Trade Openness and Other Selected Macroeconomic Effects on Economic Growth in Malaysia

Abstract

This study is conducted to investigate the relationship and effects of trade openness and selected macroeconomic variables, namely gross fixed capital formation and inflation rate, on economic growth in Malaysia. The annual time series macroeconomic data collected from the official website of the World Bank, from 1980 to 2020, was used in this study. This study tries to examine the short-run and long-run relationships between the macroeconomic variables and gross domestic product. Thus, the Vector Error Correction Model (VECM) approach is adopted to achieve the study's objective. The findings of the unit root test indicate that the time-series data of all variables are stationary at first difference; therefore, VECM can be performed in this empirical study. The test of Johansen Juselius Cointegration shows the existence of a cointegration system in the long-run equilibrium among the variables. In terms of causality, gross domestic product and gross fixed capital formation have Granger causality with all selected macroeconomic variables; on the other hand, trade openness has Granger causality only with the inflation rate, while the inflation rate has Granger causality with only trade openness and gross fixed capital formation. Hence, trade openness is the dominant factor affecting economic growth due to its ability to increase access to products and services, resource allocation efficiency, and total factor productivity.