How Terms of Trade Impact Economic Growth: The Case of the United States

Abstract

Trade has a crucial role in a country’s economic development. This study scrutinizes the impact of terms of trade (TOT), labor force, and capital on the United States’ economic growth. This study aims to investigate the short and long-run impacts of Capital, Labor, and Terms of Trade on the economic growth of the United States. To accomplish the study’s goals, this study analyzed a time series of annual data for the United States from 1980 to 2021. The Philipps-Perron test, the model of Augmented Dickey-Fuller (ADF) model, and the Autoregressive Distributed lag (ARDL) of the bound tests were applied to test whether the data is stationary or not. We employed an Autoregressive Distributed lag (ARDL) unit root model to examine the study variables’ short- and long-term associations. The outcomes of the unit root of the (ADF) test explain that both the Trace and Maximum Eigenvalues values showed that the study’s variables were stationary at both level and first difference, but stationarity was not there at the first difference using the PP model. At I(0) and I(1), the log(GDP), labor, capital, and log(TOT) stayed stationary. However, the estimated results of the (ARDL) model revealed that the economic growth of the United States was negatively and significantly affected by the (TOT), but economic growth, capital, and the labor force have favorable long and short-run relationships. The results of ECM(-1) imply that 7% of adjustment from disequilibrium to equilibrium from short-run to long-run. This study’s findings suggest that policymakers and governments ease trade between countries to achieve the highest economic growth.