# The Cobb Douglas Function

Posted on

This chapter will discourse the estimated techniques theories and the equation, it is include the Unit root trial and Autoregressive Distributed Lag ( ARDL ) Bounds trial. And the information beginnings besides discuss in this portion.

3.1 Endogenous growing theory and mold

In the economic status, the Cobb-Douglas functional signifier of production maps is normally used to stand for the relationship of an end product to inputs. It was predictable by Knut Wicksell ( 1851-1926 ) and tested against statistical grounds by Charles Cobb and Paul Douglas in the old ages of 1900-1928. The production map is shown as below:

Y = ALI±KI? , ( 1 )

Where the symbol of transmutation for the Cobb-Douglas map is:

= Entire production ( the pecuniary value of all goods produced in a twelvemonth )

= Labor input

= Capital input

= Total productiveness growing

The and are the end product snap of labour and capital at the same time. These values are changeless determined by available engineering.

For end product eleasticity the receptivity of end product to a alteration in degrees of both labour and capital used in production in the status of ceteris paribus. Such as if =0.20, it will demo that the 1 % addition in labour will take to a 0.2 % addition in end product.

I± + I? = 1,

These map indicate that the changeless return to scale in production map. That means if L and K are each addition 30 % , Y will increase in 30 % excessively.

If the return to graduated tables are diminishing and return to graduated table are increasing, this will be show as below:

Expect it on the perfect competition, the and can be indicate to be the both labour and capital portion of end product.

The Cobb-Douglas map are influnced by statistical grounds that come into sight to demo that labour and capital portions of entire end product are changeless over clip in developed states, the research workers clarified this by statistical adjustment least squares regression in their production map. It is show that holding uncertainty over whether stability over clip exists.

But harmonizing to Yao and Wei ( 2007 ) , through joint ventures local houses have been able to copy foreign engineerings and started to bring forth their ain theoretical accounts or supply parts to foreign industries. There is no uncertainty that FDI has non merely helped better the production efficiency of domestic houses but besides helped to force Korea ‘s production frontier towards the universe ‘s most advanced degrees. Assume that there are two states in the universe: 1 is an industrialised economic system A and the other is a freshly industrialising economic system ( B ) and both states will follow a Cobb-Douglas production engineering:

( 2 )

Where Y, K, L are severally to GDP, capital and labour, J and t denote state ( A, B ) and clip. And g ( omega ) is a map of assorted factors impacting production efficiency and the production frontier, including exports, human capital, FDI, establishments and others. As state A is richer and has a higher K/L ratio than state B, state A tends to do investings in B in order to maximise returns to capital, every bit long as a?‚YBt /a?‚KBt & gt ; a?‚YAt /a?‚KAt holds true.

Harmonizing to Yao and Wei ( 2007 ) , in this two-country position, both states should hold common benefits for cross-border motion of capital to take topographic point. The benefit for A is that it can maximise returns to its capital and has entree to B ‘s market. The benefit for B is that it can hold entree to A ‘s engineering and better per capita income so that the income spread between A and B declines over clip. Another premise is that both states invest in scientific discipline and engineering to make cognition and invention. However, because A has better gifts in both physical and human capital, it is more able to introduce and therefore bring forth a higher degree of end product given the same degree of inputs in comparing with B. The lone manner for B to diminish this technological spread is through importing of A ‘s engineering embedded through FDI.

But once more from harmonizing Yao and Wei ( 2007 ) that the function of FDI can urge by their two propositions. First, they given the same steady province of B ‘s engineering, FDI can better B ‘s production efficiency because foreign invested houses are front smugglers in the acceptance of GPTs because of their superior human capital, direction and organisational construction. Domestic houses can be trained from foreign invested houses through acquisition by watching. They besides have inducements to go more adept and competitory because they fear losing out to foreign invested houses.

The traveling consequence of FDI on production efficiency of B can be illustrated in Figure 1. Production frontier of A and B, denotes the production frontier of B. At a steady province when input is fixed at X0, the existent degree of domestic production is Yd0 without the consequence of FDI. If FDI has a positive impact on production efficiency at this steady province, or a?‚YB/a?‚FDIB & gt ; 0, the existent degree of production will lift to Yf 0. The net traveling consequence of FDI on state B ‘s production is ( Yf 0 a?’ Yd0 ) . Second proposition examine that FDI is a shifter of the domestic production frontier. If FDI does non hold a shifting consequence, the maximal end product of B can ne’er travel above PFB. If FDI has a switching consequence, state B ‘s maximal possible end product can be every bit high as those located on PFA, which is the production frontier of A. ( Cobb-Douglas. Wikipedia. Retrieved April 20, 2010, from: hypertext transfer protocol: //en.wikipedia.org/wiki/Cobb % E2 % 80 % 93Douglas )

Figure 3.1: Production Frontier of A and B and the function of FDI in B.

Y PFA

Yft

PFB

Ydt

Yf0

Yd0

0 X0 X1

Ten

For illustration, without a switching consequence, the existent degree of production may travel from Yf 0 at the initial steady province to Ydt at the new steady province with a new input mix Xt. The maximal possible end product of B at the new degree of input will be on PFB or below. If FDI has a switching consequence, the existent degree of end product can travel above PFB, with a maximal possible end product to be on PFA. In Fig. 1, if the new existent end product is Yf T, which is situated between the two frontiers, it means that the production frontier of B has been shifted towards PFA from PFB. This positive switching consequence can be expressed as a?‚YB/a?‚FDI = degree Fahrenheit ( T ) & gt ; 0, connoting that the fringy merchandise of FDI is an increasing map of clip ( Yao and Wei, 2007 ) .

Harmonizing to Yao and Wei ( 2007 ) indicate that with Propositions 1 and 2, state B ‘s production map can be rewritten as:

( 3 )

And FDI is portion of the multiplier ABt along with a set of other variables Z1 which can besides better production efficiency. Besides, FDI enters the residuary term to be a shifter of the production frontier along with other variables, including a clip tendency T, which captures the Hick ‘s impersonal technological advancement in B in the absence of FDI or foreign engineerings, t * FDI captures the extra technological advancement that is attributed merely to FDI. The entire consequence of FDI on economic growing in state B can be expressed as:

( 4 )

The first portion on the right-hand side of ( 4 ) measures the traveling consequence, and the 2nd portion the switching consequence of FDI on YB. If both effects are positive and important, the above two propositions hold true.

While the traditional growing theory considered merely two factors of production, viz. capital and labour, this new growing theory adds a 3rd, engineering. Endogenous growing theory or new growing theory focuses on the wider construct of engineering, which is expressed through thoughts, alternatively of objects or merchandises. It necessitates a different set of institutional agreements, like pricing systems, revenue enhancement or inducements to guarantee the efficient allotment of thoughts. These types of theoretical accounts are sometimes called Schumpeterian theoretical accounts because Schumpeter emphasized the importance of impermanent monopolistic power over finds, as a motivation force for continued advanced procedure.

A great trade of grounds has been produced in recent old ages projecting uncertainty on endogenous growing theory. Mankiw, Romer and Weil ( 1992 ) argue that the neoclassical growing theoretical account of Solow and Swan with exogenic technological advancement and decreasing returns to capital, explains most of the cross-country fluctuation in end product per individual. The Schumpeterian discrepancy of endogenous growing theory that emphasizes technological advancement, invention and R & A ; D has come under peculiarly heavy fire.

Endogenous growing theoretical accounts attempt to explicate a greater proportion of ascertained growing every bit good as why different states experience different growing rates. They by and large use the neoclassical theoretical account but let the production map to exhibit increasing returns to scale, concentrate on outwardnesss and presume that technological alteration, although of import, is non necessary to explicate long-term growing. In 1986, paper of Romer ignores physical capital and lone considers ‘knowledge ‘ but a general signifier of his theoretical account can be written as:

Y = A ( R ) F ( Rj, Kj, Lj ) ( 5 )

Where R J, K J and L J are, severally, stock consequences from research and development outgo by house J, physical capital of house J and labour of steadfast J ; R is the aggregative stock of cognition. Any private research attempt will hold a spillover consequence for the public stock of cognition A ( R ) . This type of theoretical account can explicate why states experience different growing rates. A state with an initial higher degree of K experiences a higher rate of growing of K taking to a higher rate of growing of per capita income because such a state is more ‘experienced ‘ through ‘learning by making ‘ . This is an external consequence that prevents decreasing returns.

3.2 Model specification

The old empirical surveies have proved that GDP can be determined by the undermentioned variables: labour and capital as basic physical inputs ; export, FDI and foreign exchange rate policy as variables of openness. The undermentioned theoretical account arrested development will include all these variables.

( 6 )

Where T ( t = 1976, … , 2008 ) denote twelvemonth T, K and fifty capital stock ( Gross fixed capital accretion ) and entire labour force, fdi = FDI influx, exp = entire export and exc = existent exchange rate. Last, the Y is the Gross domestic merchandise in economic growing and the is error term.

Data for GDP are gross domestic merchandise and capital is calibrated below based on investing in fixed assets. All the variables are calculated in 2000 changeless monetary values. GDP is derived from existent GDP one-year indexes by state. Labor is entire labour force in each state. FDI is really used FDI influxs. Export is the entire value of exports.

The description of FDI in the production theoretical account needs careful consideration. Because capital stock is the accretion of fixed plus investing, which includes both domestic and foreign investings, the production map would be mis-specified if FDI, either measured as a flow or stock, were added as another explanatory variable along with capital stock. In the old literature, export and exchange rate besides has been found to be relevant variables in the production map. Like FDI, export is defined as entire FDI influxs and entire export in Korea hence can consequence to end product.

The values of exports and FDI are provided in US dollars ( USD ) in the official statistics. Since they are measured in US dollars, most economic analysts do non trouble oneself to deflate the values in current monetary values into values in changeless monetary values ( e.g. Liu et al. , 1997 ; Liu, 2000 ) . It is of import to carry on an appropriate deflation. One relevant deflator is the US consumer monetary value index. The values of trade and FDI in nominal dollars are deflated by this index. Since all the other variables in the theoretical account are measured in KRW100, it is utile to alter these two variables in KRW every bit good.

Exchange rate is existent exchange rate, which is time-variant but location-invariant as all the states faced the same foreign exchange rate. Beside this, existent exchange rate should be derived from the exchange rates and monetary value indexes of Korea ‘s chief trading spouses. However, since KRW follows the US dollar really closely, albeit non pegged to the dollar, merely the dollar exchange rate and the US monetary value index are used to cipher the existent exchange rate. Real exchange rate is expected to hold a positive mark influence on economic growing because it represents China ‘s fight in international trade and the extent of market liberalisation in the foreign exchange market from Yao and Zhang ( 2001 ) . The outlook consequence for the variable of capital stock, labour, human capital, FDI, export and existent exchange rate are expect acquiring the important and positive relationship to economic growing.

3.3 Empirical methodological analysis

3.3.1 Unit root trial

A unit root trial is critical in detecting the letter paper of clip series informations. It is chief to gauge about the variables observed have a inclination to return to the long term tendency follow a daze ( letter paper ) or the variables follow a random walk which incorporating a unit root. If the variables follow a random walk after a impermanent or lasting daze, the arrested development between variables is specious ( Amiruddin, Nor and Ismail 2007 ) . Harmonizing to the Grauss-Markov ‘s theorem, in such instances, the series do non hold a finite discrepancy. Hence the OLS will non bring forth consistent parametric quantity estimations.

A stationary series is one whose basic belongingss, for illustration it mean and its discrepancy, do non alter it over clip. In contrast, a non-stationary series has one or more basic belongingss that do alter over clip. If the clip series variable is stationery,

I ) The mean of is changeless over clip

two ) The discrepancy of is changeless over clip

three ) The simple correlativity coefficient between and depends on the length of the slowdown ( K ) but on no other variable ( for all K ) .

The unit root trial can divide into 2 trial, that is Augmented Dickey Fuller ( ADF ) trial and Phillips Perron ( PP ) trial. This will prove for degree ( original series ) , first differences and 2nd differences ( alterations ) . If stationary at degree, so the series are integrated of order nothing, I ( 0 ) and if stationary at first differences and 2nd differences, the series are integrated of order one and two, I ( 1 ) and I ( 2 ) severally.

The Augmented Dickey-Fuller trial statistic and Phillips-Perron trial statistic to gauge the stationary for the variables. The consequences are and the hypothesis will bespeak as below:

Hypothesis:

Holmium: No stationary

Hour angle: Stationary

Hence, p-value should little tahan 0.05, so rejected Ho, that is stationary, if failure to reject Ho, that means no stationary ] .

3.3.2 Autoregressive distributed slowdown ( ARDL ) -Bound trial

The Bound Testing Method can utilize to gauge the little size sample informations in between 30 observations. Therefore, one of the conditions is the dependent variables must be in I ( 1 ) and the dependent variables can be mixed in I ( 0 ) and I ( 1 ) , but non the I ( 2 ) . For illustration: Y=a+b1X1+b2X2+b3X3+e. The variable Y must stationary at order one or I ( 1 ) and the X1, X2 and X3 can be in I ( 0 ) or I ( 1 ) or assorted. For the simpleness, the Bound testing can be shown as:

( 7 )

The Autoregressive Distributed Lag ( ARDL ) method developed by Pesaran et Al. ( 2001 ) was used to set up co-integration relationships among the variables. And it can utilize to get the better of the stationary job in the time-series arrested development. The advantage of the ARDL method is it can be applied to the theoretical account whether the independent variables are stationary at I ( 0 ) or I ( 1 ) . The dependent variable must stationary in I ( 1 ) . As a consequence, a dynamic theoretical account known as the Autoregressive Distributed slowdown theoretical account ( ARDL ) will be estimated and can be written as:

( 8 )

This equation shows that end product growing is effects by values of explanatory variables every bit good as the lagged dependant and explanatory variables. The edge trial used the conventional F-test comparison to the critical value to observe the presence of co-integrating relationship. The critical value is base on the Narayan ( 2005 ) tabular array of critical values for the bounds test instance III: Unrestricted intercept and no tendency. If the F-test is higher than the upper edge critical value, the hypothesis of no-co-integration is rejected. Beside this, if an F-statistic is lower than the lower edge critical value implies that the absences of the co-integration. If the F-statistic is in between the lower edge and upper edge, there is no clear indicant of the absence or being of co-integration relationship.

Using Wald trial to look into the joint hypothesis is,

Holmium:

Hour angle:

The decision for the hypothesis can be separate to three portion, that is:

I ) If the Wald F-statistic autumn above the upper critical value- cointegration exists.

two ) If the Wald F-statistic falls down between the lower edge and upper edge critical value- inconclusive.

three ) If the Wald F-statistic falls below the lower edge critical value-no cointegration exists.

Furthermore, an Error Correlation Model ( ECM ) besides use with the Bound trial, the signifier is:

( 9 )

Where,

: 1-L is the difference operator

: degree Fahrenheit ( yt, xt )

tendency: tendency term

: long tally multiplier

Therefore, from the ARDL theoretical account, we can utilize the Bewley ‘s ( 1979 ) arrested development attack to obtain the long tally theoretical account.

( i=1,2, aˆ¦aˆ¦ , K ) ( 10 )

Where, and, i= 1,2, aˆ¦aˆ¦ , K are the selected ( estimated ) values of and, i=1,2, aˆ¦.. , K.

However, the short tally dynamic theoretical account is estimated base on the Unrestricted Error Correction Model ( UECM ) theoretical account.

( 11 )

Where ECT represents as a long tally steady point or “ partial accommodation ” term as below:

( 12 )

And utilizing the Wald trial to calculate the long tally snaps and it standard mistake is:

1-Sum of the dependent coefficients= Sum of the independent coefficients ( 13 )

3.4 Datas

The secondary informations set consists of the yearly informations of the Korea economic system for the period of 1976 to 2008 obtained from World Bank database, UC Atlas of Global Inequality, International Monetary Fund ( IMF ) , International Financial Statistic ( IFS ) , Korea National Statistical and United Nations Conference on Trade and Development ( UNCTAD ) . Since the ultimate end is to execute arrested development analysis with the informations expressed in natural logarithms, it may alternatively wish to work with the log and placeholder for variable as below:

Chapter 4

REGRESSION RESULTS

4.0 Introduction

Augmented Dickey Fuller ( ADF ) trial and Phillips Perron ( PP ) trial and Autoregressive Distributed Lag ( ARDL ) .

4.1 Unit root trial

In this survey, two stationary trials on single stochastic tendency are conducted, that is Augmented Dickey Fuller ( ADF ) and Phillip-Perron ( PP ) trials which have been used often I clip series informations. The value of ADF t-statistic and PP z-statistic will be compared to the critical value given by MacKinnon ( 1991 ) . The clip series under consideration should be integrated in the same order before we can continue to cointegration analysis and causality trial. The consequence can be show as below:

4.1.1 Augmented Dickey Fuller ( ADF ) trial

Based on the consequence as below Table 4.1.1, it show that consequence for Augmented Dickey-Fuller trial statistic in Unit Root trial. This trial is map to cognize the stationary of informations for variable. In the consequence, the dependant variable and all explanatory variables are important on the first and 2nd differences for the changeless with tendencies and changeless without tendencies. This is because the p-value is little than 0.05 at important degree. So, we will rejected Ho and conclude that the information is stationary when first difference. Therefore, all series are I ( 1 ) procedure.

## Variable

## Degree

## First Differences

## Changeless with tendencies

## Changeless without tendencies

## Changeless with tendencies

## Changeless without tendencies

## t-stat

## p-value

## t-stat

## p-value

## t-stat

## p-value

## t-stat

## p-value

## Economic growing ( Y )

-2.070027 ( 0 )

0.5421

2.327602 ( 0 )

0.9999

-5.756136* ( 0 )

0.0003

-4.782721* ( 0 )

0.0006

## Capital stock ( K )

-1.911924 ( 0 )

0.6251

-0.546014 ( 0 )

0.8689

-4.515321* ( 1 )

0.0060

-4.361648* ( 0 )

0.0017

## Labor force ( cubic decimeter )

-0.459604 ( 0 )

0.9804

-1.009485 ( 0 )

0.6241

-4.564489* ( 0 )

0.0051

-4.425029* ( 0 )

0.0014

## FDI ( fdi )

-4.190134 ( 1 )

0.0125

-1.009485 ( 3 )

0.7363

-2.892944* ( 8 )

0.1825

-6.300895* ( 2 )

0.0000

## Export ( exp )

2.708182 ( 0 )

1.0000

5.784347 ( 0 )

1.0000

-3.567930* ( 0 )

0.0495

-2.184710 ( 0 )

0.2155

## Real exchange rate ( exc )

-2.246001 ( 0 )

0.4496

-1.594207 ( 0 )

0.4739

-5.035710* ( 0 )

0.0016

-5.101766* ( 0 )

0.0002

Table 4.1.1: Consequence Augmented Dickey-Fuller ( ADF ) trial

Standards: Schwarz Info Criterion ( SIC )

## Variable

## Degree

## First Differences

## Changeless with tendencies

## Changeless without tendencies

## Changeless with tendencies

## Changeless without tendencies

## t-stat

## p-value

## t-stat

## p-value

## t-stat

## p-value

## t-stat

## p-value

## Economic growing ( Y )

-2.815698 ( 18 )

0.2023

3.136859 ( 7 )

1.0000

-6.399643* ( 11 )

0.0000

-4.778071* ( 1 )

0.0006

## Capital stock ( K )

-2.096298 ( 2 )

0.5282

-0.519748 ( 5 )

0.8745

-4.100869* ( 7 )

0.0153

-4.204347* ( 7 )

0.0026

## Labor force ( cubic decimeter )

-0.631981 ( 1 )

0.9699

-1.228256 ( 1 )

0.6498

-4.564489* ( 0 )

0.0051

-4.423468* ( 1 )

0.0014

## FDI ( fdi )

-1.392163 ( 31 )

0.8440

-1.577055 ( 31 )

0.4824

-4.828185* ( 12 )

0.0027

-5.032975* ( 13 )

0.0003

## Export ( exp )

4.407935 ( 8 )

1.0000

6.050077 ( 5 )

1.0000

-3.555909* ( 1 )

0.0507

-2.042327 ( 1 )

0.2683

## Real exchange rate ( exc )

-2.374756 ( 1 )

0.3848

-1.615847 ( 1 )

0.4631

-4.981815* ( 3 )

0.0018

-5.068019* ( 2 )

0.0003Note: The figure in parenthesis are lag length. The trial employ a void hypothesis of a unit root. All series are log transformed. *Indicate that 5 % at important degree.

Table 4.1.2: Consequence Phillips-Perron ( PP ) trial

Standards: Schwarz Info Criterion ( SIC )

Note: The figure in parenthesis are lag length. The trial employ a void hypothesis of a unit root. All series are log transformed. *Indicate that 5 % at important degree.

4.1.2 Phillips-Perron ( PP ) trial

Based on the consequence as above Table 4.1.2, it show that consequence for Phillips-Perron ( PP ) trial statistic in Unit Root trial. This trial is map to cognize the stationary of informations for variable. In the consequence, the dependant variable and all explanatory variables are important on the first and 2nd differences for the changeless with tendencies and changeless without tendencies. This is because the p-value is little than 0.05 at important degree. So, we will rejected Ho and conclude that the information is stationary when first difference from the consequence of PP trial. Therefore, all variables are integrated of order I ( 1 ) .

4.2 Autoregressive Distributed Lag ( ARDL ) trial

The status of the edge testing is the dependent variable must be in I ( 1 ) and the independent variables can be mixed in I ( 0 ) and I ( 1 ) . The Y is I ( 1 ) and the independent variable is assorted in I ( 0 ) and I ( 1 ) . , the appraisal of co-integration can be done by utilizing the Autoregressive Distributed Lag ( ARDL ) . The Bound trial technique is applied to analyze the long tally relationship between the exchange rate and its determiners. The consequence of the estimated ARDL theoretical account for Malaysia is reported as Table 4.2. The goodness of tantrum of the theoretical account ( adjusted R-squared ( Adjusted-R2 ) ) and the standard mistake of arrested development are higher.

Based on the tabular array 4.2, includes the diagnostic trials used to corroborate the cogency of the theoretical account. These several of import diagnostic trial has been carry out in order to beef up the truth of the consequences. The consequence of the diagnostic trial indicated that the remainder of the theoretical account is usually distributed. Beside this, there are no heteroskedasticitity and no consecutive correlativity. However, the theoretical account successes to go through the Ramsey RESET trial. Since all the chance is larger than 0.05 ( 5 % ) important degree. Therefore, hypothesis failed to reject the Ho, hence there are absence of those job in the theoretical account carried out.

Note: The critical values are cited from Narayan ( 2005 ) . ( Table instance III: Unrestricted intercept and no tendency ; pg1988 ) . * , **and *** denote important at 10 % ,5 % and 1 % significance degree, severally.

Based on the Table 4.3, the consequences of bound cointegration trial evidently demonstrated that the void hypothesis is, against the alternate hypothesis is easy rejected at 1 % important degree. The theoretical account shows that the deciding variables are strongly cointegrated with economic growing in Korea. The consequence showed that the F-statistic compute by Wald trial is extremely important at 1 % significance degree. The F-statistic is 8.742069, which is greater than the upper critical edge value of 6.040, so it is showed that cointegration exists. Hence, based on the trial consequence, there exist cointegration or long tally relationship among the economic growing, capital stock, labour, foreign direct investing, export and existent exchange rate.

( 14 )

Based on the Table 4.4 reported the long tally snap between the variables use the ARDL trial. The expected mark of the variables are indicate in this tabular array and the estimated coefficient for capital stock ( K ) is positive 0.764333 and has consistent mark with the expected mark. This implies that an addition in the capital stock by 1 billion US Dollar ( US $ ) , the gross domestic merchandise ( GDP ) will increase 0.764333 billion US Dollar ( US $ ) . The standard mistake is 1.594101 and chance 0.6359 is the p-value in the theoretical account.

For the labour force ( cubic decimeter ) , the estimated coefficient is positive mark, it is 25318.75 and which is consistent with the expected mark. The coefficient means that when 1 unit labour force addition, the GDP will increase 25318.75 US Dollar ( US $ ) . The chance is 0.4858 and standard mistake is 35765.61.

In add-on, the foreign direct investing ( fdi ) in estimated coefficient is positive 5.627353 and same with the expected mark. This indicate that when increase 1 billion US Dollar ( US $ ) in the foreign direct investing, the GDP will increase 5.627353 billion US Dollar ( US $ ) . The p-value is 0.4313 and standard mistake is 7.032203.

The estimated coefficient for export ( exp ) is positive 0.798721, it has consistent mark with the expected mark. This implies that an addition 1 billion US Dollar ( US $ ) in export, the GDP will increase 0.798721 billion US Dollar ( US $ ) . The standard mistake for export is 0.204665 and the chance is 0.0007.

In the instance of existent exchange rate ( exc ) , the estimated coefficient is positive 173672187.2 and is similar with the expected mark. The coefficient means that when existent exchange rate addition in 1 units of Korea Won 100 ( KRW100 ) per US $ 1, the GDP will take to increase in 173672187.2 US Dollar ( US $ ) . The p-value for existent exchange rate is 0.1910 and standard mistake is 1.29E+18.

4.5 The Error Correction Model ( ECM ) trial

The consequence of the Error Correction Model is reported at Table 4.6 and the Error Correction Term ( ECT ) is shows as below:

( 15 )

So, the ECT equation will be generated into short tally dynamic theoretical account.

Based on the Table 4.5, the mistake rectification term ( ECT ) is -0.090218. This implies that velocity of accommodation to the long tally stableness is really slow which is 0.09. It is negative mark and rapid accommodation from a short term instability. The negative mark of the ECT means when there is a short tally dazes occur, the spread is closed towards the accommodation procedure to the long tally stableness. This implies that the instability of end product growing in the short tally possibly adjusted with mistake corrections that resume the long term equilibrium. Approximately a high per centum of 89.7 % of the gross domestic merchandise can be clarify by the capital stock, labour, foreign direct investing, export and existent exchange rate selected.

Furthermore, the variable of capital stock ( K ) is significantly act upon the gross domestic merchandise ( GDP/y ) in the short tally. The capital stock represents the gross fixed capital formation to be the most of import factor that influences the gross domestic merchandise in Korea. The capital stock, labour ( cubic decimeter ) , foreign direct investing ( fdi ) , export ( exp ) and existent exchange rate ( exc ) is statistically positive influence in the current twelvemonth of gross domestic merchandise. As mentioned in literature reappraisal, this all explanatory variables should be elastic, portrays a positive mark and is should be a statistically variable in most of the research.

In the short tally, capital stock is statistically important and positive mark to the gross domestic merchandise for Korea. When capital stock is increase 1 billion US Dollar ( US $ ) , the gross domestic merchandise will pull about increase 1.249795 billion US Dollar ( US $ ) . Beside this, when the labour is increase 1 unit labour force, the gross domestic merchandise will increase 2308.908 US Dollar ( US $ ) . And if the foreign direct investing addition 1 billion US Dollar ( US $ ) , the gross domestic merchandise will increase 0.508124 billion US Dollar ( US $ ) . If export addition in 1 billion US Dollar ( US $ ) , gross domestic merchandise will increase 0.072330 billion US Dollar ( US $ ) . Last, when the existent exchange rate is increase in 1 units of Korea Won 100 ( KRW100 ) per US $ 1, the GDP will increase in 15708616 US Dollar ( US $ ) .