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This paper examines the role of trade, that is exports and imports, on economic growth, represented through real GDP and provides policy recommendations. For this purpose, time-series data from 1959 to 2019 collected in Ghana is used, where the export driven growth model is stressed on, and the structural adjustment policy is considered a success. We have conducted two types of computations in order to better discern the data: three separate univariate analyses and thereafter a VAR and VECM.
According to our analysis, the results from the univariate time-series indicate that the future values of GDP could, to a limited degree, be predicted by their past values. However, the same cannot be concluded for exports and imports that had badly fitting models, violating normality in the residuals requirements and suffering from autocorrelation. A multivariate analysis was thus used to better understand the relationship between exports, imports and real GDP. A VAR was utilised, subsequently leading to the application of the VECM due to there being cointegration.
The results from multivariate analysis indicated that GDP was negatively dependent on its previous value when the lagged values were jointly taken into consideration. Unlike the univariate analysis, the VAR model observes normality, homoscedasticity and no serial autocorrelation. The cointegration test establishes a relationship between Real GDP, exports and imports, with results being significant at 5% level. The test shows that imports have a negative long-run impact on GDP and exports have a positive impact on GDP. The granger causality test shows two things - first, we can predict the value of Real GDP based on the value of exports and second, we can predict the value of imports based on the value of exports. Further, when we conduct VECM analysis, we observe the speed of adjustment for Real GDP to be -28%, which indicates that our model will recover from shocks pretty soon.
Thus, Ghana needs to take advantage of its natural resources and train its labour force to develop local production capacity. Export diversification is crucial, and incorporating small enterprises that are drivers in the economy can be used to reduce a reliance on imports.