Foreign Trade and Economic Growth: Evidence of Thirlwall’s Law in Iran

Abstract

Thirlwall’s law establishes a relation between the long-run growth rate, the growth of exports and the long-run income elasticity of imports. This paper applies Thirlwall’s basic balance-of-payments constraint growth model to Iranian economic growth for the period of 1971-2007 by using Autoregressive Distributed Lag (ARDL) Bounds Testing approach. The empirical results reveal that import is cointegrated with relative price and income, and the equilibrium growth rates coincide with actual growth rates. However, our estimated findings reveal that the Thirlwall’s law has been rejected in Iran. In other words, balance of payment doesn’t hinder economic growth in this country. The reason may be due to the fact that Iran is a member of OPEC and its oil export plays a significance role in the country’s foreign trade.