INTERNATIONAL TRADE COMPOSITION AND MEDIUM-RUN GROWTH: Evidence of a Causal Relationship

The motivation for this article stems from Mazumdar's (1996) hypothesis that international trade composition impacts a country's ability to achieve transitional economic growth. In his article, Mazumdar suggested that developing economies, generally known for exporting consumption goods and importing capital goods, benefit more from international trade than do developed economies. In addition to static gains, developing economies experience a decline in the replacement costs of capital as the relative price of capital falls with trade. To empirically test this hypothesis, a trade composition variable is created using unpublished SITC export and import data of both consumption and capital goods. Incorporating this variable into a linear equation, a Granger Causality test and a more extensive VAR test are performed for a select group of developed and developing economies. The empirical results are suggestive, and indicate some support for the hypothesis that trade composition "causes" medium-run transition.