International Trade and Economic Growth in Iran

Trade promotes growth through increased specialization, efficient resource allocation, diffusion of international knowledge, and heightened domestic competition. Recent advances in the theory of endogenous technological progress have led to renewed interest in the relation between trade, technological change, human capital and economic growth. In theory, trade yields gains for growth, via at least three main channels. The first channel of growth through trade derives from the opportunity that trade specialization offers to exploit comparative advantage. A second channel of growth from trade is via its impact on the flow of ideas, knowledge and technologies, and finally, trade itself is linked with the discovery of new ways of doing things. Despite these seemingly positive growth aspects of international trade, the empirical evidence on the effects of trade on growth appears to be mixed. The ambiguous results are related to conceptual and empirical shortcomings. This paper conducts an empirical investigation of the role of trade in determining the rate of economic growth in Iran using the annual data from 1959 to 2003. The results show that the rate of real per capita physical capital stock and the rate of human capital stock have by far the greatest effects on real per capita GDP growth. The variables have coefficients above 0.4 and are statistically significant in the per capita GDP growth regression. The third strongest impact comes from the rate of inflation which has a negative effect on the real per capita GDP growth and finally a positive relationship between international trade indicators and economic growth is found and it is concluded that trade has a positive effect on growth but this effects relatively is not strong.