The relationship between goods trade, service trade and growth: The example of Turkey

The economic indicators demonstrate a process in which the increasingly globalized international trade can contribute significantly to economic growth. The growing contribution of international trade has also been observed in the economic growth of Turkey, which transitioned to a free-market economy in 1980. While the share of merchandise trade is significant within this contribution, the share of service trade, which can generate higher value-added, continues to increase steadily. Within international trade, the role of service trade, often overlooked, is being amplified, particularly in the production of manufactured goods, in light of advancements in information and communication technologies. Within this framework, this study investigates the impact of international trade in both goods and services on economic growth, while also examining the relationship between merchandise and service trade, with the results being assessed in the context of the Turkish economy. In this study conducted on Turkey, the relationship between merchandise trade and service trade with economic growth, as well as their interrelation, is examined using Fourier-based cointegration and causality tests based on annual data for the period 1981-2019. It is well-known that during the sample period, various internal and external events affecting the Turkish economy led to structural breaks in macroeconomic series. In this context, the methods used in the study were selected considering these structural breaks. Unit root analysis was conducted using ADF and Fourier ADF tests; cointegration analysis was performed using the Fourier Bootstrap ARDL Bound Test; and causality analysis was carried out using the Fourier Granger test. As a common result of conventional and structural break unit root tests, it was determined that all series are stationary at the first difference in the constant trend model. In the cointegration analysis, a long-term relationship was not found for the first six models, which include the relationship between merchandise trade and service trade with economic growth. However, for Models 7, 8, and 9, which reveal the relationship between merchandise and service trade, a cointegration relationship was detected, and the long and short-term coefficients in these relationships were reported. Finally, as a result of the causality test, a two-way short-term relationship was found between international trade series and RGDP. Similarly, a two-way causality relationship was detected between merchandise and service trade series. Additionally, there is a one-way causality from exchange rates to service imports, and a two-way causality relationship between exchange rates and other series.