway and Robert Hine. “Imports of services and economic growth:.” SETI (2003): 1-19.

Ugur, Ahmet. “Import and Economic Growth in Turkey:Evidence from Multivariate VAR Analysis.” EAST-WEST Journal of ECONOMICS AND BUSINESS IX (2008): 54-75.

Zestos, George and Xiangnan Tao. “Trade and GDP Growth: Causal Relations in the United States and Canada.” Southern Economic Journal (2002): 859-874.