TERMS OF TRADE AND ECONOMIC GROWTH IN MALAYSIA

Abstract

The main aim of the study is to investigate the impact of terms of trade on economic growth of Malaysia using time series data. Moreover, the study examines Grangercausality between terms of trade and economic growth. The empirical models are based on an augmented production function. The study employs two measures of terms of trade, namely commodity terms of trade and income terms of trade. The estimates of cointegrating equations and error correction models suggest that an increase in commodity terms of trade or income terms of trade would lead to an increase in economic growth. Nonetheless, there is no strong evidence to suggest that terms of trade Granger causes economic growth and vice versa in the short run. Generally, changes in terms of trade have a significant impact on economic growth of Malaysia.