International Journal of Economics and Business Administration Vol. 1, No. 2, 2015, pp. 120-127 http://www.aiscience.org/journal/ijeba * Corresponding author E-mail address: F.Habibi@uok.ac.ir Does Trade Openness Influence Economic Growth? Fateh Habibi * Department Economics, Faulty of Humanities and Social Sciences, University of Kurdistan, Sanandaj, Iran Abstract The aim of this study is to determine the effects of trade openness on economic growth. We use panel cointegration tests and panel error-correction models (ECM) to explore the causal relationship between trade openness and economic growth for 120 countries over the period 2000-2013. The results of pedroni cointegration test demonstrate that trade openness and economic growth is cointegrated; on the other hand, a long run relationship can be fine among these two variables. We segment the data set into four subpanels according to per capita income classification that distinguishes between low-income, lower-middle- income, upper-middle income and high-income economies. The results suggest that the long-run causality between trade openness and growth runs in four panel groups. The result indicates that bidirectional causalities in the study were observed from real GDP growth to trade openness in all panels except low income groups. Second, unidirectional causation from trade openness to economic growth was obtained in the study for low income economies. The desired growth-led openness and openness-led growth hypothesis can only be supported for Upper middle and high income countries. Keywords Trade Openness, Economic Growth, Classification Countries, Panel Data Received: July 10, 2015 / Accepted: August 1, 2015 / Published online: August 9, 2015 @ 2015 The Authors. Published by American Institute of Science. This Open Access article is under the CC BY-NC license. http://creativecommons.org/licenses/by-nc/4.0/ 1. Introduction Over the past 60 years, trade liberalization has contributed to increasing the standard of living of billions of people across the world by creating new economic opportunities and lower prices to consumers. An open international trade and investment environment is fundamental to foster economic growth, job creation and prosperity (ICC, 2013). Over the past few years, the world trading system is becoming progressively open and competitive. Tariffs are reducing in both developed and developing countries and restrictions are eliminating. International trade plays an important role in the development of any economy. International trade affects economy through, creates employment, generate capital formation that leads to better living standards in terms of higher level of GDP and GDP per capita (Lewis, 1980). Trade openness can be seen as an important catalyst for the growth and development in an economy. The high degree of trade openness can enhance market access to its goods and services sectors. In addition, there is a positive impact of trade openness on cross border inter and intra-firm trade activities (Turner and Witt, 2001). The openness improves the efficient allocation of resources through comparative advantage, allows the dissemination of knowledge and technological progress, and encourages competition in domestic and international markets (Chang et al, 2005). The recent empirical growth literature has suggested a wide list of growth determinants, with trade openness among others. Figure 1 show the trade as percentage of GDP. Data from the World Development Indicators, 2015 show that the share of trade in percentage of GDP increased substantially between 2005 (54%) and 2008 (62%), then was driven down by the financial crisis to 52% in 2009, before going up again to 61% in 2013. Figure 1 shows that in 2013, the share of trade in high-income developing economies was higher than the other regions (150%) and another region are developing economies (69%), developed economies (56%), middle income (21%) and low