Causality Study of Trade and Economic Growth of Nepal

Abstract

This paper investigates the impact of foreign trade on economic growth in Nepal. The objective of this study is to identify the causal relationship between the foreign trade and economic growth of Nepal. For this achieving the purpose, secondary data of 1975 to 2017 have been used, which are referenced from the Nepal Rastra Bank. The analysis methods has been used the Auto Regression Model and Granger-Causality Tests for achieved the results. The result of the study reveals that there is a significant relationship between the export and economic growth of Nepal. The result showed when export increases by 1 unit then GDP increases by 0.58 units in short run. It indicates that current GDP growth is also affected by past year’s export. Similarly, Granger causality test also shows that export trade caucused to economic growth (p=0.0071) and foreign loan also caucused to economic growth (p=0.0410). It shows that there is a unidirectional causality with economic growth in Nepal. Hence, this study suggests that the policy makers should focus on exportable products which have potential for larger scale productions within the country, and comparative advantage for export trade as well as economic growth in Nepal. Moreover, national economic policy should be focused on investment friendly environment and creating a trust for foreign loan in Nepal.