CARIFORUM and UK EPA Study

Following Balassa (1978), Feder (1983), and Fosu (1990), Fatemah and Qayyum (2018) estimated an elasticity model of real GDP, which responded to a function of aggregate exports and other covariates: (1) where Yt is the log of real gross domestic product , Kt is for the log of capital (real gross domestic capital formation), Lt is for the total labor force (age 15-60) in Pakistan, Xt is for the log of aggregate real exports, πt is for the annual percentage change in the Consumer Price Index (CPI), , is for the log of domestic credit to the private sector as a percentage of GDP, and εt is for the usual stochastic error expression, assumed to be independently and identically distributed with zero mean and constant variance. It is rather apparent that the typical income-export specification typifies dual causality. We will exploit this relationship to examine the effects of the covariates and income per capita on aggregate exports (the response or endogenous variable). The respecification (Equation 3 below) of earlier models emphasizes the importance of exports and the variables that are most likely to induce or hinder the promotion of exports. Though the respecification or relationship among the variables can theoretically be taken for granted, we plan to subject the concept of dual causality to a Granger Causality test in order to econometrically affirm the variables that are most likely to manifest interdependent effects (See Note 1) . We also maintain the theoretical value of elasticity for theoretical and econometric simplicity but propose a modification of the specification and covariates to include openness and a broader measure of inflation, the GDP deflator, which captures the effects of price movement on consumption and production. We, therefore, propose an export function with the highly pertinent covariates: 0 1 2 3 4 5 ; r t t t t t t t Y K L X C b b b b b p b e = + + + + + + r t C

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