Abstract
This paper examines equilibrium relationships and dynamic causality between economic growth, exports, and imports in Nepal using time-series data between 1965 and 2020. This research examines the impact of exports and imports on the economic growth of Nepal and documents empirical evidence in exports-led growth, imports-led growth, growth-led exports, and growth-led imports hypotheses in both the short and long run. The test results show no evidence favoring the exports-led growth and growth-led exports hypotheses in both the short and long run. However, the study finds evidence supporting the imports-led growth hypothesis in the short term and the growth-led imports hypothesis in the long term. Overall, this paper finds no evidence in favor of the notion that foreign trade supports the economic growth of Nepal in the long run. The research findings may have important implications for policymakers in Nepal. The paper contributes to trade and economic growth literature by investigating the relationship between exports, imports, capital, and gross domestic products in a small economy such as Nepal, where exports make a minimal and imports make an extensive contribution to gross domestic products by using cointegration and the vector error correction model.
Highlights
The role of foreign trade on economic growth has been a critical discussion among economists for decades
Imports may play a crucial role in economic development in the long run since significant export growth is usually associated with rapid imports growth (Rodrik 1999)
The ADF and Phillip–Perron unit test results suggest that the time-series data for the GDP, capital, exports, and imports are nonstationary at their levels but stationary at their first differences
Summary
The role of foreign trade on economic growth has been a critical discussion among economists for decades. Classical economists view the relationship between foreign trade and economic growth optimistically. The impact of exports and imports on economic growth has been a topic of critical discussions and research among academicians and policymakers for decades. Most of the prior studies focus solely on the role of exports on economic growth and use bivariate causal models that ignore contributions of imports (Rahmaddi and Ichihashi 2011). Nepal’s foreign trade has been dominated mainly by imports in recent decades. Nepal’s exports imports graphically fromby close-up anal- FigNepal’s foreign trade and has been dominated mainly imports in A recent decades. Ysisure of the Figure 1Nepal’s shows that the imbalance between exportsfrom and 1965 imports in Nepal was 1 presents exports and imports graphically to 2020.
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