Final Consumption and Foreign Trade for Romania and European Union – A Granger causality-based analysis

Mihai Păunică,Cătălina Motofei,Alexandru Manole,Gabriela-Lidia Tănase

doi:10.2478/picbe-2021-0077

Abstract

Abstract In this paper, the authors seek to analyze if the relationship between final consumption and foreign trade indicators, at a macroeconomic level, manifests as a Granger causality. The graphical representation of the datasets reveals that the evolutions follow a similar pattern (with the exception of the net export). The indicators on both sides of the causality have been widely approached by researchers, as they contribute to the formation of the Gross Domestic Product. The research methodology follows the Toda-Yamamoto procedure for measurement of Granger causality, as the variables were expected to be (and were found to be in the initial step of the data analysis) non-stationary, and the results on the processing in levels can provide more accurate information. The research hypotheses were designed in order to detail the main topic of the paper on foreign trade indicators. None of the hypotheses has been validated, and the authors consider, in the future, the application of other methods to assess the quantitative side of the links between foreign trade and final consumption. The authors consider that a significant contribution brought by this study is the type of data analysis method applied and the approach towards the two macroeconomic components of the economy, for the cases of Romania and the entire European Union, of which Romania is a member.

Highlights

Consumption and trade have both been extensively studied in the literature, as two of the main elements that have a connection with a country’s development
We focused our attention on European Union due to the economic similarities between the economies of the countries, and on Romania due to our professional and personal interest regarding the economy of this country
It can be observed that the foreign trade indicators, with the exception of the net export, follow a similar pattern of evolution as the final consumption, which allows the conclusion that there must be some type of connection between the indicators

Summary

Introduction

Consumption and trade (import and export) have both been extensively studied in the literature, as two of the main elements that have a connection with a country’s development. The connections between consumption and economic development and between trade and the gross domestic product are generally known and accepted. Bidirectional causality links can be found between output and trade (measured through imports and exports) in short and long run situations in 11 African countries, supporting the idea that exterior commerce will have an impact on economic growth, in the same way, that the renewable energy consumption will positively influence the GDP (Aïssa et all., 2014). If that is the case, will an increase in trade reduce the final consumption, or is it the other way around? By understanding the way that international trade influences the final consumption, a country can implement import and export policies that will improve consumption and, in the end, the gross domestic product. Consumers can influence the trade policy, which will impact economic growth

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Conclusion