Trade in goods and trade in services linkage: Some evidence from casuality test

Abstract

The conventional view is that service sector is a collection of mainly non-tradable activities with low productivity growth potential. The above view is fast changing. Trade in services provides same mutual economic gains made possible by trade in goods. Trade in services is essential and inseparable from trade in goods. The present paper is an attempt to understand whether trade in goods cause trade in services or vice-versa. The study is based on country level data collected over a 21 year period. Granger Causality Test is employed to determine the nature of causality between trade in goods and trade in services for countries in different income groups. Out of 20 countries selected for Causality Test, in 13 countries trade in goods is causing trade in services. The results also reveal that differences in income do not play a role in determining the direction of casual relationship. The study has certain conclusions such that liberalization of trade in goods at GATT/ WTO level has been an important factor for the growth of trade in service in recent years.