The main purpose of this study is to examine the dynamic relationship between various variables in the system of equations formed in the long-term and short-term on economic growth. This empirical study utilizing the multivariate approach which includes Johansen Juselius and Vector Error Correction Model (VECM). Through the econometric method used, this study is able to detect the existence of long-term and short-term relationship and the strength of each variable can be identified. The empirical study has proven that international trade plays an important role in generating economic growth where Gross Domestic Product (GDP) acts as an endogenous variable in the long-term system of equations for both models, Model 1 - Export and Model 2 - Import. In addition, the effect of interaction variables in both models which is X_REER (ECT = 0.005041) in Model 1 - Export and M_REER (ECT = 0.011019) in Model 2 – Import were positive and significant. Besides, the results showed bidirectional causality between interaction variables and economic growth in the long-term and also in the short-term. This means international trade is very sensitive to changes in exchange rate. However, because international trade is a major source of national income, any shocks in exchange rate still can be overcome by involving the interaction variable. Hence, the influence of interaction variables between international trade which is export and import with the exchange rate should be taken simultaneously in the implementation of policies to generate more rapid economic growth in the future.
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In-Text Citation: (Sulaiman & Ramli, 2018)
To Cite this Article: Sulaiman, N. A., & Ramli, N. R. @. (2018). Effect of International Trade to Economic Growth in Malaysia. International Journal of Academic Research in Business and Social Sciences, 8(12), 2278–2292.
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