Abstract
North Sumatra is one of the provinces in Indonesia with high levels of economic openness. On average, since 2000, the contribution of export value to the Regional GDP reached 40 % and import value of 28%. Using Granger causality method, the study aims to investigate causal relations between international trade and North Sumatra’s local economy especially the impact of exports and imports on Regional GDP, Regional GDP per capita, employment and poverty reduction. The empirical results of present study discovered that (i) the exports and imports respectively have positive and significant impact on regional GDP, regional GDP per capita, employment and poverty reduction, (ii) there is a bi-directional causality between imports and regional GDP, where GDP growth rate would boost imports over-proportionally, (iii) both exports and imports are dominated by intermediate goods as the raw materials for further processing industry, (iv) export structure which is dominated by the agricultural-based intermediate good is proverty-reduction through factor market in the upstream sector making the rural peoples benefited from the exports.
Highlights
International trade will provide benefits to the countries involved therein
In the last 17 years (2000 - 2016), Trade Index that served as openness parameter {(Export + Import)/ Regional Gross Domestic Product (GDP)} of North Sumatra ranged between 50 - 78, while Export Index (Export/ Regional GDP) was 34 - 44
The magnitude of the value of North Sumatra’s exports since 2000 was at an average of 40 % of the Regional GDP, with the composition of export volume by 75 % of the intermediate goods processed from natural resources, especially fresh palm oil fruits into crude palm oil (CPO) and latex into crumb rubber on one hand and on the other hand, the imports value reached an average of 28 % of Regional GDP with the composition of imports volume of 72 % of intermediate goods will be the raw materials for further processing industry and 3.5 % of capital goods
Summary
International trade will provide benefits to the countries involved therein. According to Adam Smith, trading itself takes place on the basis of absolute advantage, which in the text book of international economics among others by Salvatore (2013) and Krugman et al (2012) describes the model of two countries and two commodities where the efficiency of labor (as the only factor of production) differs in the production of commodities in both countries. The thought development is focused on the reasons why trade takes place, where David Ricardo showed that the absolute advantage is just a special case of a comparative advantage and the advantage is viewed from the perspective of opportunity cost of the commodities produced. A preliminary thesis on welfare improvement as a result of international trade remains unchanged Both countries will benefit from the welfare improvement illustrated with the ability to consume a combination of two commodities outside a production possibility curve (frontier curve), which means to reach furthest out the social indifference curve. The concept of endogenous growth theory proposed by Romer (1990) and Grossman & Helpman (1990) added more international trade benefits especially for developing countries, where with the integration of economy, growth can be accelerated through a variety of channels including increased innovation, technological spillovers and elimination of replication in research and development (R&D)
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