The Review Of Empirical Literature Economics Essay

經濟學的實證文獻的評dissertation章
 

有許多變量能夠影響一國的貿易平衡。然而，所有可用的許多變量之間，實際有效匯率、實際的國內收入和外國直接投資是以前的研究者最為關注的變量。已有許多上述變量之間關系的研究。然而，這些研究成果給出了矛盾的結果。

 

改編自尤斯福，M.。（2009）。雙邊貿易平衡，匯率，和收入：來自馬來西亞的證據。全球經濟，9（4），1-19。

 

上面的圖表顯示的理論模型是由尤斯福于2009年制作。本研究目的是測試貿易收支實際有效匯率、實際的國內收入和實際外匯收入的影響。

 

圖2.2：研究的模型

 

真實有效

 

匯率

 

貿易實際國內收入的平衡

 

外商直接投資

 

基于尤斯福（2009）的模型，我們的重構了模型來作為研究人民幣實際有效匯率、實際的國內收入和對外直接投資之間的貿易平衡的功能。

 

2.3：理dissertation獻綜述

 

2.3.1：實際有效匯率

 

There are many variables capable of affecting the Trade balance of a country. However, among all the many variables available, Real Effective Exchange Rate, Real Domestic Income and Foreign Direct Investment are variables most concerned by previous researchers. There were many studies done to determine the relationship between the variables mentioned above. However, the findings of these studies have given conflicting results.

 

Adapted from Yusoff, M. B. (2009). Bilateral Trade Balance, Exchange rate, and Income: Evidence from Malaysia. Global Economic, 9(4), 1-19.

 

The chart above showed the theoretical model is by Yusoff (2009). This study is to examine the effects of Trade Balance on Real Effective Exchange Rate, Real Domestic Income and Real Foreign Income.

 

Figure 2.2: Research’s Model

 

Real Effective

 

Exchange rate

 

Balance of Trade Real Domestic Income

 

Foreign Direct Investment

 

Based on Yusoff (2009) model, we remodelling the model become Trade Balance as a function of Real Effective Exchange Rate, Real Domestic Income and Foreign Direct Investment.

 

2.3: Review of Theoretical Literature

 

2.3.1: Real Effective Exchange Rate

 

In the research of Yusoff (2007), Rizaudin, Hussein and Muhd (2008) and Abdorreza, Chua and Behnaz (2011), they found that Malaysia exhibited the J-curve effect phenomenon. This means that the J-curve effect will show the worse of a country’s economy for the first few years but will improve in the coming years. In other words, the depreciation of Malaysian ringgit will improve the Trade Balance in the long run. However, it is a good phenomenon to a country if they are having a worse Trade Balance economy.#p#分頁標題#e#

 

Figure 2.3: The J-Curve

 

Surplus

 

Deficit Time

 

Based on the J-curve theory, Real Effective Exchange Rate has a negative relationship with Trade Balance in short run, nevertheless, positive relationship in long run.

 

The second theory for the effect on Real Effective Exchange Rate is the Marshall- Lerner condition (Bahmani-Oskooee and Harvey, 2006 and Yusoff, 2007). It is related to the technical reason to explain why a reduction in value of a country’s currency need not immediately develop its Trade Balance. The conditions stated that, for a currency depreciation to have a positive impact in Trade Balance, the sum of price elasticity of exports and imports in absolute value must be greater than one. It said that if the export price goods are price elastic, their quantity demanded will increase more than the decrease in price, and total export revenue will increase. Similarly, if goods imported are elastic, total import expenditure will decrease

 

In addition, Lane and Ferretti (2002) have the result of negative relationship between Real Effective Exchange Rate and Balance of Trade. The increasing of Trade Balance will result of negative J-curve effect. This may be due to the responsiveness of import price to exchange rate depreciation, as well as to the size of depreciation since foreign exporters can compensate price increases only to a certain degree. This not only can improve our country’s Trade Balance in the long run, but also can increase the competitiveness in the international market. For instance, in the research of Wong and Tang (2008), Malaysia's largest export industry (semiconductor) are having the impact on their export volume by the variable of REER on both short term and long term. Besides that, in Mazila (2008) research also found that Malaysia's major export includes electrical and electronic, palm oil, timber apparel and rubber also have impact on exchange rate variability neither in the fixed or floating exchange rate periods.

 

Tiwari and Shabaz (2011) assume that a real depreciation, which means an increase in the Real Effective Exchange Rate series, improve the Trade Balance in a long run (positive relationship) through price effects- negative relationship between Trade Balance and Real Effective Exchange Rate. This is due to a decrease in Real Effective Exchange Rate leads to the cheapened of domestic goods to the foreign in real term and this stimulates exports. On the other hand, foreign goods are more expensive thus imports of domestic will be discouraged.

 

2.3.2. Real Domestic Income

 

Real Domestic Income has been used as the concept to represent the magnitude of economic activities in a nation. Yujiro (2001) said that Real Domestic Income is a typical flow variables, which aggregates various income earned on different days over the year.#p#分頁標題#e#

 

To our knowledge, we know that if the household income is high, the import will be increased since wealthy people will have higher desire on foreign goods and services. If the production income is higher, export will be increased since the producer will be capable of producing more goods and services and pay for exporting fees. This theory is also supported by Yujiro (2001).

 

Income elasticity of Trade Balance is expected to be negative since increasing Domestic Real Income would stimulate more imports through an increasing domestic absorption which initially deteriorates the Trade Balance. But as Doma? (1993) states, when real income increases, the production of import substitute goods may reduce the volume of imports, and in this case the sign of real income would be positive instead.

 

2.3.3 Foreign Direct Investment

 

Nowadays, Foreign Direct Investment (FDI) plays a crucial role in boosting the economic growth for developed and developing countries. Athukorala, Prema and Menon (1996) said that the FDI has brought significant returns to Malaysia principally because the general economic climate has been favourable for the internationalization of production for a considerable period. Moreover, Malaysia is now being hailed as the next Asian Newly Industrializing Country (World Bank, 1993). The role of FDI is often cited as the most important contributory factor behind this success story.

 

According to Mohammad (2010), FDI shows positive impact on Balance of Trade as it may motivate the multinational corporation to produce import substitution domestically and it can reduce import and a positive impact on Balance of Trade as FDI flows increases.

 

Theoretically, there is positive relationship between FDI and Trade Balance in the long run. The simulative positive effects of FDI on exports of the host country came from the additional capital, technology, and managerial know-how the multinational corporations (MNCs) bring with them, along with access to global, regional, and especially home-country, markets (Mencinger, 2007).

 

However, Mencinger (2007) suggest that the initial inflow of FDI tends to increase the host country's imports in the short run. In other word, the increment of imports will worsen the trade balance in short run. One reason that causes this is that FDI companies have high propensities to import capital and intermediate goods and services that are not readily available in the host country.

 

2.4 Review of Empirical Literature

 

2.4.1 Real Effective Exchange Rate

 

Among the discussion in the journal of Bahmani-Oskooee (2001), Onafowora (2003), Narayan and Narayan (2004), Stucka (2004), Nusrate (2008), Heim and Bakija (2008) state that the Real Effective Exchange Rate is an important variable that affects Trade Balance positively in Malaysia. If Real Effective Exchange Rate falls (depreciate), it would decrease the demand for imports, in other words, increasing Trade Balance.#p#分頁標題#e#

 

According to Bahmani- Oskooee (2001), he stated that devaluation or depreciation of REER can increase a country’s international competitiveness. He said that devaluation increases export by making exports cheaper, discouraging imports, thus, improving the Trade Balance. Furthermore, Nayaran and Nayaran (2004) states that the long-run elasticity of the trade ratio with respect to the REER is positive, implying that a devaluation of the REER will lead to a reduction in the ratio of imports to exports. In other word, import will be decreased as export remains unchanged. It can also be said that REER has negative relationship with import. This result is in line with the result of Onafowora (2003).

 

Besides that, Stucka (2004) states that as exchange rate falls, investment and trade deficits will also decrease, which means that REER have positive effect on Trade Balance. This researcher suggested that the elasticity of REER is more than one which shows that if the REER depreciates by one percentage point, the Balance of Trade will increase by 1.033 percentage points. Moreover, Heim and Bakija (2008) show that if REER falls, it decreases the demand for imported consumer and investment goods and services. In short, REER falls, domestic investment also falls, consequently trade deficit decreases. Nevertheless, Nusrate (2008) defined that REER has significantly positive influence on Trade Balance in short and long run.

 

On the other hand, Hailu (2010) states that negative relationship between REER and trade balance. By doing the research in African countries, Hailu (2010) used Least Square Dummy Variable Regression Method and found out that the negative coefficient of REER indicates that real appreciation of local currency leads to decrease in growth rate of import and export.

 

Besides, Boyd and Caporale (2011) found that REER is a weak exogenous variable, which means that Balance of Trade can be more improved by others variable such as Domestic Income. Besides that, in the study of Rose (1990), the researcher said that the non-structural technique indicates that a depreciation of the REER is not strongly associated with a significant improvement in the Trade Balance. He added that REER has no statistically distinguishable impact on the multilateral trade balance without making supplementary assumptions. REER often shows either insignificant or perverse impact on the Trade Balance and in this study REER does not indicate strong impact on Trade Balance.

 

Apart from that, Liew, Lim, Huzaimi (2000) said that REER cannot be used solely in managing the Trade Balances in Malaysia, thus, policy maker should consider other variable such as Real Domestic and Foreign income as important as REER.

 

In the studies of Yusoff (2009), he states that the exchange rate regime did not have any significant impacts on the Trade Balance in the short-run. A depreciation of the Ringgit Malaysia will immediately deteriorate the Trade Balance. Besides that, he found that there is non-stationary relationship between REER and Trade Balance. REER depreciate improves the Malaysian Balance of Trade in long run, REER, Domestic and Foreign income have significantly positive sign to explain the Trade Balance.#p#分頁標題#e#

 

Besides that, researchers Duasa (2007) and Naseem, Tan and Hamizah (2009) also proposed that REER do not have a significant effect on the imports of developing countries. According to the research of and Duasa (2007) and Naseem, Tan and Hamizah (2009), they stated that every goods and/or services in Malaysia are having an incomplete pass through. This means that not all the foreign goods and/or services are trade accordingly with an exchange rate in the international market.

 

2.4.2 Real Domestic Income

 

Real Domestic Income is normally used for assessing the economic growth of a country over time and comparing economic position with the rest of the countries (Yujiro, 2011).

 

According to the study of Dr. Muhammad (2010), Liew, Lim and Hazaimi (2000), Jarita (2007), Rizaudin, Hussein and Muhd (2008), Naseem, Tan and Hamizah (2009), Abdorreza, Chua and Behnaz (2011), they found that Real Domestic Income are closely related to exchange rate and thus have the relationship of impact in the country Trade Balance in long run.

 

In terms of theory, Real Domestic Income should have a positive relationship with the Trade Balance. In other words, as the Real Domestic Income increases, it encourages economic growth. This theory is in line with Dr. Gulzar (2011) research in which stated that an improvement in income will increase domestic savings; consequently it can reduce the trade deficit.

 

However, some researchers get a result stating that the Real Domestic Income has negative effect on Trade Balance. Duasa (2007) and Tiwari and Shabaz (2011) defined that Real Domestic Income are significantly negative affecting the Trade Balance. This result is consistent with Yusoff (2009) and Korap (2011).

 

Duasa (2007) said that income has an important role in determining the long run behaviour of the Malaysia Trade Balance as compared to exchange rate. This is because Malaysia always sets the exchange rate within its target zone with a series of controls and interventions. However, in the research done by Tiwari and Shabaz (2011) in India, the researcher viewed that increasing in income will cause citizen to buy more imported goods as compared to domestic goods; as a result, import will be more than export hence deteriorating Trade Balance in India. Moreover, Yussof (2009) found that a rise in Real Domestic Income increases imports which tend to erode the Trade Balance by using Johansen Cointegration Procedure.

 

Nevertheless, Onafowora (2003) and Kamoto (2006) found that Real Domestic Income is positively and negatively related to Trade Balance. They explained that if the demands are driving force in determining the export and import, thus there is a negative relationship between Trade Balance and Real Domestic Income. By contrast, the trade balance will have a positive long run relationship with Real Domestic Income if an increase in Real Domestic Income were due to the increasing productivity or production of import substitute goods and supply is the driving force in determining exports and imports. This result is consistent with the result of Kimbugwe (2006).#p#分頁標題#e#

 

Apart from this, Narayan and Narayan (2004) states that there is a long run relationship between the import and export, Foreign Income and Real Domestic Income, however, they found that Real Domestic Income is the most important determinants of Fuji’s Trade Balance. On the other hand, Narayan (2004) examined the effect on Real Domestic Income on the New Zealand’s Trade Balance and the result shows that there is no relationship between both of the variables.

 

Furthermore, Wong (2006) and Hailu (2010) said that there is no relationship between Trade Balance and Real Domestic Income. Wong stated that there is a long run relationship between commodity terms of trade but not income term of trade in Malaysia. This is because he found that the increase in commodity term of trade will lead to a decrease in trade in the long run. Besides that, Hailu said that the unimportant income elasticity can be clarify by the fact that the population lives in poverty, income may not be highly increased enough to shift expenditure form domestically produced to imported goods and services.

 

2.4.3 Foreign Direct Investment

 

Foreign Direct Investment (FDI) is an investment directly into production in a country by a company located in another countries, either by buying a company in the target country or by expanding operations of an existing business in that country.

 

In the research done by Yusoff (2007), this researcher found that FDI is important in explaining the Trade Balance. Yusoff (2007) proved that FDI plays a virtual role for employment generation, technologies improving, eliminating poverty as well as improving social welfare especially for developing countries.

 

Furthermore, Aurangze and Anwar (2012) found that all independent variables of FDI has significant impact on the Balance of Trade deficit, which is same result found by Bená?ek , Prokop and Ví?ek (2003), they found that the main drivers of the Czech international trade dynamics have been associated with changes in factor endowments and inflows of FDI, other than that, they also found the impact of REER appreciation on trade was less significance compared to FDI.

 

Besides that, Wang and Wan (2008) and Korap (2011) also found that Trade Balance is strongly improved due to an increase in net FDI inflow, which means that there exists direct relationship between them. According to the research done by Wang and Wan (2008) ,they found that the coefficient of inflow FDI and Balance of Trade is positively significant however the coefficient of outflow FDI is insignificant in determining the Trade Balance, which have the same result found by Bená?ek, Prokop and Ví?ek (2003). Wang and Wan (2008) used Akaike Information Criterion and Distributed lag model while Bená?ek etc used Ordinarily Least Square method to determine it.#p#分頁標題#e#

 

Nevertheless, the result is inconsistent with the findings of Athukoral (2003). He found that FDI inflows do not exert an independent influence on economic growth. In addition, he also obtained the result that the direction of causation is not towards from FDI to Gross Domestic Product (GDP) growth but GDP growth to FDI.

 

However, Mencinger (2007) found that in short, FDI worsens Trade Balance in all NMS in short run nevertheless FDI improved Balance of Trade in long run. The result is constant with Goh and Wong (2010) which is in FDI will improve Trade Balance in long run, but not in short run. Goh and Wong (2010) found that there are strong evidence of a positive long run relationship between Malaysia’s Outwards Foreign Direct Investment (OFDI) and the home country’s trade openness, which is same as what Mencinger (2007) found, but the only different is that the result of this previous researcher is not only base on Malaysia data.

 

By using Granger Causality method, it shows a co-integration and causality relation between the FDI and import (Dumitriu, Stefanescu and Nistor, 2010). Since FDI has negative effect on import, consequently it will influence on Trade Balance.

 

Besides that, Ghazali (2010) found that there is unilateral causality between Trade Balance and FDI. The co-integration test done by Ghazali (2010) said that there is highly degree of positive correlation. The author said that FDI inflow increase, domestic investment increase accordingly, hence resulting in the economic growth.

 

However, in the research of Dr. Gulzar (2011), he states that an improvement in the FDI can reduced the trade deficit, in other word, which is positive relationship between FDI and Trade Balance. He also found out that even though there exists a positive relationship between those variables, FDI can also has insignificantly influence on Trade Balance because of the political instability in some countries. The unstable politic has resulted in the decreasing of inflow of FDI, thus net FDI will be negative.

 

Furthermore, in the study of Wilamoski and Tinkle (2008), they found that there are only a small positive relationship between FDI and export, which is consistent with the result found by Mohammad (1999).

 

On the other hand, there were some studies done by researcher in which are not consistent with the theory that states there is positive relationship between FDI and Trade Balance. Yousaf, Nasir, Naqvi, Haoder and Bhutta (2011) concluded that there was a negative relationship between FDI and economic growth in their studies. This means that a FDI increase, it will deteriorate the economic growth. They found out that the negative relationship exists is due to the lack of infrastructure and advance technology in developing countries. Omaniyi (2011) also stated that FDI has a negative impact on Trade Balance in Nigeria. It may result in insufficient FDI investment fund, exchange rate and political view.#p#分頁標題#e#

 

Apart from this, in Kiran (2011) study, the author also cannot find evidence of causality between FDI and Trade Balance in Turkey. The statistics done by this researcher shows no evidence in the result of Granger Causality test and LM unit roots test.

 

2.5 Methodology Review

 

Firstly, this research will carry out the Augmented Dickey- Fuller (ADF) unit root test to test for stationary. ADF method is very well known and used by most of the previous researchers such as Narayan (2004), Yusoff (2007) and Ghazali (2010). If the dependent variable and independent variables are not stationary, the result from Ordinary Least Square method will be spurious.

 

This research will use Ordinary Least Square (OLS) method to determine the significant relationship of Real Effective Exchange Rate, Real Domestic Income and Foreign Direct Investment on Trade Balance. This method is also used by previous researchers such as Goh and Wong (2009) and Nayaran (2004). OLS method will be used in this research due to its simplicity, cost free and is easier to understand.

 

2.6 CONCLUSION

 

In this chapter, this study states the relationship between the balance of trade with its independent variables founded by previous researchers. Apart from that, this research also has to explain the relationship between the trade balance exposures with its independent variables. By looking into the results gain from previous researchers, there are controversies between different authors. This however generates good guidelines in this study’s analysis because these previous studies are able to support the outcome of this research analysis. In Chapter 3, this study will be conducting a methodology which states the collecting, processing and analysis of the data.