DefinePK

Research Objective

To revisit the nexus between trade, energy consumption, and economic growth in Portugal, considering capital formation and consumer prices as additional factors.

Methodology

The study employs an Autoregressive Distributed Lag (ARDL) bounds testing approach using annual time-series data for Portugal from 1986 to 2022. Variables include per capita output, labor force, capital formation, energy consumption, trade liberalization, and consumer prices. Unit root tests (KPSS) are used to determine the order of integration, followed by the ARDL bounds test for cointegration. Long-run and short-run coefficients are estimated, and structural stability is assessed using CUSUM and CUSUM Square graphs.

Methodology Flowchart

                        graph TD
    A["Data Collection 1986-2022"] --> B["Unit Root Test - KPSS"];
    B --> C["Mixed Order of Integration?"];
    C -- Yes --> D["ARDL Bounds Test"];
    C -- No --> E["Alternative Cointegration Test"];
    D --> F["Estimate Long-Run Coefficients"];
    D --> G["Estimate Short-Run Coefficients"];
    F --> H["Stability Tests - CUSUM/CUSUM Square"];
    G --> H;
    H --> I["Conclusion and Policy Implications"];                    

Discussion

The findings suggest that Portugal's economic growth is positively influenced by trade openness, capital formation, energy consumption, and domestic prices. The insignificance of the labor force in capital-rich economies is noted. The study emphasizes that while all these factors contribute, trade liberalization plays a crucial role in boosting domestic production in the long term, whereas domestic prices are more impactful in the short term. The robustness of the results is confirmed by diagnostic tests.

Key Findings

- Trade openness significantly increases economic activities in Portugal.
- Capital formation, energy consumption, and consumer prices also elevate domestic production.
- Trade openness has the strongest impact on economic growth among the considered factors.
- In the long run, capital accumulation, energy consumption, liberalized trade, and domestic prices are positively and significantly related to domestic output.
- In the short run, domestic prices show the highest positive impact on domestic production.
- The speed of adjustment to long-term equilibrium is approximately 86.52% per year, implying equilibrium is reached in about 1.16 years.

Conclusion

Capital stock, energy consumption, liberalized trade, and domestic prices are identified as "output-friendly" inputs that significantly boost domestic output in Portugal. Efforts to enhance these factors, particularly liberalized trade and capital stock, are recommended to expand domestic output.

Fact Check

- The study uses annual data from 1986-2022, a period of 37 years.
- The F-statistic for the ARDL bounds test is 11.8560, which is greater than the 5% upper critical bound of 4.3919, indicating a long-run cointegrating relationship.
- The speed of adjustment to long-term equilibrium is estimated at 86.52% per year.

Mind Map