Journal of Economics and Management Volume 20, No. 2 September, 2024

A Causal Relationship between Trade, Foreign Direct Investment, Exchange Rate and Economic Growth in Gambia

Lee, Cheng-Wen

College of Business, Chung Yuan Christian University, Taiwan.

Patrick A. Mendy

College of Business, Chung Yuan Christian University, Taiwan.

Abstract

The study explores how trade, foreign direct investment (FDI), exchange rate and economic growth relate causally within the Gambia. It investigates the mutual effects over time analogs and explore into subterranean dynamics that drive socioeconomic progress over the period under study. The main objective of this study is to analyze the impact of trade, FDI and exchange rate on economic growth in Gambia. This investigation employs quantitative methodologies combined with econometric techniques drawn from a diverse range of time-series data sources; seeking crucial insights regarding interconnections among the macroeconomic variables of interest being: measurements reflecting GDP Growth, trade, exchange rate and FDI inflows. The study employed secondary time series data sourced from World Bank Website using OLS, Johansen’s Cointegration, and Causality Analysis for 1980 to 2021 period. It unravels a significant outcome in which the independent variables have a positive impact on economic growth. There is no reciprocal causality relationship between the variables except a unidirectional causal relationship between exchange rate and GDP as well as FDI with direction from exchange rate to GDP and to FDI. The findings indicate that trade openness, attracting FDI, and maintaining exchange rate stability are crucial for promoting sustained economic growth in Gambia. Therefore, the government should engage in trade liberation, attract more FDI with a stable foreign currency exchange rate which will help enhance economic growth.

Keywords：Economic Growth, Trade, Foreign Direct Investment, Exchange rate, Causality, Gambia

JEL Classifications：O11, F14, F21, F31, O55

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