Economics and Finance Review Vol. 1(3) pp. 13 – 20, May, 2011 ISSN: 2047 - 0401 Available online at http://wwww.businessjournalz.org/efr 13 DYNAMIC CAUSAL RELATIONSHIP BETWEEN TRADE BALANCE AND UNEMPLOYMENT SCENARIO IN MALAYSIA: GRANGER NON-CAUSALITY ANALYSIS Loganathan, Nanthakumar Department of Economics, Faculty of Management and Economics Universiti Malaysia Terengganu, 21030 Kuala Terengganu, Terengganu, Malaysia Email: kumar@umt.edu.my Muhammad Najit Sukemi Department of Economics, Faculty of Management and Economics Universiti Malaysia Terengganu, 21030 Kuala Terengganu, Terengganu, Malaysia Email: kumar@umt.edu.my Mori Kogid School of Business and Economics, Universiti Malaysia Sabah 88400 Kota Kinabalu, Sabah, Malaysia Email: morikogid@gmail.com ABSTRACT The Malaysian economy has gone through a process of profound changes for the past 30 years. From the global economics perspective, the decade started with inflation pressures, deep recession in the middle of 1980s and 1990s, and decline of trade balance and with high level of unemployment rate in 1980s. The aim of this paper is to trace out more about the asymmetrical integration between trade balance and unemployment dynamics for Malaysia using Granger non-causality test analysis. The major finding of this paper shows that increased in trade balance has a negative Granger non-causality effects on rigidity of unemployment dynamics for the case of Malaysia. This indicates that trade liberalization is also able to increase aggregate productivity in the differentiated sectors and able increase efficiency on economic performance will simultaneous increase in term of employment opportunities for skilled and unskilled labor in Malaysia. Trade balance can be also become an additional favorable effects of reducing Malaysia’s unemployment scenario in future. Keywords: Granger non-causality analysis, trade balance, unemployment 1. INTRODUCTION Malaysia is a growing and relatively an open economy country. According to Global Competitiveness Report (2010), Malaysia was ranked at 26 in year 2010 and also one of the largest economic countries in South East Asia. Malaysia has achieved consistent records of dynamic economic growth over the period of 1980-2010, although have faced Asian financial crises in 1997. In term of openness of economy, Malaysia still remains positive effects with high volume of exports and this dynamic open economic has reflected some of major economic indicators in Malaysia, especially in term of unemployment scenario. The dynamic integration between trade balance and unemployment scenario has been a topical issue for several decades for developed and developing countries in Asia. In some of previous studies, the explosion of economic growth in 1990’s among developing countries has inspired a stream of literature focusing on the impact of trade openness on unemployment scenario (Papageorgiou, Choksi and Michaely, 1990; Agenor and Aizenman, 1996; Davidson, Martin and Matusz, 1999; Dollar and Collier, 2001; Moore and Ranjan, 2005; Porto, 2008; Felbermayr; Prat and Schmerer, 2011). Trade balance is one of the major sources of economic performance in many developed and developing countries. In the 1980s until 1990s, Malaysia has recorded unstable trade balance and this happened because of global economic crisis, such as oil price crisis in 1980s and Asian financial crisis in 1997. Flowing closely the contraction in trade balance between the first and the second economic crisis, trade balance continued to grow