Impact 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. The study did not provide any explanation as to why the results were stronger in the US compared to Canada. 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. This implies that there is a distinct relationship between imports and GDP and the fluctuations in GDP can be partly explained by imports. 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. Afonso argues that free trade, which includes both imports and exports, results in economic growth in developed countries because it impacts on domestic innovations and invention. The role of innovations and entrepreneurship on enhancing economic growth is widely agreed upon by academics and professional economist. Innovation spur economic activity by developing new products, creating demand for it and it the process creating employment in the sector as well as complimentary sectors. Afonso also argues that free trade allows for importation of capital goods that further improves the ability to adopt new innovations (Afonso). A non-linear regression model conducted by Priede and Jiaotong also revealed also similar findings. Their study sought to analyze the impact of imports competition on quality of exports and income level. Their study was based on the European Union that eliminated both tariff as well as non-tariff barriers for trade among non-member countries. The study period was between 1995 and 2005 (Priede and Jiaotong). Their study revealed that import competition has a positive impact on quality. In addition, import competition has a positive impact on the country income level. The existing literature point at an improvement in economic growth with free trade. The nature and extent to which an economy grows depends on the development and income level of the economy. For instance, the economic growth explained by free trade is higher in developing countries compared to developed countries. This is explained by economic convergence theories that argue that free trade allows developing countries to import capital goods from developed countries allowing to catch up with the developed countries over time. However, the impact of free trade on developed countries is still significant. The geographic location also plays a significant role in determining the strength of the relationship between the two variables. There are few studies that have been conducted on the US assessing the nature and extent of the relationship between imports and economic growth. This study seeks to fill the gap. In addition, 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. The study will also use correlational analysis to first determine whether there is any unique relationship between imports and GDP before performing the regression analysis.
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
I. 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;
Ho: There is no relationship between imports and the economic growth in the US
Ha: There is a positive relationship between imports and the economic growth in the US
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