Exports, imports and economic growth in South Korea and Japan: a tale of two economies

Abstract

This article investigates the relationship between exports, imports and economic growth for South Korea and Japan by constructing a Vector Autoregression (VAR) model. Causality is examined between real Gross Domestic Product (GDP), real exports and real imports. Several principal results emerge from the empirical work. First, the three variables are cointegrated for both countries, implying that a long run steady state exists. Second, there is evidence of bidirectional causality between imports and economic growth for both countries. Finally, Japan seems to experience export-led growth, while GDP growth in South Korea has a negative effect on export growth. These contrasting findings could result from export goods in Japan exhibiting greater nonprice competitive aspects, although their success fails to trigger a virtuous circle since growth fails to lead to increased exports, while for South Korea, output growth leads to a decrease in export growth suggesting a strong domestic market.