PIR MEHR ALI SHAH

ARID AGRICULTURE UNIVERSITY- RAWALPINDI

(UNIVERSITY INSTITUTE OF MANAGEMENT SCIENCES)

DATA ANALYSIS AND DECISION MAKING

SUBMITTED TO:

DR. AHMED IMRAN HUNJRA

GROUP MEMBERS:

MALIK UMAR INSAF (13-ARID-3755)

ANEEQ SAHAB SHAFQAT (13-ARID-3741)

ANEES UR REHMAN (13-ARID-3742)

INTRODUCTION:

Since the end of apartheid foreign trade in South Africa has increased, following the lifting of

several sanctions and boycotts which were imposed as a means of ending apartheid.

South Africa is the second largest producer of gold and is the world's largest producer

of chrome, manganese, platinum, vanadium and vermiculite, the second largest producer

of limonite, palladium, rutile and zirconium. It is also the world's third largest coal

exporter. Although, mining only accounts for 3% of the GDP, down from around 14% in the

1980s.  South Africa also has a large agricultural sector and is a net exporter of farming products.

Principal international trading partners of South Africa—besides other African countries—

include Germany, the United States, China, Japan, the United Kingdom and Spain.  Chief exports

include corn, diamonds, fruits, gold, metals and minerals, sugar, and wool. Machinery and

transportation equipment make up more than one-third of the value of the country’s imports.

Other imports include chemicals, manufactured goods, and petroleum.

On 23 November 2010, government, under the leadership of Minister Ebrahim Patel, released the

Framework of the New Economic Growth Path aimed at enhancing growth, employment

creation and equity. The principal aim of the policy is to create five million jobs over the next 10

years.

This framework reflects government's commitment to prioritizing employment creation in all

economic policies. It identifies strategies that will enable South Africa to grow in a more

equitable and inclusive manner while attaining South Africa's developmental agenda.

Importantly, the document underlying the New Growth Path recognizes the challenges of an

uncompetitive currency and sets out clear steps whereby government can address the impact of

the Rand on the economy. More specifically, on p. 2, the document discusses a trade-off between

a competitive currency that supports growth in production, employment and exports and a

stronger Rand that makes imports of capital and consumer goods cheaper.2 The 2011 industrial

policy action plan (IPAP, 2011:39) also calls for a competitive exchange rate.

The South African Reserve Bank (SARB) stated its own position on the exchange rate as

follows:

Exchange rate appreciation has been both a positive and a negative, on the one hand lowering

South Africa's trade competitiveness, but also helping to dampen inflationary pressures given the

influence of the exchange rate on consumer prices (SARB, 2012:6)

This shows that the debate about growth through competitiveness and exchange rate pass-

through - the effects of a weaker Rand on inflation - is still alive and well.

In this paper we find for the time period of 1994-2011, there is vigorous statistical proof that, in

long run, net exports are boost by a weaker real effective exchange rate. However, this effect

does not clutch in the short run. We thus find empirical proof supporting the J-curve effect for

South Africa.

 A depreciation of the Rand may have adverse effects on South African consumer price inflation.

This link is known as exchange rate pass-through, which in empirical studies is typically

analyzed in three ways.

The first approach is to explore the direct link between the nominal exchange rate and CPI

inflation. This is the route followed by; inter alia, Razafimahefa (2012). He analyzes the pass

through of the nominal effective exchange rate to domestic prices in sub-Saharan African

countries from 1985 to 2008. He finds that the average elasticity is estimated at 0.4. Half of the

increase (of domestic prices in response to depreciation) occurs within the first quarter following

the exchange rate change, and the full impact generally takes place within four quarters. For

South Africa, the impact of a 10 per cent depreciation of the Rand after four quarters is 1.31 per

cent (1.6 per cent after eight quarters). This is in line with his finding that higher income

countries have a lower exchange rate pass-through.

The second approach is to investigate the relationship between the nominal exchange rate and

import prices (where the latter would feed into the CPI). This is the avenue followed by Aron,

Farrell, Muellbauer and Sinclair (2012). They examine exchange rate pass-through to the

monthly import price index in South Africa during 1980-2009. They find that pass-through is

about 50 per cent in a year and 30 per cent in six months. Johansen analysis broadly supports

these short-run results but implies lower long-run pass-through.

A third approach is to assess both the relationships between exchange rate movements, prices of

imported inputs and domestic inflation. This is obviously the most complex modeling strategy

and is employed by Rigabon (2007). It can be motivated by realizing that the pass-through is a

function of the monetary policy framework. Rigabon evaluates how credible the SARB's

inflation targeting is to shocks to the nominal exchange rate. His argument is that a credible

central bank that announces an inflation target is 100 per cent credible if, in the presence of a

transitory exchange rate shock, the target is unaffected, and the central bank is therefore able to

keep it. This would be the case of zero pass-through. On the other hand, a non-credible central

bank implies that nominal exchange rate devaluation will be accommodated by the central bank

with further domestic inflation. The definition he uses in his paper is: How many of the nominal

exchange rate movements are ultimately accommodated by the monetary authority? So, by

looking at the change in the pass-through, he is able to detect the gains in credibility. Rigabon

concludes that the large reduction in the pass-through experienced in South Africa is the outcome

of a large gain in the inflation targeting regime's credibility.

During apartheid, South Africa's foreign trade and investment were affected by sanctions and

boycotts by other countries ideologically opposed to apartheid. In 1970, the United Nations

Security Council, adopted resolution 282imposing a voluntary arms embargo upon South Africa,

and which was extended by subsequent resolutions 418 and 591, declaring the embargo

mandatory. In 1978, South Africa was prohibited loans from the Export-Import Bank of the

United States which was later followed by a prohibition on IMF loans in 1983. An oil embargo

was imposed by OPEC in 1983 which was strengthened by Iran in 1979.

The trade balance for any country is the difference between the total values of its exports and

imports in a given year. When a country’s total annual exports exceed its total annual imports, it

is said to have a trade surplus. When imports exceed exports, a country has a trade deficit. 

The Balance of Trade includes only visible imports and exports, i.e. imports and exports of

merchandise, the difference of imports and exports is called Balance of Trade. If imports are

more than exports, it is unfavorable balance of trade. If exports exceeds imports, it is favorable

balance of trade.

Balance of Trade includes revenues received or paid on account of imports and exports of

merchandise. It shows only revenue items.

Balance of Trade can be favorable or unfavorable. If imports are more than exports, it is

unfavorable balance of trade. If exports exceeds imports, it is favorable balance of trade.

In case of Balance of Trade, there is no deficit or surplus balance. The balance shows favorable

or non-favorable. So, external assistance is not required.

Trade, in general connotation, means the purchase and sales of commodities. In International

Trade, purchase and sale are replaced by imports and exports. Balance of Trade is simply the

difference between the value of exports and value of imports. Thus, the Balance of Trade denotes

the differences of imports and exports of a merchandise of a country during the course of year. It

indicates the value of exports and imports of the country in question. If the value of its exports

over a period exceeds its value of imports, it is called favorable balance of trade and, conversely,

if the value of total imports exceeds the total value of exports over a period, it is unfavorable

balance of trade. The favorable balance of trade indicates good economic condition of the

country.

Policies of early modern Europe are grouped under the heading mercantilism. Early

understanding of the imbalances of trade emerged from the practices and abuses of mercantilism

in which colonial America's natural resources and cash crops were exported in exchange for

finished goods from England, a factor leading to the American Revolution. An early statement

appeared in Discourse of the Common Wealth of this Realm of England, 1549: "We must always

take heed that we buy no more from strangers than we sell them, for so should we impoverish

ourselves and enrich them." Similarly a systematic and coherent explanation of balance of trade

was made public through Maun's 1630 "England's treasure by foreign trade, or, The balance of

our foreign trade is the rule of our treasure"

Annual trade surpluses are immediate and direct additions to their nations’ GDPs. To some

extent exports induce additional increases to GDP that are not reflected within the export

products’ prices; thus contributions to GDP from trade surpluses are generally understated.

Products’ prices generally reflect their producers’ production supporting expenditures. Producers

often benefit from some production supporting goods and services at lesser or no cost to the

producers.

For example, governments may deliberately locate or increase the capacity of their infrastructure,

or provide other additional considerations to retain or attract producers within their own

jurisdictions. The curriculum of a nation's schools and colleges may provide job applicants

specifically suited to the producer’s needs, or provide specialized research and development. All

national factors of production, including education, contribute to GDP, and unless globally

traded products fully reflect those goods and services, these other export supporting

contributions are not entirely identified and attributed to their nations’ global trade.

Annual trade deficits are immediate and indirect reducers of their nations’ GDPs.

Trade deficits make no net contribution to their nations’ GDPs but the importing nations

indirectly deny themselves of the benefits earned by producing nations; (refer to “Annual trade

surpluses are immediate and direct additions to their nations’ GDPs”). Among what’s being

denied is familiarity with methods, practices, the manipulation of tools, materials and fabrication

processes.

The economic differences between domestic and imported goods occur prior to the goods entry

within the final purchasers' nations. After domestic goods have reached their producers shipping

dock or imported goods have been unloaded on to the importing nation’s cargo vessel or entry

port’s dock, similar goods have similar economic attributes.

Although supporting products not reflected within the prices of specific items are all captured

within the producing nation’s GDP, those supporting but not reflected within prices of globally

traded goods are not attributed to nations' global trade. Trade surpluses' contributions and trade

deficits' detriments to their nation's GDPs are understated. The entire benefits of production are

earned by the exporting nations and denied to the importing nation.

South Africa’s trade balance shifted back into surplus in March as exports of precious metals and

electronics climbed.

The trade surplus of 482 million rand ($41 million) compared with a revised 8.7 billion rand

deficit in February, the Pretoria-based Revenue Service said in a statement on its website

Thursday. The median estimate of 12 economists surveyed by Bloomberg was for a shortfall of

6.5 billion rand. The deficit for the first three months of the year was 32.6 billion rand compared

with 27.2 billion rand in 2014.

Eskom Holdings SOC Ltd., the state-owned utility that supplies about 95 percent of the nation’s

power, is rationing electricity supply because its aging plants can’t meet demand. The scheduled

blackouts, known locally as load shedding, will harm growth prospects in Africa’s most-

industrialized economy, according to the World Bank.

The effect of power cuts “was not as severe on mining and manufacturing as we had suspected,”

Isaac Mats ego, an economist at Ned bank Group Ltd., said by phone from Johannesburg on

Thursday. “We will be watching the number very closely in April and May because in April is

when load-shedding became more severe.”

A positive trade balance may relieve pressure on the current account, the broadest measure of

trade in goods and services, and the rand. The current-account gap averaged 5.4 percent of gross

domestic product in 2014 and will narrow to 4.5 percent this year, according to the National

Treasury.

South Africa posted a trade deficit in July as imports of vehicle and transportation equipment

increased, offsetting a surge in base metals exports.

The trade balance swung to a 0.4 billion rand ($30 million) deficit from a revised 5.48 billion

rand surplus in June, the Pretoria-based South African Revenue Service said in an e-mailed

statement on Monday. The median estimate of seven economists surveyed by Bloomberg was for

a deficit of 1.6 billion rand. The shortfall for the first seven months of the year was 25.3 billion

rand compared with 53.4 billion rand in 2014.

A deficit on the trade account will keep pressure on the current account, the broadest measure of

trade in goods and services, and the rand, which fell to a record against the dollar last week. The

current-account shortfall eased to 4.8 percent of gross domestic product in the three months

through March, from 5.1 percent in the previous quarter.

“The economy is probably going to struggle to meaningfully narrow the current-account deficit

much below 4 percent of GDP over the medium term,” Jeffrey Schultz, an economist at BNP

Paribas Cadiz Securities, said by phone from Johannesburg. “South Africa is going to remain

very reliant on portfolio flows and other investments in the capital account to finance its

deficits.”

The trade balance for any country is the difference between the total values of its exports and

imports in a given year. When a country’s total annual exports exceed its total annual imports, it

is said to have a trade surplus.

When imports exceed exports, a country has a trade deficit.  Recent history has shown the United

States has recorded the largest trade deficits that the world has ever seen. The U.S. trade deficit

declined between 2011 and 2012 from $559.9 billion to $540.4 billion (Scott, 2013). After

recording relatively large trade deficits during the 1980s, U.S. trade deficits declined

substantially during the first half of the 1990s. At the end of the twentieth century, however, the

deficit began increasing again, and peaked in 2005. A drop in the trade deficit in 2013 has

pointed towards an economic recovery for the U.S. This is a result of a boom in oil exports from

increased exploration (Deseret, 2013)

 

Significance of the U.S. Trade Deficit. For decades, economists and citizens in the U.S. and

other countries have debated the significance of trade balances. Many argue that it is better for

countries to have trade surpluses— to export more than they import—than to have deficits. They

believe that trade deficits are harmful for a number of reasons:

Trade deficits are often interpreted as a sign of a nation’s economic weakness. They are said to

reflect an excessive reliance on products made by others, and to result from deficiencies in the

home country’s economic output. In the eyes of many labor supporters, an excess of imports

over exports comes at the expense of domestic production and jobs. Some people argue that the

loss of millions of manufacturing jobs in the United States over the past several decades is due to

the trade deficit.

Trade deficits represent a sacrifice of future growth. Because a nation with a trade deficit is

purchasing more than it produces, investment in future growth is being traded for consumption in

the present. Large trade deficits create an environment conducive to financial crises that could

damage the economy.

According to this view, when the United States runs a large trade deficit, foreign sellers of goods

and services simultaneously accumulate large amounts of U.S. dollars. These dollars cannot be

spent inside their own countries, so they need to be invested somewhere. Much of this trade

deficit-driven accumulation of dollars is used to purchase American stocks and bonds, pieces of

American companies, and other U.S. assets.

The potential for instability arises if foreign investors in U.S. assets begin to worry that a

persistent trade deficit is going to make the U.S. dollar less valuable relative to currencies in

other countries. If this concern prompts a lot of foreign investors to sell their U.S. assets at the

same time (in the hope of reinvesting the proceeds somewhere else), then the value of the U.S.

dollar could fall substantially in a short period of time.

Others doubt the importance of these risks, and counter that:

Consumers, particularly in the United States, can enjoy a higher living standard than they would

if limited to domestically produced goods and services;

Trade deficits have rarely sparked financial crises in advanced industrial countries; and

Trade deficits can be a sign of economic strength; as imports tend to increase rapidly during

times of economic growth when consumers and firms have more money to spend on foreign as

well as domestic goods.

This argument is consistent with the experience of the United States during the second half of the

1990s, when a booming economy and rising employment were accompanied by record import

levels and trade deficits.

In economics, broad money is a measure of the money supply that includes more than just

physical money such as currency and coins (also termed narrow money). It generally includes

demand deposits at commercial banks, and any monies held in easily accessible accounts.

Components of broad money are still very liquid, and non-cash components can usually be

converted into cash very easily. One measure of broad money is M3, which includes currency

and coins, and deposits in checking accounts, savings accounts and small time deposits,

overnight repos at commercial banks, and non-institutional money market accounts.

This is the main measure of the money supply, and is the economic indicator usually used to

assess the amount of liquidity in the economy, as it is relatively easy to track.

However broad money can have different definitions depending on the situation of usage, usually

it is constructed as required to be the most useful indicator in the situation. More generally, broad

money is just a term for the least liquid money definition being considered and less a fixed

definition across all situations. As such broad money may have different implications in the

United States than it does in Australia, and even from academic paper to paper. The term broad

money will usually be more exactly defined before a discussion, when it is not sufficient to

assume a wider definition of money.

Broad money to total reserves ratio in South Africa

Broad money to total reserves ratio in South Africa was last measured at 5.24 in 2013, according

to the World Bank. Broad money (IFS line 35L..ZK) is the sum of currency outside banks;

demand deposits other than those of the central government; the time; savings; and foreign

currency deposits of resident sectors other than the central government; bank and traveler’s

checks; and other securities such as certificates of deposit and commercial paper. This page has

the latest values, historical data, forecasts, charts, statistics, an economic calendar and news for

Broad money to total reserves ratio in South Africa.

In the U.S. the most common measures of the money supply are termed M0, M1, M2 and M3.

These measurements vary according to the liquidity of the accounts included.

M1(A measure of the money supply that includes all physical money, such as coins and

currency, as well as demand deposits, checking accounts and Negotiable Order of Withdrawal

(NOW) accounts. M1 measures the most liquid components of the money supply, as it contains

cash and assets that can quickly be converted to currency. It does not contain "near money" or

"near, near money" as M2 and M3 do ( M0 includes only the most liquid instruments, and is

therefore narrowest definition of money.M2 (a measure of money supply that includes cash and

checking deposits (M1) as well as near money. “Near money" in M2 includes savings

deposits, money market mutual funds and other time deposits, which are less liquid and not as

suitable as exchange mediums but can be quickly converted into cash or checking deposits.

 M3( A measure of money supply that includes M2 as well as large time deposits,

institutional money market funds, short-term repurchase agreements and other larger liquid

assets. The M3 measurement includes assets that are less liquid than other components of the

money supply, and are more closely related to the finances of larger financial institutions and

corporations than to those of businesses and individuals. These types of assets are referred to as

“near, near money.”)

includes liquid instruments as well as some less liquid instruments and is therefore considered

the broadest measurement of money. Complicating the situation, different countries often define

their measurements of the money slightly differently. In academic settings, the term "broad

money" should be separately defined in order to prevent potential misunderstandings.

The value for Broad money (current LCU) in South Africa was 2,513,870,000,000 as of 2013.

As the graph below shows, over the past 48 years this indicator reached a maximum value of

2,513,870,000,000 in 2013 and a minimum value of 4,768,400,000 in 1965.

Definition: Broad money (IFS line 35L..ZK) is the sum of currency outside banks; demand

deposits other than those of the central government; the time, savings, and foreign currency

deposits of resident sectors other than the central government; bank and traveler’s checks; and

other securities such as certificates of deposit and commercial paper.

Source: International Monetary Fund, International Financial Statistics and data files.

Broad money (% of GDP) in South Africa was 71.13 as of 2013. Its highest value over the past

48 years was 80.80 in 2008, while its lowest value was 45.50 in 1993.

Definition: Broad money (IFS line 35L..ZK) is the sum of currency outside banks; demand

deposits other than those of the central government; the time, savings, and foreign currency

deposits of resident sectors other than the central government; bank and traveler’s checks; and

other securities such as certificates of deposit and commercial paper.

Source: International Monetary Fund, International Financial Statistics and data files, and World

Bank and OECD GDP estimates.

The value for Broad money growth (annual %) in South Africa was 5.92 as of 2013. As the

graph below shows, over the past 47 years this indicator reached a maximum value of 27.02 in

1988 and a minimum value of 1.76 in 2009.

Definition: Broad money (IFS line 35L..ZK) is the sum of currency outside banks; demand

deposits other than those of the central government; the time, savings, and foreign currency

deposits of resident sectors other than the central government; bank and traveler’s checks; and

other securities such as certificates of deposit and commercial paper.

Source: International Monetary Fund, International Financial Statistics and data files.

Deposits Included in

Broad money

Deposits Excluded from Broad Money

Trade Balance

METHODOLOGY:

Detailed data was being collected and techniques were used for the analysis of

data for decision making. The intention behind the project was to test the OLS and the

assumptions of OLS Concept.

DATA:

South Africa is being selected as Population.Secondary Data used for the testing and

analysis OLS and the assumption of OLS. Data has been collected from IFS Browser. The data is

collected from the period of January 1971 to October 2010.

THEORETICAL FRAME WORK:

MATHMATICAL EXPRESSION:

Trade Balance = + (DEBM) + (DIBM)

*DIBM = Deposits included in broad money

*DEBM = Deposits excluded from broad money

TECHNIQUES:

“ASSUMPTIONS OF ORDINARY LEAST SQUARES (OLS)”

Following are the assumptions of ordinary least squares (OLS).

LINEARITY:

The equation must be linear in parameters; the dependent variable y can be calculated as

a linear function of a specific set of independent variables plus an error term.

XT HAS SOME VARIATION:

There should be some variations in the values of independent variables.

XT IS NON-STOCHASTIC (NON-RANDOM) AND FIXED IN REPEATED SAMPLES:

The independent variables (x) are non-stochastic, whose values are fixed. This

assumption means there is a unilateral causal relationship between dependent variable, y,

and the independent variables x. Suppose 10 families have same income but their

consumption could be different.

THE EXPECTED (MEAN) VALUE OF THE DISTURBANCE TERM IS ZERO:

The mean of the error terms has an expected value of zero given values for the

independent variables.

HETEROSKEDASTICITY:

All disturbance/ error terms should be not be same and are not correlated with each other.

SERIAL INDEPENDENCE (NO AUTOCORRELATION):

The disturbance/ error terms are associated with different observations are not related to

each other and are independently distributed.

NORMALITY OF RESIDUALS:

The residuals must be normally distributed having mean zero and variance constant.

n>k AND MULTICOLLINEARITY:

The number of observations is greater than the number of parameters to be estimated,

usually written n > k and there will be no linear relationship between independent

variables.

“MULTICOLLINEARITY”

Multi-collinearity (also collinearity) is a phenomenon in which two or more than two

independent / exploratory variables have a direct relationship between them. An assumption of

CLRM suggests that there is no relationship between the independent variables. When

explanatory variables are very highly correlated with each other (correlation coefficients either

very close to 1 or to -1) the problem of multi-collinearity occurs.  Multi-collinearity increases the

standard errors of the coefficients. Multi-collinearity misleads the standard errors. Thus, it makes

some variables statistically insignificant while they should be otherwise significant.

PERFECT MULTICOLLINEARITY:

Perfect multi-collinearity exists when two or more explanatory variables are perfectly

correlated. Perfect multi-collinearity does not occur often, and usually results from the way

which variables are constructed. If we have perfect multi-collinearity, then we cannot obtain

estimates of the parameters. This can be expressed as X2=2X

1.

CONSEQUENCES OF PERFECT MULTICOLLINEARITY:

Under perfect multi-collinearity, the OLS estimators do not exist. If you try to estimate an

equation in E-Views and your equation conditions undergo perfect multi-co linearity, E-Views

will not give you results but will give you an error message mentioning multi-collinearity.

IMPERFECT MULTICOLLINEARITY:

Imperfect multicollinearity exists when two or more explanatory variables are not perfectly

Correlated .This can be expressed as: X2=2X

1+v where v is a random variable that can be view

as the ‘error’ in the exact linear relationship. Results may change with very small changes in

data.

CONSEQUENCES OF IMPERFECT MULTICOLLINEARITY:

OLS estimation may be indefinite because of large standard errors.

Affected coefficients may fail to attain statistical significance due to low t-stats.

There will be existence of sign reversal.

Addition or deletion of few observations may result in considerable changes in the probable

coefficients.

DETECTING OF MULTICOLLINEARITY:

Simple correlation co-efficient: If independent variables are highly correlated there will be multi-

collinearity.

High R2 and Low t-Statistics: multi collinearity does not affect the R2 statistic; it only affects

the estimated standard errors and hence t-statistics. A possible symptom of severe

multicollinearity is to estimate an equation and get a relatively high R2 statistic, but find that

most or all of the individual coefficients are insignificant, i.e., t-statistics less than 2.

Variance Inflating Factor (VIF): Higher the R2 there will be higher VIF it shows that there will

be higher multicollinearity.

VIF= 1/1-R

2

Tolerance (TOL): When multi-collinearity is higher than tolerance will be smaller.

Tolerance =1/VIF.

An easiest way of detection is by simply looking at the matrix of correlation between variables.

RESULTS & THEIR INTERPETATIONS

Variable Coefficient t-Statistic Prob.

D.I.I.B -3.026659 -1.978712 0.0952

D.E.F.B -0.085932 -0.303643 0.7717

C 3550.078

R-squared 0.507195

Adjusted R-squared 0.342927

Sum squared residual 62321387

F-statistic 3.087600

Prob(F-statistic) 0.119681

INTERPETATIONS OF RESULTS

R-square vale is 0.507195, so out of 100, independent variables (Deposit include in bro and

Deposit exclude from bro ) are explaining Depended variable (trade balance) 0.507195 and

remaining 0.492805 is error. or contribution of explanatory variable is 0.507195,it is Goodness

fit of model.

Adjusted R-square is less than R-square (0.342927 > 0.507195), aggregate of independent

variables is relevant and function is correct so there degree of freedom is 0.342927.

Comparison

T-stat value of DIBM is -1.978712, is beyond the limit +- 1.96 so it is significant.

T-stat value of DEBM is -0.303643, between the limit +- 1.96 so it is not significant.

P value of DIBM is 0.0952, not in range of .05 so it’s insignificant.

P value of DEBM is 0.7717, not in range of .05 so it’s insignificant.

F-stat value of DIBM is 3.08, is more than 3 so overall model is significant.

P value of F-state is 0.119681 not in range of .05 so it’s insignificant.

Slope of DIBM is -3.026659, its mean when 1 unit of DIBM changes than 3.026659 units of

trade balance changes inversely or negatively.

Slope of DEBM is -0.085932, its mean when 1 unit of DEBM changes than 0.085932 units of

trade balance changes inversely or negatively.

Solution:

Balance of trade = α + β (DIBM) + β (DEBM)

Balance of trade = 3550.078 + (-3.026659) + (-0.085932)

Balance of trade =3546.965409

Ess and Tss:

Ess = Rss × Tss

Variance Inflation Factor and Tolerance

Centered Tolerance

Variable VIF

DIBM  1.338921 0.74687

DEBM  1.338921 0.74687

Value of Centered VIF in respect to both Independent variables is less than 3, so there is no

multi co linearity or there is no linear relationship among the explanatory variables.

Value of Tolerance of is near to 1 (0.74687) so higher the tolerance means no multi co-linearity

exist.

Correlation:

D.I.I.B D.E.F.B

D.I.I.B  1.000000  0.503120

D.E.F.B  0.503120  1.000000

GRAPHICAL METHOD

SCATTER DIAGRAM

Variance of error term is not constant there no is equal spread.

Variance of error term is constant there is equal spread.

Variance of error term is constant there is equal spread.

HETEROSKEDASTICITY

ARCH METHOD

Heteroskedasticity Test: ARCH

F-statistic 1.653637     Prob. F(1,6) 0.2459

No Heteroskedasticity exists because P value of F-Stat is more than 0.05.

WHITE CRITERIA

Heteroskedasticity Test: White

F-statistic 4.704616     Prob. F(5,3) 0.1163

No Heteroskedasticity exists because P value of F-Stat is more than 0.05.

Reference:

https://en.wikipedia.org/wiki/Foreign_trade_of_South_Africa

http://www.scielo.org.za/scielo.php?pid=S2222-34362014000500006&script=sci_arttext

Reference :Globalization101.Sunny Levin Institute

http://www.bloomberg.com/news/articles/2015-04-30/south-africa-trade-balance-swings-to-

surplus-as-exports-climb

http://www.bloomberg.com/news/articles/2015-08-31/south-africa-posts-trade-deficit-in-july-as-

vehicle-imports-rise

  http://www.investopedia.com/terms/b/broad-money.asp#ixzz3r1uRrvHN