National University of Laos
Faculty of Economics and Business Management
Major of International Economics
RESEARCH TOPIC:
FACTORS EFFECTING ON TRADE BALANCE BETWEEN
LAOS AND PRINCIPAL TRADE-PARTNERS
Advisor : Dr. Bounthone SOUKAVONG
By: Thanouxay VOLAVONG
2011-2012
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Content Outline
I. Introduction
II. Research Objective
III. Research Question
IV. Literature Review
V. Methodology and Modeling
VI. Expect Outcome
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I. Introduction
• Laos is once of lease developing countries in the world, Lao government
has national goal to graduate from Least Developed Country (LDC) by
2020.
• There are many issues and many strategies to achieve that goal.
International trade was be once of tools to support for develop country
• Trade can bring incomes from trading and also can import goods, service,
technology capital moving and migration etc…
• Lao is developing country so most trade ratio depend on foreign countries
• Since 1986 Laos open country the number of trade with other
countries was increased year by year especially China, Thailand and
Vietnam
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I. Introduction Count….
• This study focus on trade with partnership countries China,
Thailand and Vietnam because the number of trade between
those countries was very higher than other countries
• Thailand, Vietnam and china are different in term of Society
and Economic as well
• so if there were crisis in those countries what factors will
impact to Laos Economics especially trade sector.
• The study will use time series data during 1990-2010, Multiple
regression techniques was used to estimate the export supply
and import demand function of Laos
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Laos export to 10 countries 1990-2009
Countries
Exports, total
1. Thailand
2. Viet Nam
3. China, People's Republic of
4. Germany
5. Korea, Republic of
6. United Kingdom
7. France
8. United States
9. Malaysia
10. Belgium
1990
64.4
40.3
3.6
5.9
1.7
–
0.1
2.5
0.1
0.1
…
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
82.1 103.5 240.5 300.4 311.2 320.7 192.1 370.8 462.5 391.3 375.7 385.9 437.7
42.7 37.3 74.8 77.2 83.3 96.7 34.3 28.8 51.6 68.9 81.0 85.0 94.3
3.0 7.0 23.1 81.2 87.7 157.6 0.2 119.5 179.4 96.1 61.8 56.9 55.2
2.0 3.4 25.5 8.1 8.8 0.8 0.3 7.2 8.7 5.8 6.8 8.8 10.2
8.6 5.3 9.0 11.8 12.7 4.8 16.2 21.4 27.0 20.8 25.5 22.0 23.6
– – 1.9 – – 0.5 0.7 – 1.1 0.5 0.4 0.1 0.1
0.1 0.3 – 0.9 0.9 6.6 14.9 7.7 12.5 7.2 9.3 13.4 14.1
8.1 12.1 12.6 10.3 11.1 8.2 20.0 23.3 18.2 27.1 33.7 33.8 33.6
2.0 5.8 10.7 5.0 5.3 2.7 7.0 20.0 12.6 8.8 3.6 2.6 4.0
0.1 0.1 – – – – – 0.0 0.0 0.1 0.3 0.4 0.2
… … … … … … 17.9 12.7 13.5 13.6 10.4 13.6 18.0
2004
535.3
104.3
67.5
11.4
28.7
1.3
26.8
43.4
3.4
0.1
13.4
2005 2006 2007 2008 2009
696.9 1178.5 1324.5 1604.9 1459.2
204.4 475.5 431.5 568.7 423.7
88.6 151.5 192.1 248.3 219.3
23.2 45.1 77.3 135.9 219.2
31.6 34.6 43.0 42.0 48.2
1.9 16.1 63.9 48.2 42.5
8.3 1.4 42.3 54.5 62.3
41.9 29.1 27.2 23.0 12.8
4.1 8.5 19.1 40.4 41.7
11.8 44.6 32.4 2.7 0.2
15.6 16.8 11.2 17.9 14.7
Asian Development Bank, (2010) (www.adb.org/statistics)
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Laos import from 10 countries 1990-2009
Countries
Imports, total
1. Thailand
2. China, People's Republic of
3. Viet Nam
4. Japan
5. Korea, Republic of
6. Singapore
7. France
8. Germany
9. Australia
10. Hong Kong, China
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
148.6 154.3 258.4 431.9 564.1 588.8 689.6 408.5 644.6 808.9 689.8 719.5 722.2 808.9 1055.8 1270.3 1652.3 2107.9 2829.5 2722.8
72.3 84.3 133.1 164.8 270.3 287.8 310.0 336.7 411.3 452.0 419.0 451.7 444.0 501.5 639.5 846.2 1125.4 1442.8 1932.6 1800.5
15.9 12.3 30.6 18.1 20.2 21.5 23.2 4.9 19.6 24.4 37.9 59.9 59.7 108.1 108.8 115.9 185.6 195.2 295.0 312.5
17.6 3.9 17.6 19.7 22.5 23.9 25.8 25.1 80.7 181.8 77.7 70.8 71.2 57.0 75.2 76.1 104.5 120.7 164.8 145.5
21.6 23.5 30.8 56.1 45.8 48.8 52.5 10.4 21.0 24.9 23.6 13.0 19.6 15.0 15.4 21.3 22.6 41.7 69.1 83.5
– – – 2.3 2.2 2.3 2.5 3.3 5.3 11.9 4.9 6.9 4.9 8.7 9.9 15.3 25.7 61.2 58.5 51.7
– – 4.7 19.2 14.7 15.7 16.9 0.6 22.1 37.0 32.9 28.9 29.1 22.4 42.3 44.1 45.2 43.0 28.1 40.4
3.1 3.3 3.3 6.6 5.9 6.2 6.7 1.7 6.2 7.6 27.5 8.5 8.9 11.8 10.5 13.5 11.2 12.6 20.1 62.7
1.0 0.9 1.4 – – – – 0.9 15.4 9.5 3.6 7.4 4.1 7.5 28.0 11.3 12.0 34.8 25.1 17.9
1.2 0.4 15.8 3.4 0.4 0.4 0.5 0.3 2.3 2.5 4.2 8.3 12.6 7.9 18.3 19.9 20.6 24.1 15.5 9.6
1.3 3.6 4.1 4.3 7.0 7.5 8.1 9.5 8.7 11.0 7.9 10.1 6.1 8.1 8.0 8.3 15.5 14.7 23.4 18.5
Asian Development Bank, (2010) (www.adb.org/statistics)
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II. Objective
• To study factors that have impact on Trade Balance
between Laos and principal trade partner countries
included Thailand, Vietnam and China
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III. Research Question
The research question will seek to answer the following
questions:
1. What the main factors impact on Trade Balance between
Laos and principle trade partners?
2. If there are crisis in principle trade partners of Laos what
will happen to Lao’s trade?
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IV. Literature Review
 Concept and Theory
- Import Demand concept
M=D-S
(1)
Where:
D= Demand
Y= Domestics income
P= Price of Goods
S= Supply
Z= Domestic Production Condition
M = D(Y, P) – S(P, Z)
(2)
M = M P, Y, Z ; M 1 < 0, M 2 > 0, M 3 < 0
(3)
M 1 = ∂M ∂P, M 2 = ∂M ∂Y and M 3 = ∂M ∂Z
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Import Demand concept cont...
from formular 2 we can find elasticity of import
(P M) (∂M ∂P) = (P M) (∂D ∂P – ∂S ∂P)
(4)
when (P M) (∂M ∂P) = Elasticity of import (nm)
Formular 4 we can rewrite
nm =(P M) ( D P)( ∂D ∂P)( P D)-( S P)( ∂S ∂P) ( P S)
(5)
denote by (∂D ∂P)(P D) = Elasticity of Demand (nd)
(∂S ∂P)(P S) = Elasticity of Supply (es)
so nm = (D M) nd − (S M) es
(6)
so we cand rewrite it to:
(7)
M = M Pm , Pd , Y
Where: M = Import ,
Pm = Import Price,
Pd = Import-Competing Price
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Export supply concept
X S = S − D (8)
Where:
S = Domestic Supply
D = Domestic Demand
S Depend on Price and Domestic Productin, Q
D depent on Price
X S = S(P,Q) –D(P) (9)
if formula 9 Multiply price ratio and export. Formula can be
eS = S X (eS ) − (D X)(nd ) (10)
Denote: eX = Elasticity of Export Supply
eS = Elasticity of Domestic Supply
nd = Elasticity of Domestic Demand
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Export Supply concept Count
XS = S(Px,P,Q) –D(P) (11)
𝑆1 ,𝑆3 > 0, 𝑆(𝑆2 ,𝐷1 ) < 0
Where S 1 = ∂S ∂Px , S 2 = ∂S ∂P S 3 = ∂S ∂Q and D 1 = ∂D ∂P
S2 < 0 Cause when domestic price increase export supply will
decrease. Opposit case of Px so we rewrite new formula of 11
XS = XS (Px,P,Q) (12)
where (X1 ,X3 ) > 0, (X2 > 𝑜𝑟 < 0)
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IV.Literature Review count...
•
•
•
Pheinghathai VONJIEMLAD 1992, Analyze Trade balace of thailand,
Qualitative analyzes, Master degree
Thivaphone phasouk, (1997) The Effect of Exchange Real Exchange Rate on
Thai Trade Balnace, Thailand
M.Faruk Aydin and M.Eray Yucel (2004) Export Supply and Import Demand
Models for the Turkish Economy, the centrl bank of the Republic of Turkey
• Goldstein and Khan (1985) Income and price effects in foreign trade,
𝒅
𝒍𝒐𝒈𝑴𝒊𝒕 = 𝒂𝟎 +𝒂𝟏 𝐥𝐨𝐠(𝑷𝑴𝒊
𝑷𝑫𝒊)𝒕 +𝒂𝟐 𝐥𝐨𝐠𝒀𝒊𝒕 +𝑼𝒕,
• Is the import demand function, where Mi is the quantity of imports of
country i, PMi is the unit value of imports in country i , PDi is the domestic
price level of country i, Yi is the real GNP of country i, and Ut is an error
term associated with each observation.
𝒍𝒐𝒈𝑿𝒅𝒊𝒕 = 𝒃𝟎 +𝒃𝟏 𝐥𝐨𝐠(𝑷𝑿𝒊 𝑷𝑾)𝒕 +𝒃𝟐 𝐥𝐨𝐠𝑾𝒕 +𝑽𝒕,
• Is the export demand function where Xi is the quantity of exports of country
i, PX is the unit value of exports of country i, PW is world price level, and
W is the real world income (proxied by Organization for Economic Cooperation and Development - OECD real GNP).
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V. Methodology and modeling
 Descriptive Analysis
This research use secondary data and collect data from
Misnistry of Industry and commerce, National Statistic
Center, Bank of Laos.
 Used time series data since 1990 to 2010
 Quantitative Analysis
 Use Ordinary Least Square Method OLS model to estimate
the export Supply and import Demand functions of Laos
and principle partner countries and fumula is by Multiple
regression Log-lenair form. Caculate by SPSS program or
other operation progam if necessary
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Modeling
 Model of Export Supply
EX=(GDPj,FDIj,REER,WPI)
Log-linear Form
𝐥𝐨𝐠 𝐄𝐗 = 𝛃𝟎 + 𝛃𝟏𝐥𝐨𝐠(𝐆𝐃𝐏𝐣) + 𝛃𝟐𝐥𝐨𝐠(𝐅𝐃𝐈𝐣) + 𝛃𝟑𝐥𝐨𝐠 𝐑𝐄𝐄𝐑 + 𝛃𝟒𝐥𝐨𝐠(𝐖𝐏𝐈) + 𝜺)
1 to  4 Co-effience of Independent Variables
 Error Term
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The meaning of dependent and independent variable
Export (EX)
Meaning
Laos export to trade
partner countries
Symbol
Code
Dependent
variable
(Numeric Variables)
Gross Domestic
Product (GDPj)
GDP of partner
countries j
+
independent
variable
Foreign Direct
Investment
(FDIj)
Foreign Direct
Investment inflow to
Laos
+ (-)
independent
variable
Real Effective Exchange
Rate
+
independent
variable
Weight Price Index
+
independent
variable
Real Effective
Exchange Rate
(REER)
Weight Price Index
(WPI)
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Model of Import Demand
𝐈𝐌𝐢 = (𝐆𝐃𝐏𝐢, 𝐌𝐂𝐏𝐈, 𝐑𝐄𝐄𝐑, )
Log-lenair OLS form
𝐥𝐨𝐠 𝐈𝐌𝐢 = 𝛃𝟎 + 𝛃𝟏𝐥𝐨𝐠⁡(𝐆𝐃𝐏) + 𝛃𝟐𝐥𝐨𝐠⁡(𝐌𝐂𝐏𝐈) + 𝛃𝟑𝐥𝐨𝐠 𝐑𝐄𝐄𝐑 + 𝜺)
1 to  3 denote by coeffetcien of Independent Variables
 Error Term
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The meaning of dependent and independent variable
Import (IMi)
Meaning
Loas import from
partner countries i
symbol
Code
Dependent
variable
(Numeric Variables)
Gross Domestic
Product (GDPi)
GDP of Laos
+
Consumer Price
Index (MCPI)
Compare
Consumer Price
index
-
Independent
variable
Independent
variable
Real Effective
Exchange Rate
(REER)
Real Effective
Exchange Rate of
Laos
-
Independent
variable
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Real Effective Exchange Rate (REER)
k
REER jt   ( NEER jit )( pit* / Pjt )
i 1
• where subscripts j, i and t represent country, trading
partner and period respectively.
• NEERjit is Nominal Effective Exchange Rate
• P*Jt is the total trade weighted wholesale price index of the
trading partners representing the price of tradeables,
• Pjt is the CPI of the domestic country (a proxy for price of
non-tradables).
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Nominal Effective Exchange Rate
NEERjit  i 1 wit * Eit
k
• Wit is the appropriate total trade Weight for each
trading partner i (i=1……k)
• Eit is the period average nominal exchange rate
between the home country and each trading partner
in period t
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Weights Price Index
For Exports:
xit 
X it
k
X
j 1
For Imports:
mit 
jt
X it
k
M
j 1
For Total trade we have: wit 
jt
X it  M it
k
(X
j 1
jt
M
jt
)
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Weights Price Index
k
k
• Where X ,  M
,
j 1
jt
j 1
k
jt
(X
j 1
jt
 M jt ) are
total exports from the
domestic Country to all the trading partners, total imports
of the domestic country from all the trading partners and
total trade between the domestic country and all the
trading partners respectively.
• X it , M it and
X it  M itrepresent exports to trading
partner i by the domestic country, import from trading
partner i by domestic country and total between trading
partner i and domestic country respectively. The subscript
t represents the time period in all definitions
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VI. Expect Outcome
• The study expected to provide infromation about main factors
effecting on Laos’s trade for governt, policy maker and other
person who interested in Economics field.
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