Effect of Trade and Extent of the Market on Economic Growth: The Case of Iran and Its Trading Partners

Sustainable economic growth is one of the most important macroeconomic objectives. There are various factors affecting economic growth including trade and extent of the market. The aim of this study is to examin the effect of trade and extent of the market on economic growth in Iran and its trading partners using the data over the period 1995-2005. Trading partners comprise Germany, Italy, Singapore, Netherlands, China, Japan, the United Arab Emirates, India, France, South Korea, Kuwait, Sweden, Switzerland, USA, Azerbaijan, Greece, Pakistan, Spain, Turkey, Bahrain, Austria, Saudi Arabia, Tajikistan, the United Kingdom, Qatar, Brazil, Armenia, Thailand, Indonesia, and the Syrian Arab Republic. A growth regression model is used to model the relationship between economic growth, trade and extent of the market. The OLS technique is employed to estimate the growth model. Three openness measures are include in the model. They comprise nominal openness, real openness and geography-fitted real openness. We find that trade and domestic market size are robust determinants of economic growth over the 1995-2005 period when trade openness is measured as the US dollar value of imports and exports relative to GDP in PPP US$ (real openness). When trade openness is measured as the US dollar value of imports and exports relative to GDP in exchange rate US$ (nominal openness). However, trade and the size of market are non-robust determinants of growth. We argue that real openness is the more appropriate measure of trade. Moreover, when geography-fitted real openness is considered as a measure of trade openness, it has a strong effect on economic growth in countries with smaller domestic market.