I. II.

Introduction Model specification

1. 2.

Economic theory Econometrics model Data collection Descriptive statistics Assumption Functional forms Estimated equation Hypothesis testing Assumption violation

III.

Data processing
1. 2.

IV.

Result
1. 2. 3. 4. 5.

V.

Summary and conclusion

Along with inflation, trade deficit has always been a major problem of Vietnamese economy. In fact, apart from several period (January 2012 for instance) of trade surplus, Vietnamese balance of trade maintained negative most of the time or in other words, imports exceeded exports. With our curiosity, we make an attempt to take into consideration the relationship between imports and its affecting factors, namely personal income, foreign direct investment and the exchange rate in period from 1990 to 2010 in order to get more understanding about the problem of trade deficit. Based on our knowledge in economics and econometrics, we hope this project will partially explain the picture of ex-importing of Vietnam.

1.

Economics theory

Personal income: Calculated by GDP per capita. GDP per capita is gross domestic product divided by midyear population. As the income of residents is improved, demand for consuming will be higher, both in domestic and foreign goods and services, making the imports rise. Thus we expect a positive relationships between 2 factors. Foreign direct investment (FDI): The more FDI is made, the greater number of goods are produced domestically and the more various and diversified types of goods as well. Exchange rate: A decline in value of domestic currency relative to foreign currency called depreciation makes the price of foreign goods and services more expensive than the price of domestic goods and services, the demand for foreign goods will decrease and imports will do, too. So FDI & exchange rate are expected to have negative relationships to Imports.

2.

Econometrics model

Applying the economics and econometrics theory, we supposed to set up the models as follows: IMPORTS = 1 + 2FDI + 3EX_RATE + 4GDPPC + u The variables are defined as below: IMPORTS = The imports value of Vietnam per year (million USD) FDI = Foreign direct investment value of Vietnam per year (million USD) EX_RATE = The average exchange rate between USD and VND per year (VND/USD) GDPPC = The average personal income in Vietnam or GDP per capita per year (USD)

1.

Data collection
We mostly use external data which are given out by certain statistics organizations such as General Statistics Office of Vietnam and World Bank. The sample includes 21 observations which are taken annually in time series from 1990 to 2010. The factors we consider in this project are The amount of Imports, Exchange rate, FDI, GDPPC which does not changed and fluctuated often. Actually, these data can only be observed clearly from year to year. Hence, we can just collect the annual data of these factors for our project.

2.

Descriptive statistics:
1. Summary of the descriptive statistic:
Imports
26677,1 15636,5 84801,2

Observation Means Median Maximum Minimum Skewness

FDI
3720,3 2591,0 11500,0

Exchange rate
13909,1 14514,0 19403,0

GDP/capita
498,8 402,0 1224,0

2338,1
1,2 26628,0 560219,3

180,0
1,5 3382,9 78125,5

8125,0
-0,2 2905,1 292092,0

98,0
1,0 329,6 10474,0

Stad. Dev
Sum Number of observations

21,0

21,0

21,0

21,0

2.

Descriptive statistics:
2. Graph of the data

100000 80000 Imports 60000 40000 20000 0 -20000

200

400

600

800

1000

1200

1400

GDPPC

Figure 1: Relationship between The amount of Imports and GDP per Capital in Vietnam

100000 80000 60000 Imports 40000 20000 0 0 5000 10000 15000 20000 25000

-20000
-40000

Exchange rate

Figure 2: Relationship between The amount of Imports and Exchange rate in Vietnam

90000 80000 70000 60000 Imports 50000

40000
30000 20000 10000

0
-10000 0 2000 4000 6000 8000 10000 12000 14000

FDI

Figure 3: Relationship between The amount of Imports and FDI in Vietnam

1.

Assumption

In order to apply ordinary least squares method which is the most powerful and popular method of regression analysis, we make some assumptions as follow: The multiple regressions model is linear in the parameters. X is assumed to be nonstochastic , that is X values are fixed in repeated sampling. Zero mean value of disturbance ui or E(ui/Xi, X2i,X3i) = 0 for each i Homoscedasticity or equal variance of ui or var(ui)= No serial correlation or cov(ui,uj). i j Zero covariance between ui and each X variable, or cov(ui, X2i) = cov(ui, X3i) =0 The number of observations n must be greater than the number of parameters to be estimated. (n>k) Variability in X values or Var(X) must be a finite positive number. No specification bias or the model is correctly specif ied. No exact collinearity between the X variables.

Functional forms The log- Log model:

2.
Dependent Variable: LOG(IMPORTS) Method: Least Squares Date: 05/05/12 Time: 11:09 Sample: 1990 2010 Included observations: 21 Variable Coefficient C 8.698242 LOG(FDI) -0.388451 LOG(EX_RATE) -1.171149 LOG(GDPPC) 2.523074 R-squared 0.985297 Adjusted R-squared 0.982702 S.E. of regression 0.149926 Sum squared resid 0.382124 Log likelihood 12.27088 Durbin-Watson stat 1.654031

Std. Error t-Statistic 3.849411 2.259629 0.116954 -3.321401 0.501958 -2.333163 0.275573 9.155742 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

Prob. 0.0373 0.0040 0.0322 0.0000 9.651973 1.139935 -0.787703 -0.588746 379.7346 0.000000

2.

Functional forms

For the purpose of selecting the best model among 4 models above, R-squared figured are compared:
Model Lin-Lin Lin-Log Log-Lin Log-Log

R-squared

0.979122

0.859938

0.917677

0.985297

We find that the R-squared value of Log-Log function is the highest one. Consequently, Log-Log model is the most applicable equation that should be set up.

3.

Estimated Equation
Estimated Equation After testing the functional form, we made decision on using the log-log model: Log (IMPORTS-hat) = 8.698242 - 0.388451*log(FDI) - 1.171149*log(EX_RATE) + 2.523074*log(GDPCP) 2. Interpretation
1.

= 8.69824165236 = -1.17114867112 = -0.388450555205 = 2.52307370898 R2 = 0.985297

4.

Hypothesis testing

Dependent Variable: LOG(IMPORTS) Method: Least Squares Date: 05/02/12 Time: 23:21 Sample: 1990 2010 Included observations: 21 Variable Coefficient C 8.698242 LOG(GDPPC) 2.523074 LOG(EX_RATE) -1.171149 LOG(FDI) -0.388451 R-squared 0.985297 Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat 0.982702 0.149926 0.382124 12.27088 1.654031

Std. Error t-Statistic 3.849411 2.259629 0.275573 9.155742 0.501958 -2.333163 0.116954 -3.321401 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

Prob. 0.0373 0.0000 0.0322 0.0040 9.651973 1.139935 -0.787703 -0.588746 379.7346 0.000000

4.

Hypothesis testing
1.

Individual partial coefficient test: Testing 2 ( Holding Ex_rate and FDI) H0 : 2 = 0 H1 : 2 # 0 t = = = 9.155742 Compare with the critical value t = 2.110 |t| = 9.155742 > tc = 2.110 Reject H0 GDPPC (GDP/capita) has the effect on Imports

Similarly, We conclude that Ex_rate (exchange rate) has the effect on Imports FDI (Foreign direct invesment) has the effect on Imports

4.

Hypothesis testing
2.

Testing overall significance of multiple regression

0 : 2 =0,3 =0,4 =0 ( All variable are zero effect) 1 : 2 0,3 0 or 4 0 ( At least variable has the effect) Value of F statistic:
2 /(1) 0.985297/3 F= = = 379.735 (12 )/() (10.985297)/(214) The critical value ,1, = 0.05,3,17 = 3.2 F=379.735 > =3.2

=> Reject Ho => The overall estimators are statistically significant differrent from zero

5.

Assumption violation
1.

Multicollinearity Assumption 10 states that there are no perfect linear relationships among the explanatory variables. In order to detect this problem, we run three following models in Eview and then have three corresponding R-squared value: log(FDI) = A1 + A2 log(EX_RATE) + A3log(GDPPC) R2 = 0.926150 log(EX_RATE) = B1 + B2 log(FDI) + B3log(GDPPC) R2 = 0.908227 log(GDPPC) = C1 + C2log(FDI) + C3log(EX_RATE) R2= 0.969536 Kliens rule of thumb, all of those auxiliary R2 < overrall R2. It is not a big obstacle. In addition, our regression model has not only quite high R2 but also all the partial slope coefficients that are simultaneously significantly different from zero. Therefore, we decided to do nothing with multicollinearity phenomenon.

5.

Assumption violation
2. Heteroscedasticity

Heteroscedasticity appears when the variance of each disturbance term ui is not a constant number, Whites general heteroscedasticity test ( with cross term): H0: Homoscedasticity var(ui) = 2 HA: Heteroscedasticity var(ui) = i2 We obtain: W = nR2 = 15.13812 and 2(0.05,9) = 16.9 => W < 2(0.05,9) => do not reject H0 Conclusion: There is enough statistical evidence to infer that we may not reject the assumption of homoscedasticity at 5% of significant.

White Heteroskedasticity Test: F-statistic Obs*R-squared Test Equation: Dependent Variable: RESID^2 Method: Least Squares Date: 05/07/12 Time: 02:20 Sample: 1990 2010 Included observations: 21 Variable C LOG(FDI) (LOG(FDI))^2 (LOG(FDI))*(LOG(EX_RATE))

3.156347 15.13812

Probability Probability

0.038182 0.087211

Coefficient
-63.88603 4.569352 0.025027 -0.639494

Std. Error
80.98241 2.620348 0.058085 0.358986

t-Statistic
-0.788888 1.743796 0.430875 -1.781386

Prob.
0.4468 0.1090 0.6749 0.1024

(LOG(FDI))*(LOG(GDPPC))
LOG(EX_RATE) (LOG(EX_RATE))^2 (LOG(EX_RATE))*(LOG(GDPPC)) LOG(GDPPC) (LOG(GDPPC))^2 R-squared

0.187363
17.26863 -1.161407 1.659545 -12.20798 -0.423211 0.720863

0.264360
21.41940 1.421760 1.340417

0.708741
0.806214 -0.816880 1.238081

0.4932
0.4372 0.4313 0.2415 0.2402 0.3135 0.018196

9.832057 -1.241650 0.400703 -1.056172 Mean dependent var

Adjusted R-squared S.E. of regression

Sum squared resid Log likelihood Durbin-Watson stat

0.492478 0.016966
0.003166 62.59942 2.967727

S.D. dependent var Akaike info criterion

Schwarz criterion F-statistic Prob(F-statistic)

0.023815 -5.009469
-4.512077 3.156347 0.038182

5.

Assumption violation
3. Autocorrelation
Autocorrelation is presented by: Cov(Ui,Uj) 0, i j. Durbin-Watson d test to detect the problem in the model as follow: H0: = 0 ( no autocorrelation) HA: 0 ( yes, positive autocorrelation) From Eview, the Durbin- Watson statistic d* = 1.654031 dL = 0.803 and du = 1.408 As d* > dU and d* satisfies that d*< 4, Do not reject H0 Thus there is no auto-correlation in this model

a big question was raised: Which factors are affecting the imports?" The issues relating to the imports could be explained partially in the model concluding three factors: Foreign direct investment, exchange rate VND/USD and GDP per capital. And the following model among other alternative ones is the most applicable with Rsquared above 98%: Log (IMPORTS-hat) = 8.698242 - 0.388451*log(FDI) 1.171149*log(EX_RATE) + 2.523074*log(GDPPC)

1 and 2 have negative relationships, 3 has positive one with dependent variable. When individual partial coefficient tests were carried out, they shows that as keeping other factors remain constant, each explanatory variable FDI, EX_RATE ( exchange rate) and GDPPC ( GDP/capita) has significant effects on IMPORTS. The overall significance test also illustrates that overall estimators are statistically significant different from zero.

Personal income (GDP/capita) has the biggest impact on the Vietnams imports, that will rise about 2.52% when personal income increase by 1%. Our model meets the assumptions of homoscedasticity and no autocorrelation but still contains multicollinearity that exists the relationship among independent variables. However, we do nothing with this phenomenon because this near multicollinearity is not a big problem and can occur in every model.

Some limitations:
The first one is that there are not many observations in data

sample. Secondly, in this project, we merely mention to three factors amongst several other factors affecting Vietnams imports

For further research, we expect that in the condition of longer time, deeper and wider knowledge, better finance capacity and more useful tools of finding and analysis, this project will make it possible to give out a more appropriate model together with a more convincing explanation about factors attributing to imports of Vietnam