Trade and GDP Growth: Causal Relations in the United States and Canada

Abstract

Causal relations between the growth rates of exports, imports, and the GDP of Canada and the United States are studied using the vector error correction (VEC) model. Utilizing time‐series annual data (1948‐1996), Granger causality tests are performed within the framework of the VEC model. Bidirectional causality is supported for Canada from the foreign sector to GDP and vice versa. A weaker relationship between the foreign sector and GDP is statistically supported for the United States. These results are also supported by comparing the total trade (exports plus imports) shares to GDP of the two neighboring economies. The Granger causality tests suggest that Canada is a more open economy than the United States and more trade dependent.