Impact of oil price on trade balance in Vietnam from 1990 to 2011
Student: Van Thi Bich Advisors: Dr. Ming-Hung Shu

Institute of Industrial Engineering and Management
National Kaohsiung University of Applied Sciences
Abstract
The goal of this thesis is to evaluate the impact of oil prices on Vietnam’s trade balance in the short run and long run. The author examined the potential relationship between variables, which are oil price, output gap and exchange rate by using vector error correction model (VECM) and co-integration technique. Author used annual data for the period 1990 – 2011 and include exchange rate, output gap as additional determinants of trade balance. The author has found out evidence of a long run and short run relationship between oil price and trade balance. The result shows that the oil prices have negative relationship with trade balance. More specifically, a one-percent increase in the oil prices and exchange rate causes the trade balance to fall by 2.34% and 2.38% respectively in the long run. On the contrary, the results reveal that the output gap have positive relationship with trade balance. These findings allow some recommendations and suggestions to reduce negative effects of oil shocks on Vietnam’s trade balance.


Keywords: Oil price, Trade balance, VECM, Vietnam.

TABLE OF CONTENTS

Abstract i
Acknowledgments ii
TABLE OF CONTENTS iii
LIST OF TABLE x
LIST OF FIGURES xi
CHAPTER 1 INTRODUCTION 1
1.1 Introduction 1
1.2 Research Background 7
1.3 Research Objectives 10
1.4 Organization of this study 11
CHAPTER 2 LITERATURE REVIEW 12
2.1 Introduction 12
2.2 Literature Review 12
2.3 Theoretical Background 17
2.3.1 Trade balance 18
2.3.2 Exchange rate 18
2.3.3 Oil price 19
2.3.4 Output gap 19
2.4 Summary 20
CHAPTER 3 METHODOLOGY 21
3.1 Introduction 21
3.2 Research Framework and Research Hypotheses 22
3.2.1 Research Framework 22
3.2.2 Research Hypotheses 24
3.3 Data Collection Procedures 23
3.3.1 Research Problem and Objectives 23
3.3.2 Data description and observation 23
3.4 Data Analysis Method 24
3.4.1 Unit root tests 25
3.4.2 Co-integration test 26
3.4.3 Vector Error Correction Model (VECM) 28
3.5 Conclusion 31
CHAPTER 4 EMPIRICAL RESULTS 32
4.1 Introduction 32
4.2 Analysis Results 32
4.2.1 Results unit root test 32
4.2.2 Co-integration test results 36
4.2.2.1 Trace test result 36
4.2.2.2 Maximum-Eigen Value Test result 37
4.2.3 Long run and short run relationship 39
4.2.3.1 Long run relationship 39
4.2.3.2 Short run relationship 42
4.3 Summary 46
CHAPTER 5 CONCLUSION 48
5.1 Conclusion 48
5.2 Managerial Implication 49

5.2 Research Contribution 49
5.3 Limitations and Future Research 51
5.4 Summary 52
Reference 54
Website reference 58


LIST OF TABLES

Table 1.1 OPEC oil reserves 2012 2
Table 3.1 The variables which is used in the study 25
Table 4.1 Unit root tests on level and first differences 35
Table 4.2 Johansen Co-integration Test (Trace Test) 38
Table 4.3 Johansen Co-integration Test (Maximum-Eigen Value Test) 39
Table 4.4 Coefficient result of Johansen Long Run Co-integrating Technique 41
Table 4.5 Regression of the Vector Error Correction Model 43
Table 4.6 Granger causality tests 45
Table 4.7 Variance decomposition 46



LIST OF FIGURES

Figures 1.1 World proved oil reserves by geographic region in 2011 3
Figures 1.2 Global oil Demand 1995 to 2011 5
Figures 1.3 Crude oil prices since 1861 to 2011 6
Figures 1.4 GDP and Population 7
Figures 1.5 Oil reserves of top ASIA PACIFIC countries 8
Figures 3.1 Conceptual framework of the study 23
Figures 4.1 Data trend and their difference 37

References
1.Alogoskoufis, G. S. and Smith, R. P. (1989). The Phillips curve and the Lucas critique: some historical evidence, Birkbeck Discussion Paper in Economics, No. 89/4 (March).
2.Akpan, E.O. (2009). Oil resource management and food insecurity in Nigeria. Paper Presentation at the European Report on Development (ERD) Conference in Accra, Ghana, 21st-23rd May 2009.
3.Backus, D. K., & Crucini, M. J. (2000). Oil Price and the Terms of Trade. Journal of International Economics, 50, 185-312.
4.Bahmani-Oskooee, M. (2001). Nominal and real effective exchange rates of Middle Eastern countries and their trade performance. Applied Economics, 33, 103-111.
5.Bahmani-Oskooee, M. (1991). Is There a Long-Run Relation Between the Trade Balance and the Real Effective Exchange Rate of LDCs? Economic Letters. 36: 403-407.
6.Bloomberg, S.B. and Harris, E.S. (1995). The commodity-consumer price connection: Fact or fable? Federal Reserve Board of New York, Economic Policy Review, October, 21-38.
7.Chinn, M.D. (2004). Incomes, Exchange Rates and the U.S. Trade Deficit, Once Again. International Finance 7(3) (Winter):1–19.
8.Cologni, A. and Manera, M. (2009). The asymmetric effects of oil shocks on output growth: A Markov-Switching Analysis for the G-7 Countries. Economic Modelling, Vol. 26, pp. 1-29.
9.De Masi P. R. (1997). IMF Estimates of potential output: Theory and Practice, IMF Working Paper No. WP/97/177.
10. Donders, J. and Kollau, C. (2002). The Cyclically Adjusted Budget Balance: The Brussels Methodology, Division of General Financial and Economic Policy of the Ministry of Finance.
11.Granger, C.W.J. (1986). Developments in the Study of Co-integrated Variables. Oxford Bulletin of Economics and Statistics, 48, 424-438.
12.Granger, C.W.J. (1988). Some Recent Developments in the Concept of Causality. Journal of Econometrics, 39, 199-211.
13.Grossman, G.H., Holpman, E. (1989). Comparative advantage and long run growth, National Bureau of Economic Research 1050 Massachusetts Avenue Cambrige.
14.Hassan, S.A., Zaman, K. (2012). Effect of oil prices on trade balance: New insights into the co-integration relationship from Pakistan. Economic Modelling. 29, 2125–2143.
15.Hanson, K., Robinson, S., Schluter, G. (1993). Sectoral effects of a world oil price shock: economy wide linkages to the agricultural sector. Journal of Agricultural and Resource Economics 18 (1), 96–116.
16.Himarios, D. (1989). Do Devaluation Improve the Trade Balance? The Evidence Revisited, Economic Inquiry. 27: 143-168.
17.Jiménez-Rodríguez, R. and Sánchez, M. (2005), “Oil Price Shocks and Real GDP Growth: Empirical Evidence for Some OECD Countries”. Applied Economics, 32(2):201–228.
18.Kipici, A. and Kesriyeli, M. (1997). The real exchange rate definitions and calculations, Research department, Publication No: 97/1, ANKARA, January, 1997.
19.Kreuger, A.D. (1983). Exchange Rate Determination. Cambridge.
20.Lardic, S. and V. Mignon (2008), “Oil Prices and Economic Activity: An Asymmetric Co-integration Approach”, Energy Economics, Vol. 30, pp. 847–855.
21.Lutz Kilian* Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market, American Economic Review 2009, 99:3, 1053–1069,
22.MacKinnon, J. G. (1991). “Critical values for Co-integration tests,” In Long-run Economic Relationships: Readings in Co-integration (Eds). R. F. Engle and C. W. J. Granger, Oxford University Press, UK, pp: 267–276.
23.Meyer, B. (2007). Oil price, GDP and international trade: The case of Germany. Social Science Research Network (SSRN), vol. 34, pp. 1-10.
24.Mehta S (2011). Structural Transformation and Industrialization: A Panel Analyses of Indian Manufacturing Industries. UGC Research Fellow Department of Economics Punjabi University, Patiala 147002.
25.Mussa, M. (2000). The Impact of Higher Oil Prices on the Global Economy. International Monetary Fund.
26.Mohammad, S.D. (2010). Determinant of Balance of Trade: Case study of Pakistan. European Journal of Scientific Research. ISSN 1450-216X Vol.41 No.1 (2010), pp.13-20.
27.Reboredo, J.C. (2012). Modelling oil price and exchange rate co-movements. Journal of Policy Modeling, 34, 419–440.
28.Robert, E.M and Constantine, S.K. (1997). Theories of international trade, foreign direct investment and firm internationalization: a critique, Cardiff Business School, University of Wales, UK.
29.Sherbaz, S., Amjad, F., and Khan, N.Z. (2006). Output gap and its Determinants: Evidence from Pakistan (1963-2005). Fatima Jinnah Women University.
30.Soytas, U., and Sari, r. (2003). Energy Consumption and GDP: Causality relationship in G7 countries and emerging markets. Energy Economics, Vol. 25, pp: 33-37.
31.Srinivasan, T.N. and J. Bhagwati. (1999). Outward-Orientation And Development: Are Revisionists Right? Economic Growth Center Yale University, P.O. Box 208269, New Haven, Connecticut 06520-8269.
32.Tang, W., Wu, L., Zhang, Z.X. (2010). Oil price shocks and their short- and long-term effects on the Chinese economy, ENEECO-01886; No of Pages 12.
33.Williams, J.L., 2011. World in motion—importance of oil.
34.Zaytsev, O. (2010). The Impact Of Oil Price Changes on the Macroeconomic Performance Of Ukraine. Kyiv School of Economics.

Website reference

1.APEC - Energy Demand and Supply Outlook – 5th Edition, from: http://aperc.ieej.or.jp/
2.Bhardwaj, A. (2014). Energy Intelligence Unit Releases Report on OPEC – A world view and its role in 21st Century, from:
http://ttgt.blog.com/2014/03/23/%E2%80%8Benergy-intelligence-unit-releases-report-on-best-practices-in-oil-and-gas-solutions
3.BP Statistical Review of World Energy, from:
https://www.google.com.vn/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCoQFjAA&url=http%3A%2F%2Fwww.bp.com%2Fcontent%2Fdam%2Fbp%2Fexcel%2FEnergyEconomics%2Fstatistical_review_of_world_energy_2013_workbook.xlsx&ei=4gaEU_2QD4KakQXIw4DQAg&usg=AFQjCNGM5kkuU2vi9JRlgbniPF2Bi-zHtQ
4.EIA-US. Energy Information Administration, International Energy Outlook 2011, from:
https://www.google.com.vn/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCoQFjAA&url=http%3A%2F%2Fwww.eia.gov%2Fpressroom%2Fpresentations%2Fhoward_09192011.pdf&ei=2wWEU9q0K4aGlAXTyYG4Dg&usg=AFQjCNGHG-0ZPdIAe1Jxp-iQimSe5CEy4Q
5.EIA- U.S. Energy Information Administration, Independent statistic & Analysis (2013), accessed in April 2013 from:
http://www.eia.gov/countries/country-data.cfm?fips=vm
6.EIA-U.S. Energy Information Administration, Independent statistic & Analysis (2014), accessed in February 2014 from:
http://www.eia.gov/countries/country-data.cfm?fips=ch
7.EIA – U.S. Energy Information Administration, Short-term energy outlook (February 2014), Accessed on April 2014, from:
file:///C:/Users/user/Downloads/steo_full.pdf
8.EIA - World Energy Outlook (2011), from:
http://www.iea.org/ebc/files/impact.pdf
9.Mahboob. E. (2014). The coal can energize Pakistan, from: http://pakobserver.net/detailnews.asp?id=136745
10.OPEC annual statistical Bulletin 2013, from:
http://www.opec.org/opec_web/en/data_graphs/330.htm