The Impact of Foreign Trade on Economic Growth in Ghana (1980 – 2012)

The study examined the effect of foreign trade on economic growth in Ghana by using a Johansen cointegration analysis. It was found out that all the variables of interest; real gross domestic product, foreign direct investment exports, imports and foreign direct investment turned out to be non stationary at their levels but became stationary at their first difference. The results of Johansens's cointegration test indicated that there exist a long run and short run relationship among real gross domestic product, foreign direct investment, exports, imports and foreign direct investment in Ghana. The study found out that in the long run, exports had a positive effect on real gross domestic product and as a result, an increase in exports leads to an improvement in real gross domestic product. Imports and foreign direct investment had a negative effect on real gross domestic product, respectively. Therefore, a decline in both variables causes an improvement in real gross domestic product. In the long run all the variables were statistically significant at 5% significance level. The speed of adjustment was 4.57 percentage point taking place at each year towards the long run periods. Therefore, exports should be encouraged, diversified, processed raw materials before export to improve the real gross domestic product. Imports should be reduced by assisting our infant industries to produce more of our imported goods and services. Finally, foreign direct investment must be channeled to productive sectors of the economy (agriculture, education, health and housing) to improve the real gross domestic product of Ghana.