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THE ANALYSIS OF FACTORS AFFECTING INDONESIAS TOBACCO EXPORTS TO THE UNITED STATES: A PARTIAL ADJUSTMENT MODEL (1981- 2001)

A THESIS Presented as Partial Fulfillment of the Requirements To Obtain the S1 Degree in Economics Department

By

SITI HAJAR RAHMAWATI


Student Number: 01313097

DEPARTEMENT OF ECONOMICS INTERNATIONAL PROGRAM FACULTY OF ECONOMICS UNIVERSITAS ISLAM INDONESIA YOGYAKARTA 2006

TABLE OF CONTENTS

Page of title Approval page Legalization page Acknowledgements Devotion page Motto Table of contents Lists of table List of graph List of appendices Abstract (in English) Abstract (in Bahasa Indonesia)

i ii iii iv vi vii viii ix x xi xii xiii

CHAPTER 1: INTRODUCTION 1.1 Study background 1.2 1.3 1.4 1.5 1.6 1.7 Problem identification Problem formulation Problem limitation Research objectives Research contribution Definition of term 1 10 11 12 12 13 13

CHAPTER 2: REVIEW OF RELATED LITERATURE 2.1 Previous researcher 14

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CHAPTER 3: THEORITICAL BACKGROUND AND HYPOTHESIS 3.1 Theoretical background 3.1.1 Demand theory 3.1.1.A Change in demand 3.1.1.B Elasticity of demand 3.1.2 3.1.3 Export: demand side Factors affecting export in Indonesia 3.1.3.A The Gross Domestic Product 3.1.3.B The Exchange Rate 3.2 Demand Theory on Open Economy 3.3 3.4 International Trade as one part of Economic system Hypothesis formulation 30 30 33 36 38 39 39 41 43 44 44

CHAPTER 4: RESEARCH METHOD 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Research method Research subject Research setting Data source Research variable Technique of data analysis Analysis tools 4.7.1 Classical Assumptions test 4.7.1.1 4.7.1.2 4.7.1.3 Multicollinearity Heteroscedasticity Autocorrelation 47 48 48 48 49 49 50 50 50 51 52

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4.7.2 4.7.3 4.7.4 4.7.5 4.7.6

Time Series Regression T- Statistic Testing F- Statistic Testing PAM regression The Multiple Regression Coefficient of Determination (R)

53 54 55 55 55

CHAPTER 5: RESAECH FINDINGS AND DISCUSSIONS 5.1 5.2 5.3 5.4 Data description Source of data Data description Analysis result 5.4.1 5.4.2 5.4.3 5.4.4 Multiple Regression Coefficient of Determination F- test Test on Independent Variables (T- Statistic testing) Coefficient PAM 56 57 57 59 60 60 61 65 66 68 70 70 70 72 73

5.4.4.1 Result on Data estimation 5.4.4.2 Analysis elasticity Short- run and Long- run 5.4.5 Violation on Classic Assumption

5.4.5.1 Multicollinearity 5.4.5.2 Hetroscedasticity 5.4.5.3 Autocorrelation 5.4.6 Proof of hypothesis

CHPATER 6: CONCLUSION AND IMPLICATION 6.1 6.2 Conclusion Implication 74 75 78 79 x

REFERENCES APPENDICES

LIST OF TABLE Page

Table 1.1 Table 1.2 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 5.5 Table 5.6

Indonesian Export and Import growth Important Indonesias tobacco exports destination country Regression PAM result Coefficient of Short- run and Long- run Multicollinearity result Heteroscedasticity result Autocorrelation result Autocorrelation test with LM method

LIST OF GRAPH Graph 3.1 Graph 5.1 Graph 5.2 Graph 5.3 Graph 5.4 Change on demand Test on price of tobacco Test on USA real total GDP Test on exchange rate Test on previous year tobacco volume export

LIST OF APPENDICES Page

Data Calculation of data change to Ln Data with Ln Heteroscedasticity Autocorrelation Multicollinearity Linear Log- linear MWD multiple regression Linear MWD multiple regression Log- linear PAM linear PAM log- linear Unit root test Dummy to prove negative exchange rate

ABSTRACT

Since long time, the main destination of Indonesian tobacco has been were The United States, Japan, Malaysia, Belgium and Luxemburg, Netherlands, Germany, France and Spain. But the main destination is to The United States and the volume of tobacco export to USA is more stable than to another countries. Indonesia has several kinds of tobacco export, they are: tobacco not stripped Virginia type flue crude, tobacco not stripped, tobacco wholly/ partly stripped Virginia type flue crude, and tobacco wholly/ partly stripped. All the fact above interest the researcher, in holding the research to recognize the flows of export tobacco Indonesia to The United States. Hence, the title of this thesis is: THE ANALYSIS OF FACTORS AFFECTING INDONESIAS TOBACCO EXPORTS TO THE UNITED STATES: A PARTIAL ADJUSTMENT MODEL (1981- 2001) This research attempt to investigate about the effect of international tobacco price on the export volume of Indonesias tobacco to the United States, the effect of real total GDP of the United States on the export volume of Indonesias to the United States, the effect of exchange rate on the export volume of Indonesias to the United States, the effect of previous tobacco export on the export volume of Indonesias to the United States. The data used in this study are secondary data consisting of the export volume of Indonesias tobacco, international tobacco price, real total GDP of the United States, exchange rate, and the export volume at previous year. To eliminate the mistake and to make the estimation process is easier, the researcher used computer program Eviews. The relevance economic theory that is used in this research is demand theory. The analytical method used in this research is PAM (Partial adjustment Model). Since the research using PAM so volume export at previous year will be used as independent variable. The regression that used in this research is log- linear.

The results of this research are: Price of tobacco has a significant and positive effect on the volume of tobacco export. The United States real total GDP has a significant and positive effect on the volume of tobacco export. Exchange rate has a significant and negative effect on the volume of tobacco export. Tobacco export at previous year has a significant and positive effect on the volume of tobacco export. From he short- run and long- run PAM regression model the researcher conclude that Indonesias tobacco is less important to the USA in the future because in the short- run Indonesias tobacco is elastic and becoming more inelastic in the future. Beside that, the decision of buying Indonesias tobacco is more induced by income decision. In the short- run the commodity is necessity, however in the long- run it becomes non- necessity. From both result the researcher can conclude that Indonesia cannot rely on their income from tobacco. So Indonesia should make product diversification or country diversification.

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CHAPTER I INTRODUCTION

I.I

STUDY BACKGROUND

The economic growth of Indonesia is now better compared to the situation before 1970s. The Indonesian Bureau Of Statistics (Badan Pusat Statistik) recorded that the economic growth of Indonesia was 4,08% in 2003, even though it less than before the crisis (i.e. 7%). It is a good condition, because after the crisis hit this country our per capita income is very low. With the increasing of economic growth the investment to the industrial sector and agriculture sector also increased. After the economic crisis hit Indonesia and many other Asian countries, resulting in local currency depreciation particularly against US$ and the depreciation had a negative impact on most of national industry performances including the agricultural sector. However, Indonesia tried many things to increase the economic growth, one of them is by increasing the export goods and services. Export is including in international trade. International trade is the exchange of goods and services between countries. It occurs because a country is able to purchase goods abroad more cheaply than it can produce them at home. The international trading could be: 1. The exchange of good and services 2. The movement of row material in each country

3. The exchanging and expanding the goods and services can be pursue the increase on economy development. Indonesia is one of the developing countries that follow an open economy system in economy. It means that an international economy has an important role in developing the national economy. The target of development economy in Indonesia is to develop the national society as a whole with the surplus condition in international trading. The improving of advanced technology can be a help to increase the production on goods and services for trading. In International Trade Theory a country has a comparative advantage in production if the country has goods which quality has superiority compared to the other goods in the imported country. Hence, trade between two countries can benefit both countries. Indonesia is famous in agricultural sector (include in non oil and gas), it is known in 1980s era Indonesia make lot of income from this sector. At that time agriculture was bigger than the oil- gas sector. The growth of agricultural sector (non oil and gas) is seen from the growth of Indonesian import and export.

Table 1.1 Indonesian Export and Import Growth INCLUDE OIL AND GAS YEAR 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 EXPORT 23950.4 2,164.5 22328.3 21145.9 21887.7 18586.7 14805.0 17135.6 19218.5 22158.9 25675.3 29142.4 33967.0 36823.0 40053.4 45418.0 49814.8 53443.6 48847.6 IMPORT 10834.4 13272.1 16858.9 16351.8 13882.1 10259.1 10718.4 12370.3 13248.5 16359.6 21837.0 25868.8 27279.0 28327.8 31983.5 40628.7 42928.5 41679.8 27336.9 NOT INCLUDE OIL AND GAS EXPORT 6168.8 4501.3 3929.0 5005.2 5869.7 5868.9 6528.4 8579.6 11536.9 13480.1 14604.2 18247.5 23296.1 27077.2 30359.8 34953.6 38093.0 41821.1 40975.5 IMPORT 9090.4 11550.8 13314.1 12207.6 11185.3 8983.5 9632.0 11302.0 12339.5 15164.4 19916.6 23558.5 25164.6 26157.2 29616.1 37717.9 39333.6 37755.7 24683.2

*) Indonesian Statistical Year Book 1998

One of the most government revenue is come from tobacco production as Indonesian tobacco industry is well developed. Indonesia is a large producer and exporter of tobacco and cigarettes, and therefore a good prospective market for The United States tobacco. Tobacco export from Indonesia has a good market in United States market, because they like the kind of tobacco from Indonesia. Indonesia has several kind of cigarettes product like the sweet- smelling kretek (clove- flavored). Indonesian annual production of cigarettes is 245 billion pieces. During 1997 Indonesia also exported cigarettes worth US$ 127 million. The export of cigarettes reflects that Indonesia's total international trading of tobacco and cigarettes in 1997 was US$ 588 million, with a positive balance of US$ 174.6 million. The core objective of Indonesian tobacco policy is maximum revenue collection and export of cigarettes. Indonesia has succeeded in attracting Foreign Direct Investment (FDI) in cigarette manufacturing, which has helped Indonesias exports. The simultaneous import and export of tobacco is explained by the need for blending various tobaccos for the desired flavor for international brands cigarettes. Geographically, cigarette manufacturers are concentrated in two regions, which are almost 2000 Km apart. 90% of cigarette manufacturing is in Central and East Java (in a 200 Km radius). Important cities in this region are Surabaya, Bojonegoro, Kudus, Kediri, and Malang, those cities centers for tobacco manufacturing and trading. They have been marked red

in the map, at annexure-A. 10% cigarette manufacturing is in Sumatra Island, and the city of Medan is important center for tobacco trading. Size of Firm As for the "Size of the Firm" is varying, the market for tobacco can be divided into three segments. The three segments are as follows: Large Enterprises 1. PT. Gudang Garam: It is a local Indonesian company, which enjoys Indonesian market leadership. Its annual production is 85 billion pieces, with 34% market share. 2. PT. Djarum Kudus: Djarum Kudus annual production capacity is 39.6 billion pieces with market share of 16.15%. 3. British American Tobacco (BAT): It is the largest multinational tobacco in Indonesia. Its annual production capacity is 11.2 billion pieces, having 4.56% market share. 50% of their cigarette production is for export market. 4. PT. Bentoel: Its annual cigarettes production capacity is 17.1 billion pieces. Its brands are Bentley and Marlboro. Its market share is 6.96%. Medium Size Enterprises 1. Rothmans: Its annual production capacity is 7.2 billion pieces, having 2.93 % market share. Its popular brands are Dunhill, Kansas, Blue Ribbon and Pall Mall.

2. Philips Morris: Philips Morris imports blended tobacco from their subsidiary in Malaysia. In Indonesia they have only cigarette manufacturing factory. Tobacco blending is done in Malaysian subsidiary. 3. PT Sampoerna: Its annual cigarette production capacity is four billion pieces, having 1.63 % market share. It has also factories in Viet Nam and Myanmar. The tobacco sourcing for those factories is also done from Indonesia. 4. NV. Sumatra Tobacco Trading Company: The factory and the company head quarter are in the city of Medan, in Sumatra. Its annual production is 14.2 billion pieces, with 5.78% market share. Its famous brands are Jet, Hero, and United. Small Enterprise There are 135 small size cigarette manufacturers; they have a total 26.8% market share. Their main raw material is local tobacco. However, they also use some imported tobacco, primarily for blending. There are eight-tobacco importers in The United States who buy Indonesian tobacco, they are: 1. 2. 3. 4. 5. American Tobacco Company (Richmond) Conwood Corporation (Memphis) Culbro Tobacco (Bloomfield) Fader & Son inc (Baltimore) Finck Cigar Company (San Antonio)

6. 7. 8.

Lancaster Leaf Tobacco co (Lancaster) Marine marketing of California (California) Thorpe & Ricks inc (Rocky Mount)

Market Demand Forecasting Indonesian tobacco harvesting months are August/September. In 2005 the Industry sources predict that due to non-availability of fertilizers and pesticides, the production will be lower. There is too much rain, the crop wont be good, and production is less than average. On the other hand, the demand for cigarettes is increasing at the rate of 4.50% per annum and hence the demand for imported tobacco will increase. Due to its strong cigarette manufacturing industry, both for local consumption as well as for export, Indonesia will be an important market for tobacco. The need for blending of various types of tobacco for good quality cigarettes makes the imported of tobacco is essential. In the short (one year), medium (two to three years), and long term (four to seven years) Indonesia will be important market for tobacco. The export of tobacco from Indonesia has decline during crisis in 1998. Indonesian economy is now on the way to recovery. Interest rates has come down from 40% to 20%, currency has stabilized within the IMF prescribed limits, and inflation has come down from above 60% to less than 15%. The improvement in economic fundamentals and peaceful election has restored the business confidence and there are strong indications that the economy

will come out of the crisis within a year or so. Summarize the trends in global tobacco use and the resulting immense and growing burden of disease and premature death, in 1999, World Bank published, "Curbing the Epidemic; governments and the economic of tobacco control", and theres an article by Joy de Beyer, he wrote: By 1999 there were already 4 millions deaths from tobacco each year, about half of these deaths are in high- income countries. Tax increases that raise the price of tobacco products are the most powerful policy tool to reduce tobacco use, and the single most cost-effective intervention. Why? Because government hesitates to act decisively to reduce tobacco use, they are afraid of the tax increase and other tobacco control measure might harm the economy. By reducing the economic benefits, the country gains from growing, processing, manufacturing, exporting and taxing tobacco. (World Bank Journal vol. 4/ 1999) Indonesia has several important tobacco exports destination; those countries are Japan, Singapore, Malaysia, USA, Belgium & Luxemburg, Netherlands, Germany, France and Spain, but the most tobacco are exported to USA and the table under explains it.

TABLE 1.2 (Net weight 000 Kg) COUNTRY OF 1992 DESTINATION JAPAN MALAYSIA USA BELGIUM 635,0 200,4 9476,6 & 1506,9 357,3 216,6 206,5 164,3 42,6 669,3 5756,3 1119,0 612,3 992,2 6360,2 1199,2 15,1 25,0 7,4 129,2 1993 1994 1995 1996 1997 1998

9522,9 4445,7 1465,0 1019,8

6073,0 4081,5 1659,1 1829,0

LUXEMBOURG NETHERLANDS 3061,7 GERMANY FRANCE SPAIN 3839,1 2475,0 1483,5 2191,1 3159,7 3921,7 3091,4 2716,6 2211,5 1950,9 11004,3 3104,5 1657,1 1364,8 257,3 3242,5 1880,6 1006,3 3380,9 3210,5 3704,5 1787,2 2801,2 790,8 265,1 1503,8 5141,3

Source: Statistic Indonesia 1996 and 1998

As explained above, USA as one of industrialized country needs lots of tobacco. To fulfill its needs of tobacco, USA imports tobacco from tobacco exporting countries every year among them are from Indonesia. Todays USA import is affected by previous years import in 2 ways. It might be positive or negative. It is negative if USA import today isnt affected by previous year import, and it is positive if USA import today is affected by previous year import, because there are some assumptions. First that USA with its technology can heap their tobacco reserve, second USA like importing their tobacco reserve from Indonesia because the

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procedure of importing tobacco from Indonesia is not complicated. Since USA import today is affected by previous years import, this research uses PAM. Based on the fact above the writer wants to make tobacco commodity as an object to make research with entitle: THE ANALYSIS OF FACTORS AFFECTING INDONESIAS TOBACCO EXPORTS TO THE UNITED STATES: A PARTIAL ADJUSTMENT MODEL 1981- 2001

I. 2

PROBLEM IDENTIFICATION This research will focus on what factors that affect the quantity demand of Indonesian tobacco export to the United States. The factors that will be discussed are price of good, income of the country and exchange rate between countries that having international trade as well as the volume export of the previous year. The writer wants to find out when the changes in the factors would affect on the quantity of demand. For example if there were an increase in price of good, will this change affect on quantity demand of tobacco export? Hopefully this research can answer the question of what kind of factors that will affect on quantity demand of Indonesian tobacco export. In order to have a clear and bright framework, it is important to identify the main problem of this research as the basis framework to write this thesis. Problem identification is an important and first step in solving

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the problem discussed in this thesis. The problem identification in this research is analyzing factors that affect Indonesian tobacco export to The United States 1981- 2001

I. 3

PROBLEM FORMULATION Based on the study background and the demand for Indonesias tobacco export and its impact to the import condition, the writer formulates the following problems: 1. International price of tobacco Does the international tobacco price affect the demand for Indonesias tobacco export to the United States? 2. The United States total real GDP To know how far is the total real GDP of The United States will affect tobacco export to the United States. 3. Exchange rate of Rupiah to US Dollar To know how far is the exchange rate Rupiah to US Dollar affect the Indonesian Tobacco export to The United States. 4. Volume of tobacco exports Indonesia to USA previous year. To know how far is the previous tobacco export affects current tobacco export.

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1.4

PROBLEM LIMITATION The study focuses on: 1. The export volume of tobacco to The United States in 1981- 2001. 2. The international tobacco price in 1981- 2001. 3. The United States real total GDP in 1981-2001. 4. The exchange rate of Rupiah toward US Dollar in 1981-2001 5. The volume of tobacco export Indonesia to USA at previous year

I. 5

RESEARCH OBJECTIVES 1. To analyze the effect of international price of Indonesian tobacco toward export demand of Indonesian tobacco by The United States. 2. To analyze the effect of the United States total real GDP toward export demand of Indonesian tobacco by The United States. 3. To analyze the effect of exchange rate Rupiah to US Dollar toward export demand of Indonesian tobacco by The United States. 4. To analyze the effect of volume of tobacco export Indonesia to USA at previous year toward current demand of Indonesian tobacco by The United States.

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I.6

RESEARCH CONTRIBUTION For the writer, this research is the opportunity to apply the knowledge and theory that studied before. 1. To study further about the knowledge about international trade and its relation with country economic growth. 2. To give other researcher temporary data and argument about Indonesia tobacco export. 3. As additional information to tobacco commodity so it can increase the government balance of trade.

1.7

DEFINITION OF TERM Demand for Indonesian tobacco to The United States means demand from Indonesia as exporter country to The United States as importer country. Export of tobacco is one of revenue contribution to Indonesian export. This research will explain the demand of Indonesian tobacco export to The United States. The writer wants to search on what factors that would affect the quantity demand of Indonesian tobacco export. On this thesis the factors to be examined are international tobacco price, the United States income (real total GDP), exchange rate Rp/US$, and volume of tobacco export Indonesia to USA at previous year.

CHAPTER II REVIEW OF RELATED LITERATURE

2.1

Previous Researchers Triasih Djutaharta, Henry Viriya Surya, N. Haidy A. Pasay, Hendratno, Sri Moertiningsih Adietomo
The former researcher that had already researched about tobacco in Indonesia was done by Triasih Djutaharta, Henry Viriya Surya, N. Haidy A. Pasay, Hendratno, Sri Moertiningsih Aditomo (2005), in their titled Aggregate Analysis of The Impact of Cigarette Tax Rate Increase on Tobacco Consumption and Government Revenue: The Case of Indonesia. Their article was publicized in HNP discussion paper Economics of Tobacco Control Paper no. 25. They also included time series data from 1970- 2001 and monthly data from January 1996- June 2001, to estimate the price and income elasticity of demand for tobacco products in Indonesia. The study talks lot about tobacco, cigarettes, kreteks, demand, Indonesia, tobacco policy, price elasticity of demand, income elasticity of demand, taxation, tax revenues, and tax policy. It is known people in Indonesia are very contaminated with smoke. Most of young people are very addicted with cigarette and lot of people being passive smokers. This is Indonesian habit and they are hard to quit.

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Government of Indonesia already gives many ways to reducing the cigarette consumption. Like beginning in 1991 the government requiring cigarette manufactures to include a warning label on every cigarette pack. The massage: Government warning smoke is danger for health was intended to reduce smoking and provide information of the danger of smoking. However the size of warning label is to small and the warning is not clear, not specific and not strong. An empirical study shows that the label has not been effective in reducing cigarette consumption in Indonesia. (Demographic Institute 2002). The second way is government has established not smoking area in public area, like in government offices, restaurant, hospital, and public services. But unfortunately this ban is ineffective because the no smoking bans themselves are ignored To try to reduce cigar consumption especially on youth the government banned tobacco advertising in electronic media between 9.30pm to 5.55am (local time). By the year 2002, Telecommunication Law still allows the cigarette advertising, but the commercials should not show the cigarette products or smoking person. Even though the cigarette commercials on television have been accompanied by the warning that smoking is dangerous for health, the duration of the warning is so brief that the audience cannot read and absorb it (Media Indonesia, No. 328) The study simulates the effect of tax increase on tobacco control excise revenue and predicts that an increase in the tax level of 10, 50 or

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100 percent would increase total tax revenue by 9%, 43%, 82% respectively. Its comment about the effect of possible switching to cheaper products or illegal purchases. The study also showed the increased of cigarette taxes would result in a decrease in government revenue however, it is not find. The study predicts that if tax rate were increased government revenue from excise taxes on cigarette would increase, even with drop in consumption. This is strongly connected with the inelastic nature of the price elasticity of cigarette demand. Increasing the excise tax or minimum retail price is a simple instrument that the government can use to influence the price of tobacco products, and hence their consumption. This study found that even very large increases in the excise tax rate would increase total excise tax revenues from tobacco products. Increasing the cigarette excise tax would increase the retail price of cigarette, because tax increases tend to passed on (at least in part) to consumers. If there are significant price differences among tobacco products, smokers may shift to less expensive cigarette rather than reducing consumption (or some combination of switching and reducing consumption). International institutions have recommended that the Indonesian government adopt stronger tobacco control measures. They point out that

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excise tax, as a percentage of retail sales prices in Indonesia are much lower than in other countries with successful tobacco control policies. Continuous increases in cigarette taxes in the long- term may increase illegal production and marketing (smuggling). To the extent of this happens, the increase in excise tax revenue and the reduction in smoking would be less. This would require additional surveillance to anticipate possible illegal actions and strong measures to deter them. A tobacco tax increase could have implications for the Indonesian economy. The tobacco products industry has sizeable labor force, and upstream and downstream linkages. Therefore, effort to decrease the demand for tobacco products may need to be accompanied by efforts to ease the transfer of the labor force and help vulnerable groups (such as farmers and low- income workers) to adjust.

Catherine Reynolds
She is writing an article in Inside Indonesia No. 56 (OctoberDecember 1998 edition), with the title: Worshipping Cancer Sticks: The Tobacco Industry Keeps The Government Afloat, but at a Huge Cost in Ordinary Lives.

Indonesia's tobacco industry is the government's largest source of revenue after oil, gas and timber, reliable internal revenue, unlikely to suffer from external market fluctuations. This revenue recouped a

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staggering Rp 4.49 trillion in excise in 1997/98. That's over AU$ 2 billion at pre-crash exchange rates.

Amazingly, the tobacco industry is also the second largest employer after government. Employment estimates range from 4 - 17 million workers, in areas such as farming, trading, transportation and advertising, as well as those actually involved in producing cigarettes. The Indonesian government is critically dependent on the industry. As a result, opposition to it is discouraged and cigarette advertisers have free rein. In 1996 for instance, Indonesia's Health Minister confirmed that the government had no intention of trying to regulate smoking through legislation.

Any short visit to Indonesia will reveal the huge number of Indonesians, particularly men, who smoke. Estimates of participation rates range from 50% to 85%.

Indonesians are now also smoking at a younger age than ever before. A 1985 Jakarta study found that 49% of boys and 9% of girls aged 10 - 14 were daily smokers. The dangers of smoking are not well known in Indonesia. The earlier people start to smoke, the more likely they are to maintain the habit throughout life. Unless people start smoking by the time they are twenty, they usually never do. As more than 50% of the population is under 24 years old, the potential market (to use the current euphemism for a trade in lethal drugs) is huge. Tobacco companies covet

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this 'market' because they must recruit new smokers in order to maintain their profits, replacing those who die or quit.

The teenage years are the time when people are more focused on their image and identity, and are particularly vulnerable to cigarette advertising. As people get older and become more secure in their identity, the advertised 'attributes' of cigarettes are no longer such a lure. Habit and addiction take their place.

In contrast to the tobacco industry in other countries, Indonesia's industry is not dominated by multinationals, but by four ethnic-Chinese Indonesian companies. There are at least 155 tobacco companies in Indonesia, but the four major producers, Gudang Garam, Djarum Kudus, HM Sampoerna and Bentoel, control about 85% of the market share.

In 1997, Geoff Hiscock, Asia editor of The Australian, noted that of the seven Indonesian US dollar billionaires, three were tobacco barons:

1. Rachman Halim and his Wonowidjojo family (Gudang Garam) were worth US$4.9 billion in November 1997, after the drop in the rupiah; 2. Budi Hartono and family (Djarum) were worth US$1 billion with 20% market share of kreteks in early 1997; 3. Putera Sampoerna and family (Dji Sam Soe A King, A Mild, A International) were worth US$1 billion in November 1997.

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Three multinationals vie for the remaining market share: Philip Morris, BAT Indonesia and Rothmans. The Indonesian market is enormously attractive for multinational tobacco companies because they can safely engage in marketing practices they sanctimoniously decry elsewhere, in the process obtaining far less troublesome profits. For as Sampoerna's 1995 Annual Report smugly states: 'The culture of Indonesia is not litigations in nature, and therefore the industry here does not expect the same exposure to litigation and potential lawsuits as do their American counterparts'.

The recent substantial tiered price increases on cigarettes (determined by each company's production levels) have signaled at least a step in the right direction, but it is not enough. This move by the government suggests fiscal expediency rather than a desire to address the huge mortality rate from tobacco. Certainly industry analysts predict that the large tobacco companies will only benefit from this increase, with larger profit margins.

No matter what political reform takes place elsewhere it is unlikely to affect the tobacco industry. The government's first priority is to resuscitate the economy. The tobacco industry is strategically important, and it is doubtful that the political and legislative actions being taken against the industry in Western countries will be implemented in Indonesia, at least in the short term.

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In 1980, as Anthony Reid noted, Indonesian households 'spent more on tobacco than they did on clothing and footwear, on meat, or on medical and educational needs combined, and twice as much as they spent on festivals. The poorest households spent more on tobacco than they did on fish, meat, and eggs combined'.

Jane Lang McGrew


He wrote an article entitle: History of Tobacco Regulations, in Schaffer Library of Drug Policy for Federal Commission on Drug Policy. He wrote this article is to comment to the Federal government in concerning the tobacco tax.

It is generally accepted that tobacco has been an extremely powerful force in American politics. Approximately 50 million smokers smoked 535 billion cigarettes in the past year. More than 100,000 employees receive $500 million in wages annually from tobacco manufacturing companies; over 4,500 wholesalers handle the distribution of tobacco products and hundreds of thousands of merchants depend on tire sale of cigarettes as a source of their income.

Cigarette companies had been spending over $200 million per year on radio and television advertising, and since the ban, almost all of this money has been diverted to other media advertising providing many thousands of jobs in ad agencies and in the various media. Three million

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people from about 750,000 families receive $1.4 billion annually for the cultivation of tobacco used in cigarettes.

The trade association promoting the welfare of the tobacco industry is the Tobacco Merchants Association of the U.S. It is composed of manufacturers, wholesalers, retailers, importers, exporters, leaf dealers, suppliers, and firms interested in the industry. Its Bulletins cover legislation, trends, special reports; its numerous other publications and activities seek to improve industry operations and expand outlets (e.g., international) for potential sales.

This places the tobacco tax as the seventh largest source of collection by the Federal government behind the major giants, e.g., income and profit taxes (both corporate and individual), employment taxes, manufacturers excise taxes, alcohol taxes, and estate and gift taxes. In terms of individual commodities it ranks behind only alcohol. Thus, federal revenue would be importantly affected if tobacco consumption were to decline.

Ross Hammond
She wrote an article about how tobacco affected to American citizen, until the American cigarette producer should import the tobacco from foreign countries. Its make tobacco expand globally. The title is: Addicted to Profit: Big Tobacco's Expanding Global Reach.

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U.S. Cigarette companies have been increasing their use of foreign tobacco. Between 1990 and 1993, tobacco leaf imports to the U.S. more than doubled to over 1 billion pounds, and between 1995 and 1996 rose over 21 percent. According to the USDA, "The main reason for this surge was the rising popularity in the United States and abroad for low and midpriced cigarette brands (discounts). To meet this demand, manufacturers imported an increasing amount of lower cost foreign tobacco. United States has three multinational companies as the big importer tobacco, one of them is Philip Morris who own the HM. Sampoerna share (Indonesia), the multinational companies are: 1. Philip Morris Philip Morris is the world's largest multinational cigarette company. It controls around 16 percent of the global cigarette market and hawks the world's most popular brand, Marlboro, which accounts for 8.4 percent of global consumption. The company has subsidiaries, affiliates and licensing agreements in 54 countries around the world, and has at least a 15 percent market share in over 40 countries. Philip Morris' international tobacco unit is the company's fastest growing in terms of profit and sales. Since 1990, the company's cigarette sales have risen by only 4.7 percent in the United States, but 80 percent overseas, while profits from international sales have risen by 71 percent since 1993. In 1997, the company sold 235 billion cigarettes in

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the United States for a profit of $3.3 billion, while selling over 711 billion cigarettes abroad for a profit of $4.6 billion, marking the first time that the company's international sales made more profit than domestic ones. By the year 2000, predicts CEO Geoffrey Bible, the company will be selling a trillion cigarettes worldwide. "They've got a good buffer. No matter how badly things go in the United States, international sales will carry them along," says Allan Kaplan, a tobacco analyst at Merrill Lynch & Co. In 1996, Philip Morris bought a controlling interest in the Polish government's largest cigarette factory for $372 million. A year later, the company paid $400 million to take a controlling interest in Mexico's second largest cigarette maker (Cigatam). The acquisition strengthens the company's already formidable presence in Mexico (Marlboros currently have 30 percent market share) which it had gained through a previous license agreement with Cigatam to produce, market and distribute its Marlboro, Merit, Parliament, and Virginia Slims brands. The acquisition will also help the company's efforts to produce low-cost cigarettes for export to North America and Asia -Cigatam has over the past few years been exploring strategies to increase its presence in overseas markets, especially in China. In December 1997, Philip Morris announced that it would build a

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cigarette plant near Bucharest, Romania, to begin production of its Marlboro, L&M and Bond Street cigarettes. As Chairman Bible puts it, "We are still in the foothills when it comes to exploring the full opportunities of many of our new markets. 2. British American Tobacco (BAT) Brown & Williamson's parent company, British American Tobacco (BAT), is the world's second largest multinational cigarette company. With subsidiaries in 65 countries, 24 BAT controls around 15 percent of the global cigarette market.25 The company and its subsidiaries and affiliates manufacture more than half their cigarettes in Asia, Australia and Latin America. In 1997, the company's international tobacco operations made a profit of $2 billion on sales of $23.7 billion. In 1996; the company underwent a reorganization in which British American Tobacco Company, British-American Tobacco Germany, Souza Cruz (Brazil) and Brown & Williamson all merged to become a single entity -- British American Tobacco (Holdings) Ltd. The purpose of the merger was to improve the company's marketing efforts, "especially exports and the development of international brands." All of the company's operations are run out of the company's United Kingdom office, except for those of Japan, Mexico, South Korea and the United States, which are handled at Brown & Williamson's Kentucky headquarters. In the course of the merger, BAT also established the Consumer and Regulatory Affairs

26

Office to "counter the anti-smoking lobby and vigorously advocate the company's views around the world." BAT, which has long been the most international in outlook of all the tobacco multinationals, is also intensifying its strategy of acquiring and building production capacity around the world. In 1996, BAT spent $25 million to upgrade its "Liberation Factory" in Cambodia in order to boost production for both the domestic and export markets. In January 1998; BAT purchased a controlling interest in Tekel, the Turkish state cigarette monopoly. The purchase gives the company a quarter of the world's ninth largest cigarette market -Turks consume nearly 100 billion cigarettes a year. BAT will invest $145.6 million in return for a 52 percent share of Tekel, which will eventually have the capacity to produce 25 billion cigarettes a year. BAT also acquired a 49-year exclusive license to sell Tekel's popular Samsun and Yeni Harman cigarette brands. In 1997, BAT purchased Cigarrera La Moderna (CLM), Mexico's biggest cigarette maker, for $1.7 billion (see Mexico case study). This was one of the largest foreign investments ever made in Mexico and BAT's most expensive purchase ever. CLM produces both Mexican cigarettes and international brands -- sold under licensing agreements with BAT competitors -- such as Camel, Winston, Dunhill and Salem."This acquisition offers us the rare opportunity to buy a sizeable and very profitable player in a growth market," says Martin

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Broughton, chair of BAT. The purchase will consolidate the company's dominance of the Latin American market, where it currently holds a 60 percent share (almost double that of Philip Morris) and significantly increase its ability to boost exports to the United States and Asia. BAT also sees "considerable opportunities" to export tobacco leaf from Mexico, "particularly because the country is outside the U.S. import quota," says a Reuters report. 3. RJ Reynolds RJ Reynolds, the world's third largest multinational cigarette company, has recently fallen further behind Philip Morris and BAT. Saddled with a huge debt load (the result of a failed takeover bid in the late 1980's made famous in the book Barbarians at the Gate), RJR saw its international tobacco profits decline 5 percent in 1997 to $759 million on sales of $3.57 billion. This drop, however, masked a 43 percent increase in sales in Central Europe and a 13 percent increase in the Baltic Republics and Commonwealth of Independent States. The company's recent troubles have sparked speculation among Wall Street analysts that the company may enter into an international alliance with BAT that would involve a merger of the two companies' international tobacco divisions. Although smaller than its two rivals, RJ Reynolds is still a huge multinational company, with subsidiaries, affiliates and licensing agreements in 57 countries. The company, which controls around 4

28

percent of the global cigarette market, has seen a 75 percent increase in its international sales since 1990, reaching $3.4 billion in 1997.International sales now account for 41 percent of RJR's total tobacco sales. In 1995, RJ Reynolds significantly boosted its overseas operations, adding facilities in Finland, Vietnam, Poland and Tanzania, where it paid $55 million for a controlling share of the Tanzanian Cigarette Company. The purchase was the largest single foreign investment in Tanzania since the country achieved independence in 1961. RJ Reynolds has ambitious plans to rehabilitate the formerly state-owned company's Dar Es Salaam plant, which will soon produce 4 billion cigarettes annually, making it one of the biggest plants in Africa. The company hopes to use its new base in Tanzania to challenge BAT's virtual monopoly in the East and Southern African region. In November 1997, RJ Reynolds opened a new $9 million plant in Tunisia to manufacture Winstons and Monte Carlos for Tunisia's voracious smokers -- 62 percent of Tunisian men and 8 percent of women smoke. "Tunisia ranks sixth in the cigarette market in Africa," says Reynolds Executive Vice President Klaus Langner. "This new alliance will allow Reynolds to be the leader of foreign tobacco firms in Tunisia, and to reinforce its position in North Africa," he says. The company is also a huge player in Turkey, where its factories account for half of the country's cigarette exports.

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Sports and Entertainment Sponsorship The multinational cigarette companies spend millions of dollars sponsoring sporting events and teams. Sponsorships publicize their brand names and, according to the WHO, create "subconscious positive images" of the relationship between smoking and athletics. The cigarette companies also spend millions of dollars sponsoring and promoting entertainment events that appeal to young people. Cigarettes and promotional items are often given away at these events in order to hook new smokers and promote the companies' brand names: The cigarette companies deny that these activities encourage young people to smoke. What they are simply doing, they say, is competing for the loyalty of current smokers. According to the Tobacco Manufacturers' Association, "One characteristic which tobacco advertising and tobacco sponsorship both share...is that neither activity encourages non-smokers to start smoking or existing smokers to smoke more."

CHAPTER III THEORETICAL BACKGROUND AND HYPOTHESIS

3.1 Theoretical background 3.1.1 Demand Theory Demands, determined by quantity demanded of product, are the total amount of any particular goods and services that an economys consumers wish to purchase in some time period. It is important to notice three things about this concept (Lipsey, 1996: 63) First, quantity demanded is a desire quantity. It is the amount that consumers wish to purchase that the price of the other product is assumed to be constant. Second, effective demand. Are the amounts that people are willing to buy, given the price they must pay for the products Third, quantity demand refers to a continuous flow of purchase. The amount of some product that all costumers wish to buy in a given time period is influence by the following important variable (Lipsey, 1996: 65). 1. Products own price A basic economic hypothesis is that the price of a product and the quantity that will demand are related negatively, other thing being equal. That is, the lower the price, the higher the quantity demanded, and the higher the price, the lower the quantity demanded. According to Alfred Marshall this fundamental concept

30

31

is called Law of Demand. On the case of demand for electricity related to the prices of electricity is when the prices of electricity are increasing the quantity demand for electricity will decreasing. 2. Average Consumer Income If consumers receive more income on average, they can be expected to purchase more of most products even though product prices remain the same. In the case of demand for electricity related to the income is when the National income or GDP is increasing the quantity demand for electricity will also increasing. 3. Other Price It means other product prices or substitutes, A rise in the prices of substitute for a product its will make the quantity demanded for the product increase. It will make the demand curve shift to the right. In this case the price of gasoline is the substitution product for the electricity, when the price of gasoline is increasing the quantity demand for electricity is increasing or otherwise. 4. Taste Tastes have an effect on peoples desire to purchase. A change in the taste maybe long-lasting or short- lasting, a change in the tastes in favor of a product shifts the demand curve to the right. In the case of demand for electricity we dont talk about the

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taste because every person have different taste and electricity is a commodity that needed by every individual. 5. Population An increase in population will shift the demand curves for most products to the right, indicating that more will be bought at each price. It means that the increase of the population will increase the quantity demand for electricity because more people need more electricity in their daily lives. Other economist, Gregory Mankiw (2001: 67) determines that quantity demand is the amount of good that buyers are willing and able to purchase. According to him the quantity of every individual demand are determine by, 1. Price, if the price of good is increasing the quantity of demand will decrease. 2. Income, if the income is increasing the quantity demand is also increasing but this theory is happen on the normal goods, and for the inferior goods increasing to the income will lend to the decreasing to the quantity demand for that goods. 3. Prices of related goods, means that substitution and complement goods, substitution if two goods for which an increasing in the price of one leads to an increasing in the demand for the other. And complement if two goods for which an increasing in the prices of one leads to a decreasing

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in the demand for the other. In the case of electricity and gasoline is if the price of gasoline is increasing the demand for electricity is increasing so electricity and gasoline related to the substitution goods. 4. Taste, economists normally do not try to explain people taste because tastes are based on historical and psychological forces that are beyond the realm of economists. 5. Expectation, expectation of every individual will affect to the quantity of demand in the future. Demand theory has two subjects, which are change in demand and elasticity of demand.

3.1.1. A Change in Demand The amount of some product that all customers wish to buy in a given time period is influenced by the following important variables (Lipsey, 1996: 70). 1. Products Own Price A basic economic hypothesis is that the price of a product and the quantity that will be demanded are related negatively, other things being equal. That is, the lower the price, the higher the quantity demanded, and the higher the price, the lower the quantity demanded. According to Alfred Marshall (1842-1924) these fundamental concepts are called Law of Demand. For

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example, the case of demand for shrimp related to the prices of shrimp, when the prices of shrimp increase the quantity demand for shrimp will decrease. 2. Average Consumer Income If consumers have higher income than the average, they can be expected to purchase more of most products even though the prices of the product remain the same. For example, in the case of demand for copper related to the income, when the National income or GDP is increasing the quantity demand for shrimp will also increase. 3. Other Price It means that in other product prices or substitutes, a rise in the prices of products substitute will make the demanded for the product become increasing. It will make the demand curve shift to the right. For example, when the price of oil is the substitution product for the gas, when the price of oil is increasing, the demand for gas is increasing or vice versa. 4. Taste Tastes have an effect on peoples desire to purchase. A change in the taste maybe long-lasting or short- lasting, a change in the taste in favor of a product shifts the demand curve to the right. For example is between demand for rice and wheat. In Indonesia demand of rice is higher than demand of wheat,

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because Indonesian people tend to eat rice than wheat. It reverse with western people, their demand of wheat is higher than rice. Because western people prefer eat wheat better than rice. 5. Population An increase in population will shift the demand curves for most products to the right, indicating that more products will be bought at each price. For example, case in tobacco. When the population is higher, it will increase the demand for tobacco since more people need more tobacco in their daily lives.

Graph 3.1 Change in Demand P

DI

DII Q

From the graph above it can be seen, for the example if the price of good increases, there is a movement along the demand curve and a change in the quantity of the good being demanded. If

36

the demand curve D arises in the price of a good, it produces a decrease in the demand and a fall in the price of the good produces an increase in demand. The arrows on demand curve DII represent the movement along the demand curve. If some other factors on the demand change, which increase the quantity that people plan to buy, there is a shift in the demand curve to the right (from D to DII) and an increase in demand. If some other factors on the demand change, which reduces the quantity that people plan to buy that goods, there is a shift in the demand curve to the left (from D to DI) and a decrease in demand. (Samuelson, Microeconomics Seventeenth Edition, 1995)

3.1.1. B Elasticity of Demand The laws of demand and supply predict the direction of changes in price and quantity in response to various shifts in demand and supply. However, it is usually not enough to know merely whether the quantity and price each rise or fall; it is also important to know how much the change. This is what the concept of elasticity does. Elasticity is a term in economics to denote the responsiveness of one variable to change another, for example the elasticity of X with respect to the Y means the percentage of change in X for every 1 percent change in Y. In the term of

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demanding one good, the elasticity of demand will be showed by the percentage change price as the independent variable (X) and percentage change in quantity demand of good as the dependent variable (Y). In economic there are several concept of elasticity (Gregory Mankiw, 2001: 75). 1. Price elasticity of demand, a measure of how much the quantity demanded of a good responds to a change in price to that good, computed as the percentage change in quantity demanded divided by the percentage change in prices. Prices elasticity = % change in quantity of demanded % change in price 2. Income elasticity of demand, a measure of how much the quantity demanded of a good responds to a change in costumers income, computed as the percentage change in quantity demanded divided by the percentage change in income. Income elasticity of demand = % change in quantity demanded % Change in income For most goods, increasing in income can lead to increasing in the demand this happen on the normal goods. A goods for which consumption decreasing in response to a rise in income has negative income elastic ties and is called inferior

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goods. Even among normal goods, income elastic ties vary substantially in size. Necessities such as food and clothing, tend to have small elastic ties because consumer regardless of how low their incomes, choose to buy some of these goods. Luxuries, such as caviar and furs, tend to have large income elastic ties because consumer feels that they can do without these goods altogether if their income is too low. (Gregory Mankiw, p.104). In the case of demand for electricity the electricity is the normal goods cause if people income is increasing the consumption of electronic tools also can increase so they demand more electricity.

3.1.2 Export: Demand Side In international trade, supply and demand have strong connection. It is proven in the market mechanism where both supply and demand together determine the quantity of goods to purchased or sold and also determine the relative price of the goods. Demand in the market is determined by the consumers taste and income. Taste and income can obstruct the reaction between quantity of demand and change in cost. (Lindert, Peter H; 1994: 46). By doing international trade both countries can get benefits. It is shown on the indifference curve that by trading both countries can achieve maximum satisfaction. The difference in taste is

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profitable in trade because the producer can also produce different kinds of goods. According to Lindert (1994) if some countries have different taste with another country but not in the production ability, so trading among countries can develop international specialization on consumption but not in the production.

3.1.3 Factors Affecting Export in Indonesia 3.1.3.A The Gross Domestic Product In general, economists judge macroeconomic

performance by looking at a few key variables, the most important of which is gross domestic product (GDP) beside the inflation and unemployment. Gross Domestic Product (GDP) is the value of all final goods and services produced in the economy in a given time period (quarter or year). It is the basic measure of economic activity (Dornbusch and Fischer, 1994: 8). GDP can be computed in two ways. One is to add up the amount spent on all final goods during a given period. This is the expenditure approach to calculating GDP. The other is to add up the income (wages, rents, interests, and profits) received by all factors of production in producing final goods. This is the income approach to calculating GDP. These two methods lead to the same value for GDP for the

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reason: every payment (expenditure) by a buyer is at the same time a receipt (income) for the seller. We can measure either income received or expenditures made, and we will end up with the same total output1 (Case and Fair, 1999: 136). Gross Domestic Product is the key concept in national income accounting as the total market value of all final goods and services produced within a given period by factors of production located within a country. It represents the welfare and economic growth of a country. The level of welfare is determined by the value of a country's national income divided by the number of its population that is called per capita income. The higher a country's GDP value the higher per capita income of people in that country. When people have more income, they will have extra money to be saved or invested in various investment vehicles including in mutual fund, besides fulfilling their consumptions.

Suppose the economy is made up of just one firm and the total firm's output this year sells for $1 million. Because the total amount spent on output this year is $1 million, this year's GDP is $1 million. Remember: The expenditure approach calculates GDP on the basis of total expenditures for final goods and services in the economy. But every one of the million dollars of GDP is either paid to someone or remains with the owners of the firms as profit. Using the income approach, we add up the wages paid to employees of the firm, the interest paid to those who lent money to the firm, and the rents paid to those who leased land, buildings, or equipment to the firm. What is left over is profit, which is, of course, income to the owners of the firm. If we add up the incomes of all the factors of production, including profits to the owners, we get a GDP of $1 million.

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3.1.3.B The Exchange Rate Exchange rate is the price of one currency in terms of another (Mishkin and Eakins, 2000; 331). Each country has a currency in which the prices of goods and services are quoted; the dollar in the United States, the Pound sterling in Britain, the Yen in Japan and the Peso in Mexico, to name just a few. Exchange rates play a central role in international trade because they allow us to compare the prices of goods and services produced in different countries (Krugman and Obstfeld, 1997: 332). Foreign exchange rates, for the most part, are not fixed over time. Instead, like any other price, they vary from week to week and month to month according to the forces of supply and demand. The foreign exchange market is the market in which currencies of different countries are traded; it is here that foreign exchange rates are determined. Foreign exchange is traded at the retail level in many banks and firms specializing in that business. Organized markets in New York, Tokyo, London, and Zurich trade hundreds of billions of dollars' worth of currencies each day (Samuelson and Nordhaus, 1995: 668). Exchange rate affects the economy because when the Rupiah become more valuable relative to foreign currencies, for example US Dollar, Indonesian goods become more

42

expensive and foreign (American) goods become cheaper. When the Rupiah falls in value, Indonesian goods become cheaper and American goods become more expensive. In addition, changes in exchange rate have a major impact on financial institution because many of their assets are denominated in foreign currencies. When the value of foreign currencies changes, the market value of financial institutions changes as well (Mishkin and Eakins, 2000; 331). Some companies that operate and produce output which depend on imported production factors will suffer from the increase of exchange rate. The increase of exchange rate impacts on the higher production cost that influence productivity. The increase of production costs then will burden the companies and force them to shift the increase to the consumers, by raising the prices in the market. As a consequence, the products are difficult to be sold in expensive prices. This will affect company's income. The lower the income earned by a company, the worst the performance of the company in the economy and the lower the possibility for the company to share dividend. And also, can be affecting to the level of export-import in one country.

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3.2

Demand theory on open economy Market demand is the total quantities of a good or services people are willing and be able to buy at alternative prices in a given time period: the sum of individual demands. The market demand curve expresses the combined demands of all market participants. Aggregate demand2 (AD) is the total or aggregate quantity of output is willingly bought at a given level of prices, other things held constant. AD is desired spending in all product sectors: consumption, private domestic investment, government purchases of good and services, and net exports (on open economy). Demand curve3 is a graph that shows how quantity demanded varies with the price of good. The downward slope of the demand curve reflects the law of demand. It also useful to interpret points on demand curve as indicating how the willingness of buyer to pay varies with the quantity of an item actually available in a market over a period time. The demand curve indicates that the smaller the amount of goods and services offered, the more buyers are willing to pay. Total spending in the economy tends to decline as the price level raises, other things constant. But other things tend to change, and these influences produce change in aggregate demand. We can separate the determinants of AD into two categories. First, include the major policy variables under government control. In open economy system (where there

2 3

Economics (1995) Paul A. Samuelson and William D. Nordhaus.15th edition.P.442 the Microeconomy Today. Bradley R. Schiller. 3rd edition. Random Hoouse. P.88

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is a government intervention in market) government intervention are applied in monetary policy- steps by which the central bank cab affect the supply of money and other financial conditions- and fiscal policy- taxes and government expenditure. Second, is exogenous variables or variables that are determined outside the AS- AD framework.

3.3

International Trades as One Part of Economic System In open economy, participating in the world economy and linked with other currencies through trade and finance is needed. We export commodities and services that are produced most inexpensively at home and import those things in which other have cost advantages. Countries cannot live alone any more effectively than individuals can. Each country tends to specialize in the production of those commodities it can produce more cheaply than other countries, and then exchanges its surplus for the surpluses of other countries.

3.4

Hypothesis Formulation The research investigated whether the independent variables of this research affect Indonesian tobacco export to the United States. The hypotheses in this research are: a. Price of International tobacco International price of tobacco has significant and negative effect on export demand for Indonesian tobacco by The United States. It means

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that according to the theory, when the price of tobacco increases the tobacco demand from the imported country decrease. As we know the price increasing or decreasing of tobacco depend on the exchange rate. If Rupiah valuable to Dollar the price of tobacco will be expensive, but if Rupiah falls in value tobacco price will be cheaper. b. The United States total real GDP Real GDP of The United States has significantly effect toward export demand for Indonesian tobacco by the United States. It means that according to the theory when the United States GDP increases, it also increases the demand of tobacco exported from Indonesia. This tobacco can be positive if superior good for the United States or can be negative if inferior good for the United States. In this thesis we use the United States real total GDP because the price of tobacco its relatively expensive and tobacco not for individual consumption but for industrial consumption. But the GDP is weighted by the country of G5 minus USA (France, Germany, Japan, and France) because those countries are hold the world economic and to avoid multicollinearity on classical assumption regression. c. Exchange rate Exchange rate has positive and significant effect toward export demand of Indonesian tobacco by United States. It means that according to the theory, when the value of Rupiah depreciate or vice a vise to US

46

Dollar it means that the purchasing power of US$ increases, it will increase the United States export demand for Indonesias tobacco. d. Volume export of Indonesias tobacco by USA at previous year. That previous year export (Yt-1) has a significant influence to the current tobacco export volume to USA. The influence can be: positive if the needs of tobacco in the USA is not limited, negative: if the needs of tobacco in USA is limited. e. All the independent variables has significant effect on tobacco export volume to the USA

CHAPTER IV RESEARCH METHOD

4.1 RESEARCH METHOD The research method used in this research is quantitative analysis. Quantitative analysis is a characteristic of variables where the mark is stated on the numerical form. The characteristics of the measurement variable make the mark to be placed in interval. The theory based on data analysis is a demand theory as a general, which is the demand of Indonesian tobacco export by the United States. The model analyses of demand of Indonesian tobacco is as follows: Y= F (X1, X2, X3, Yt-1) Where Y X1 X2 = volume export (ton) = price of international tobacco (US$/pound) = total real GDP of the United States (Bill of US$) with 1990 as the based year X3 Yt-1 = exchange rate (Rp/ US$) = volume export at previous year (lagged 1 year)

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4.2

Research Subject The research was concentrated on the United States demand of tobacco exported from Indonesia. The research sought what variables that had impacts on the United States tobacco demand.

4.3

Research Setting This section analyze why the United States import tobacco from Indonesia. Some reason why the United States import Indonesias tobacco because it tobacco has good quality especially the flue cured Virginian type, even though the quality is still less than the Pakistan. Tobacco is the basic material for cigarette and the demand for cigar in the United States places good position in trade. Most of Indonesian tobacco uses for big cigarette factory like American Tobacco Company in Richmond city. Trading between Indonesia and the United States will create advantages in both countries.

4.4

Data Sources The data used in this research analysis were the data taken from books, literature study and secondary data. They are: a. International Financial Statistics (IFS), various editions. b. Statistical Year Book of Indonesia (Statistik Indonesia), various editions. c. Indonesian Foreign Trade Statistic (Biro Pusat Statistik), various editions

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4.5

Research variable Based on the data used in this research variables in this thesis are categorized into two variables, dependent variable and independent variables. Both variables are described as follows: Dependent variable The dependent variable in this research is the volume of Indonesian tobacco export to the United States (Q) Independent variable The independent variables in this research consist of three variables, they are: o o o Price of tobacco (P) The United States real total GDP (GDP) Exchange rate Rupiah/ US$ (Exc)

4.6

Technique of Data Analysis To achieve the research objectives, the regression analysis is conducted by using time series data from 1981 until 2001. Since this research using PAM so volume export at previous year will be used as independent variable. The regression that might be used in this research is log- linier. The log linier (double log) regression can be written as follow: LnY = ln + 1 lnX1 + 2 lnX2 + 3 lnX3 + 4

lnYt-1

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Where: Ln = autonomous lnY i = elasticity of each independent variable The types of data used in empirical analysis are time series data. Empirical work based on time series data assumes that the underlying time series is stationary.

4.7

Analysis Tools 4.7.1 Classical Assumption Test This test basically is to detect the validity of empirical model that is used in the research. In order to interpret the regression result that consists of regression coefficient number. A model becomes valid if it is free from the presence of multocollinearity, autocorrelation and heterocedasticity.

4.7.1.1 Multicollinearity Multicollinearity refers to the existence of more than one exact linear relationship or a linear relationship among some or all explanatory variable X1, X2, X3, and Yt-1. If perfect multicollinearity appears in regression problem, in simple term it can be said that Least Square (LS) solution cannot be achieved. In the regression

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analysis,

multicollinearity

gives

into

these

several

conditions below: a. Two independent variables having perfect correlation (because of that vectors that show the variables are collinear). b. Two independent variables almost having perfect correlation (for the example correlation between them is close +1 or -1). c. Linear combination from several independent variables having perfect correlation (or close to perfect) with other independent variable. d. Linear combination from one sub-collection of

independent variables having perfect correlations (or close) with one linear combination from other subcollection of independent variable. (Makridakis,S ;Wheelwright.S.C and McGee.V.E(1999)Forecasting: Methods and Applications,2nd.Binarupa Aksara)

4.7.1.2

Heteroscedasticity An important assumption of heteroscedasticity is that heteroscedasticity shows the conditional of Y increases as X increases. To detect the heterocedasticity, the writer used one of the formal methods; that is the

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White test. The white test is thus a two- stage procedure. In the first stage it runs the OLS regression disregarding the heterocedasticity question. Yi = 0 + 1X1+ 2X2 + 3X3 + i..(1) From the regression above, then a regression is done with auxiliarky regression, the model is: i = 0+o

1X1+0X2+0X1+0X2+0X1X2+Ui. (2) The decisions are as follow: If the Obs* R- squared is less than X- table at level = 5%, df= (k-1), there is heteroscedasticity in variance disturbance term in this model, otherwise there is no heteroscedasticity.

4.7.1.3

Autocorrelation The term autocorrelation may be defined as correlation between members of series of observations ordered in time (as in time series data) or space (as in crosssectional data) (Gujarati, 1995: 400). If there is autocorrelation in the model, it will raise the value of residual and the impact is the number of t-test, f-test and R2 will decline.

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In other words, the presence of autocorrelation on the model makes the data become not valid. According to Sriyana (2001) the causes of autocorrelation are: a. The presence of backward lag operations on the model with time series data. b. Mistake in function type. c. Lack of data or the data were gone. d. There is a data transformation. In testing the autocorrelation is using Lagrange Multiplier test (LM-test). This test uses the level of degree (2) to express that there is no autocorrelation. The rule is when 2 statistic is bigger than the value of 2 table, hence Ho denied and also on the contrary.

4.7.2

Time Series Regression There are three types of data available for empirical analysis: time series, cross sectional and pooled (combination of time series and cross sectional) data. Data used in this research is time series. A time series is a set of observations on the values that are taken variable at different times such data may be collected at regular time intervals, such as daily, weekly, monthly, quarterly, and annually.

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4.7.3

T- Statistic Testing Based on the Basic Econometrics book by Damodar Gujarati, test of significant approach (T- test) is a test of significance of the procedure by which sample results are used to verify the truth or falsity of a null hypothesis. The meaning of this test is to know the relationship between independent variable and dependent variable individually. This research uses one- tail test and two- tail test. One- tail test is used when: Independent variable will negatively influence on dependent variables individually.

Ho: i = 0 Ho: i < 0


Independent variable will positively influence on dependent variable individually. Ho: i = 0 Ho: i > 0 Two- tail test used when: Independent variable whether positively or negatively influence on dependent variables individually. Ho: i = 0 Ho: i # 0

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4.7.4

F- Statistics Testing Testing the overall significance of the sample regression (Ftest) is a test of the overall significance of the observed or estimated regression line, that is whether Y as dependent variable is linearly related to independent variable X1, X2, X3, Yt-1.

4.7.5

PAM (Partial Adjusted Model) One way to maintain the stationary is using PAM. In Pam the model is in the condition of short- run model (because there is lag in the model), since in the short run the dependent variable may not necessary be equal to its long- run model.

4.7.6

The Multiple Regression Coefficient of Determination (R) Multiple coefficient of determination is the quantity that gives information to know the proportion of the variation in Y explained by the variables X1, X2, X3 and Yt-1. Multiple coefficient determination is an abstraction that describes the condition of sample regression line showing all data. That R lies between 0 - 1

CHAPTER V RESEARCH FINDINGS AND DISCUSSION

5.1

DATA DESCRIPTION Model used in this thesis is: Y= f (X1, X2, X3, Yt-1) Where: Y X1 X2 = volume of Indonesian tobacco export to the United States = price of tobacco = the United States total real GDP (bill of US $), is weighted by the average of total real GDP of G5 minus USA X3 Yt-1 = exchange rate = volume of Indonesian tobacco export in the previous year

Regression model that is used is PAM of log linier (double log regression) The log linier (double log) regression can be written as follow: LnY Where: Ln = autonomous lnY i = elasticity of each independent variable = ln+1 lnX1+ 2 lnX2 + 3 lnX3 + 4 lnYt-1

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5.2

SOURCES OF DATA This chapter described about the research result and secondary testing data collected from many resources to know the factors affecting Indonesian tobacco exports to the United States in the year of 1981 2001. It covers the total value of the demand of Indonesian tobacco export to the United States (Q) measured in tons, Price of tobacco (P) measured in dollar, the United States total real GDP (GDP) measured in US Dollar and Exchange rate Indonesian Rupiah to US Dollar (Exc). The factors used in this research are price of tobacco, the United States total real GDP as the demand country, and exchange rate between Indonesia and the United States. Analysis descriptions are based on the secondary data collected from many resources. The resources are: 1. 2. 3. International monetary found (related addition) Statistics yearbook of Indonesia (related addition) Central bureau of statistics (BPS)

5.3

DATA DESCRIPTION Price of international tobacco The price of international tobacco is come from the FAOSTAT (statistical database) or Food and Agriculture organization of the United States, containing time series data. International price expressed in common currency (usually US$). International price are useful in computing comparable value aggregates for different commodities groups.

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The United States total real GDP This thesis uses the United States total real GDP because we are dealing with export demand in USA so we are talking about people in USA regardless nationality or dealing with domestic people, and the demand for Indonesian tobacco used in industrial sector not individual or private. The United States total real GDP is weighted by average of total real GDP G5 minus USA (Japan/ Yen, UK/ Pound sterling, Germany/ Deutsche Mark, and France/ Franc) because those countries are hold the world economic and to avoid the multicollinearity diseases and all of currency had already been calculated into US$.

Exchange rate There are 3 systems of exchange rates: 1. Fixed exchange rate, is the system that government set the fixed rate of exchange 2. Flexible exchange rate, is the system that the rate determine by the market 3. Managed exchange rate, is the system that the rate determined by the market but government buy or sell currencies or change money supply.

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The writer use exchange rate Rupiah to US Dollar because Rupiah kurs will affect the US Dollar purchasing power that will be lead to increase or decrease the demand of tobacco.

5.4

Analysis result The first step to analyze the data is by regress the data with the assistance of the supported computer package that competent and representative with the research. The writer uses Eviews 3.0 computer program in order to make the data estimation easier. Beside that Eviews 3.0 computer program helped the writer in avoiding the computation error. The writer use PAM (Partial Adjusted Model) because this model is gives better estimation result and has the biggest R result. Besides that the writer also run the MWD- test (McKinnon, White, Davidson, (1983)) to choose the best model for this research. The MWD test says that PAM in log- linier model is the best way and as long as DW is greater than R we can use other than ECM (Error Correction Model). Hypothesis testing can be summarized as shown in table 5.1

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Table 5.1. Regression result Dependent Variable: LNVOLUME Method: Least Squares Date: 01/12/06 Time: 08:19 Sample(adjusted): 1982 2001 Included observations: 20 after adjusting endpoints Variable Coefficien t Std. Error t-Statistic Prob. 0.1182 0.0017 0.1019 0.0768 0.0000 4.070560 0.727888 -0.241220 0.007713 63.89970 0.000000

C -1.214545 LNPRICE 2.726410 LNGDP 0.543760 LNEXC -0.248775 LNVOLUME(-1) 0.664566 R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat 0.944567 0.929785 0.192876 0.558018 7.412201 1.878440

0.732832 -1.657331 0.716226 3.806635 0.312051 1.742539 0.130939 -1.899922 0.117012 5.679483 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

From table 5.1 we can conclude that: 5.4.1 The Multiple Regression Coefficient of Determination (R) The model used in this research is proper, shown by the size of R= 0.94 it means that 94% of the variability of the dependent variable is explained by the independent variables chosen in this research. Only 6% is explained by independent variables from outside of the model.

5.4.2

F- Test From the size of F= 63.89970 which is greater than F- Table 2.85 at = 5%, all independent variables (price of tobacco, exchange rate, US total real GDP, volume tobacco export at previous year) on the model have the joined impact on the dependent variable.

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5.4.3

Testing on Independent Variables (T- Statistic Testing) T- table = t df (n-k) Where: n k df = level of significant (5%) = the amount of data (21) = the number of variables (5) = 16

Testing uses one tail or two tail (the confidence- interval approach) One tail test is that we have a strong a priori or theoretical expectation.1 Than two-tail test is that if we have two-sided alternative hypothesis reflects that we do not have a strong a priori or theoretical expectation2.

Testing on price of tobacco (LnPrice) T- Test of this explanatory variable uses negative one- tail test Ho: 1 = 0 and Ho: 1 < 0 = 3.806635 0.01 2.921 0.002 3.686 0.0043 3.806

Computed t value

Level 0.02 of significance Critical t 2.583

1 2

See Gujarati, Damodar. Basic Econometrics 4th edition. P.128 Ibid. P.127

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Since the sign is positive, it means the hypothesis is not proven. Graph 5.1

2% 1% 0,2% 0.43%%

-3.686 -2.921 -2.583

0 3.806

Conclusion = ha is rejected, price of tobacco has significant and positive influence on the export volume of Indonesia to the USA.

Testing on real total GDP (Lngdp) T- Test of explanatory variable uses twotail test3 Ho: 2 = 0 and Computed t value Ho: 2 # 0 = 1.742539 0.20 1.337 0.098 1.742 0.10 1.746

Level 0.25 of significance Critical t 0.690

See Gujarati, Damodar. Essentials of Econometrics.2nd Edition. 168

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Graph 5.2

25% 25%
Rejected Ha

20% 10% 9,8% Accepted Ha

20%

10% Accepted Ha 9,8%

-1.746 -1.742 -1.337 -0.690

0.690 1.337 1.742 1.746

Conclusion

= ha is accepted, real total GDP USA is significantly effect on the volume of tobacco export

Testing on exchange rate (Lnexc) T- Test of explanatory variable uses positive one tail test Ho: 3 = 0 and Ho: 3 > 0

Computed t- value = -1.899922 Level 0.25 of significance Critical t 0.690 0.20 1.337 0.10 1.746 0.093 1.899

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Since the sign is negative, so the hypothesis is not proven

25%

9.3%

Rejected Ha Accepted Ha

20% 10%

-1.899

0.690 1.337 1.746

Graph 5.3 Conclusion: ha is rejected, exchange rates have no effect on the volume of tobacco export

Testing on volume export tobacco at previous year (Lnvolume(-1)) T- Test of explanatory variable uses two tail test Ho: 4 = 0 and Ho: 4 # 0

Computed t value = 5.679483 Level 0.02 of significance Critical t 2.583 0.01 2.921 0.002 3.686 0.0018 5.679

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Graph 5.4

2% 1%

2%

1% 0.2% 0.18% Rejected Ha Accepted Ha 0.2% 0.18%

-5.749 -3.686 -2.921 -2.533

2.533 2.921 3.686 5.749

Conclusion: ha is accepted, previous year tobacco export has a positive effect on the volume of tobacco export.

5.4.4

Coefficient PAM The result of the PAM regression model can be seen in the following: LnY = -1.214545+ 2.726410LnX1+ 0.543760LnX2- 0.248775LnX3+ 0.664566LnYt-1 Se = (0.732832) (0.716226) (0.312051) (0.130939) (0117012)

T- Stat = (-1.657331) (3.806635) (1.742539) (-1.899922) (5.679483) R Adj R DW = 0.944567 = 0.929785 = 1.878440 = 0.000000

Prob F- Stat

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However, the results of PAM regression above just for short run estimation. For the long run we need to calculate the coefficient of long- run PAM model: Long run coefficient= Short run coefficient/ (1-) Where = coefficient of adjustment = 4 = 0.664566 1- = 1- 0.664566 = 0.335434 So the long run PAM is: LnY = -3.620816614 + 8.128007298LnX1 + 1.621064054LnX2 0.741651114LnX3 +1.981212399 LnYt-1 From the result above (in absolute value), the long- run coefficient is bigger than the short- run; it means that the development of tobacco demand in the United States is running slowly.

5.4.4.1 Result on Data Estimation This research uses PAM so the estimation of the regression uses short- run and long- run demand functions. Short- runs estimation: 1 = 2.726410 It means if price of tobacco increases 1%, volume of tobacco export will increase 2.726410%.

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2 = 0.543760 It means if total real GDP USA increases 1%, volume of tobacco export will increase 0.543760%.

3 = -0.248775 Since the sign is negative means foreign exchange rate have no effect on the volume of tobacco export.

4 = 0.664566 It means if volume of tobacco export in the previous year increases 1% so volume of tobacco export in the current year will increase 0.664566%

Long- run estimation 1 = 8.128007298 The sign is positive, it means that if price of tobacco decrease 1% the volume of tobacco export will decrease 8.128007298 2 = 1.621064054 The sign is positive, it means that if USA real total GDP increases by 1% the volume of tobacco export will increase by 1.621064054 3 = -0.741651114 The sign is negative, it means that foreign exchange rate have no effect on the volume of tobacco export.

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4 = 1.981212399 The sign is positive; it means that if export of tobacco at previous year is significant, it potentially explained the demand of Indonesian tobacco export to the United States.

5.4.4.2

Analysis Elasticity short- run and Long- run Table 5.2 Table coefficients of short- run and long- run Independent Short- run variable Ln X1 Ln X2 LnX3 Ln Yt-1 2.726410 0.543760 -0.248775 0.664566 8.128007298 1.621064054 -0.741651114 1.981212399 Long- run

1. Tobacco price (Ln X1) The elasticity of tobacco price is higher than 1 for both short- run and long- runs. These result shows that the demand for tobacco Indonesia is elastic, and becomes more inelastic if we compare short- run and long- run. Because the demand of Indonesian tobacco is elastic, means the price of tobacco is sensitive and it makes volume of export is easy to change, means Indonesias tobacco is less important to the United States and has more substitute from others tobacco producer countries.

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2.

Real total GDP (Ln X2) Income elasticity of USA is in positive sign both short- run and long- runs. But, in short- run the elasticity is below 1, it means that Indonesias tobacco for USA in the short- run is categorized as necessity goods. In the short- run, the income of USA has more influence on the demand of Indonesias tobacco than price of tobacco. The elasticity in the long- run is greater than 1, meaning that Indonesias tobacco for USA in the long- run is categorized as non- necessity goods. In the long- run, income of USA and price of tobacco do not have effect on the volume of Indonesias tobacco export to the USA because there is substitution.

3.

Foreign exchange Rp/ US$ (LnX3) This variable is not analyzed since the finding show has no effect on the dependent variable.

4. Volume export at previous year (Ln Yt-1) The elasticity of tobacco volume export at previous year is in the positive sign for both short- run and long- run; it means that the more export in the current year the more export in the future. The USA tobacco imports from Indonesia continue every year, so Indonesia as exporter countries should keep the trade with the United States.

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5.4.5

Violation on Classic Assumption 5.4.5.1 Multicollinearity. To test the multicollinearity the writer uses correlation matrix test. In this test the writer detect multicollinearity by comparing the correlation among the independent variables. The decision from this test is when r-value is smaller than R2 value; it means that there is no multicollinearity. With the help from Eviews computer program the writer can search the value of each r and the result is shown on table 5.3 below: Table 5.3 LNPRICE LNPRICE LNGDP LNEXC 1 -0.324093 0.808524 LNGDP
-0.324093

LNEXC 0.808524 0.101458 1

1 0.101458

From the table above it can conclude that the values of the correlation among the independent variables are relatively high. According to the data result above that r < 0.944567, it means that there is no multicollinearity on the model.

5.4.5.2 Heteroscedasticity In testing heterocedasticity the writer uses White test. The decision is by watching and comparing the computed value (Obs*R-square) or by multiplying n.R2 and the chi-square distribution. When the computed value (Obs*R-square) is greater than the critical chi-square with = 5%,

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the hypothesis that stated there is no heterocedasticity in the model, thus it is rejected, and on the contrary. Table 5.4 White Heteroskedasticity Test: F-statistic Obs*R-squared 2.800682 Probability 13.41425 Probability 0.058235 0.098369

Test Equation: Dependent Variable: RESID^2 Method: Least Squares Date: 01/12/06 Time: 08:28 Sample: 1982 2001 Included observations: 20 Variable C LNPRICE LNPRICE^2 LNGDP LNGDP^2 LNEXC LNEXC^2 LNVOLUME(-1) LNVOLUME(-1)^2 R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficien Std. Error t 3.966290 -3.381133 1.430770 -1.287365 0.297219 0.251681 -0.016913 -0.797962 0.099970 0.670712 0.431231 0.020013 0.004406 55.82709 3.094654 1.892556 1.468246 0.621453 0.655899 0.154941 0.392308 0.023774 0.314324 0.038216 t-Statistic 2.095732 -2.302837 2.302297 -1.962749 1.918266 0.641540 -0.711380 -2.538664 2.615927 Prob. 0.0600 0.0418 0.0419 0.0755 0.0814 0.5343 0.4917 0.0275 0.0240 0.027901 0.026536 -4.682709 -4.234629 2.800682 0.058235

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

From the White test found that the value of (Obs*R-square) is 13.41425 or n.R2 = 20 x 0.670712 =13.41425 in which smaller than the value of critical chi-square with 8 df and = 5% is 15.5073 in other words; there is no heterocedasticity in the model because the value of Obs*R-square is smaller than the value of critical chi-square.

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5.4.5.3 Autocorrelation The tool of analysis is used to detect autocorrelation in this research is using LM (Lagrange Multiplier) test. The result of LM test shown below: Table 5.5 Breusch-Godfrey Serial Correlation LM Test: F-statistic Obs*R-squared 4.275830 7.935964 Probability Probability 0.037412 0.018912

Test Equation: Dependent Variable: RESID Method: Least Squares Date: 01/12/06 Time: 08:34 Presample missing value lagged residuals set to zero. Variable C LNPRICE LNGDP LNEXC LNVOLUME(-1) RESID(-1) RESID(-2) R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient Std. Error -0.369626 0.048395 0.319741 -0.095441 0.101971 -0.073171 -0.729249 0.396798 0.118397 0.160910 0.662890 0.693455 0.298327 0.117774 0.113848 0.261308 0.249677 t-Statistic -0.557598 0.069788 1.071779 -0.810377 0.895672 -0.280019 -2.920766 Prob. 0.5866 0.9454 0.3033 0.4323 0.3867 0.7839 0.0119 3.67E-16 0.171375 -0.546724 -0.198217 1.425277 0.277482

Mean dependent var S.D. dependent var Akaike info criterion 0.336597 Schwarz criterion 12.46724 F-statistic 1.693879 Prob(F-statistic)

This test uses the level of degree (), Ho expressing that there is no autocorrelation, with the guidance if the level of degree statistic bigger than value of tables, hence Ho denied, and also the contrary.

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Table 5.6 Autocorrelation test with LM method computed 7.935964 2 0.010 table 9.21034 Decision No Autocorrelation

5.4.6

Proof of Hypothesis 1. Hypothesis is not proven. The price of tobacco (X1) has significant and positive influence on the export volume of Indonesia to the United States (at = 5%) 2. Hypothesis is proven. The United States real total GDP (X2) has significant and positive effect on the tobacco export volume of Indonesia. It means that Indonesias tobacco has already be superior goods to the United States importer. 3. Hypothesis is not proven. The exchange rate (X2) has significant and negative effect on the tobacco export volume of Indonesia. Because the exchange rate is negative the writer also try to improve the performance of exchange rate variable by creating dummy variable that might affect the effect of exchange rate on export. This data period is from 1981 until 2001 and there are many events that might be the candidate of dummy. In 1982 and 1986 Indonesia experience the devaluation and in 1998 Indonesia experience the big economic crisis, but it does not effect the sign so exchange rate has no effect on Indonesias tobacco exports volume. The writer includes the dummy

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test on the appendices to prove that exchange rate data in this thesis cannot change to be positive. 4. Hypothesis is proven. The previous year tobacco export (Yt-1) has a positive and significant effect on the tobacco volume export of Indonesia (at = 20%). 5. All independent variables on the model have joined impact on dependent variable.

CHAPTER VI CONCLUSION AND IMPLICATION

6.1

Conclusion There are some conclusions that we can get: 1. From the regression of time series data from 1981- 2001 with volume of Indonesian tobacco export to the United States as the dependent variable (Ln Y) and price of tobacco (Ln X1), the United States real total GDP (Ln X2), Foreign Exchange (Ln X3) and volume of Indonesian tobacco export at previous year (Ln Yt-1) as independent variables, the R value is 0.944567 (94%). It means that 94% of the variability of the dependent variable is explained by the independent variables chosen in this research. Only 6% is explained by variables from outside of model. 2. From classical assumption, there arent multicollinearity,

heteroscedasticity, and autocorrelation. 3. From F- test we can conclude that all of independent variables has joint impact on the volume of Indonesian tobacco export to the United States. 4. Price of tobacco (X1) has a significant and positive effect on the volume of tobacco export, both in short- run and long- run, price elasticity are elastic.

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76

5.

The United States real total GDP (X2) has a significant and positive effect on the volume of tobacco export.

6.

Foreign exchange rate has a significant and negative effect on the volume of tobacco export.

7.

Tobacco export at previous year (Yt-1) has a positive and significant effect on the volume of tobacco export.

8.

The uses PAM in this research is valid to explained Indonesias tobacco export to the United States.

6.2

Implication From the short- run and long- run coefficient of PAM regression model we can conclude: 1. The finding X1 has influence on the volume of Indonesias tobacco export to USA. The results show that the demand of Indonesias tobacco is elastic and is becoming inelastic in the future. It means that Indonesias tobacco is less important to the USA and has more substitute from others tobacco producer countries. In the future, Indonesia cannot rely on their income from tobacco export to the United States. 2. The decision of buying Indonesias tobacco is induced by income decision. In the short- run tobacco export is showing superior but in the long- run tobacco export is showing inferior.

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3.

The finding X3 has significant and negative influence. This fact shows that the fluctuation of Rupiah exchange rate does not influences the volume of tobacco export.

4.

The fact that previous tobacco export influences current tobacco export, combine with elastic price elasticity and positive income elasticity, shows that the prospect of tobacco export is a promising one.

5.

Overall, tobacco is not affected by price or by exchange rate, which can be concluded that Indonesias tobacco exports to the United States only influenced by income of the US.

6.

Indonesia has to face the fact that Indonesia cannot rely on the tobacco exports to the United States. Indonesia should make product diversification or cities diversification on the exports of tobacco.

7.

So hopefully next researchers are expected to research the volume of Indonesias tobacco exports to other country or specifically research on the several type of tobacco Indonesia.

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YEAR VOLUME PRICE 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 23.56000 24.10000 24.20000 20.50000 20.90000 24.10000 22.90000 29.10000 49.90000 68.80000 75.60000 109.9000 125.2800 97.30000 77.00000 119.4000 136.6000 84.50000 110.3000 109.8000 126.7000 2.372000 2.515000 2.771000 2.736000 2.990000 2.994000 3.257000 3.514000 3.726000 3.910000 3.904000 3.918000 3.867000 3.876000 4.012000 4.149000 3.973000 4.030000 4.030000 4.211000 4.233000

GDP 7.28565 7.86018 9.21223 11.32877 8.95751 7.58512 6.21235 6.85939 6.85057 5.86037 5.79155 6.44660 7.00688 6.48323 5.73588 6.09921 6.98749 6.74012 11.87073 8.52608 8.85439

EXCHANGE RATE 644.0000 692.5000 994.0000 1074.000 1125.000 1641.000 1650.000 1731.000 1797.000 1901.000 1992.000 2062.000 2110.000 2200.000 2308.000 2383.000 4650.000 8025.000 7085.000 9595.000 10400.00

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Year LNVOLUME LNPRICE 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Where: Y X1 X2 3.159550 3.182212 3.186353 3.020425 3.039749 3.182212 3.131137 3.370738 3.910021 4.231204 4.325456 4.699571 4.830551 4.577799 4.343805 4.782479 4.917057 4.436752 4.703204 4.698661 4.841822 0.863733 0.922273 1.019208 1.006497 1.095273 1.096610 1.180807 1.256755 1.315335 1.363537 1.362002 1.365581 1.352479 1.354804 1.389290 1.422867 1.379521 1.393766 1.393766 1.437700 1.442911

LNGDP 1.985907 2.061810 2.220532 2.427346 2.192492 2.026188 1.826539 1.925619 1.924332 1.768213 1.756400 1.863553 1.946893 1.869219 1.746741 1.808159 1.944121 1.908078 2.474076 2.143130 2.180913

LNEXC 6.467699 6.540308 6.901737 6.979145 7.025538 7.403061 7.408531 7.456455 7.493874 7.550135 7.596894 7.631432 7.654443 7.696213 7.744137 7.776115 8.444622 8.990317 8.865735 9.168997 9.249561

LNVOLUME YT-1 NA 2.159550 2.182212 2.186353 2.020425 2.039749 2.182212 2.131137 2.370738 2.910021 3.231204 3.325456 3.699571 3.830551 3.577799 3.343805 3.782479 3.917057 3.436752 3.703204 3.698661

= Volume of Indonesias tobacco export to the United States (ton) = Price of international tobacco (US$/ pound) = The United States real total GDP (Bill of US$) The United States real total GDP is weighted by average real total GDP of G4 (Japan, UK, Germany, France).

X3 Yt-1

= Exchange rate (Rp/US$) = Volume of Indonesias tobacco export at previous year

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HETEROSCEDASTICITY

White Heteroskedasticity Test: F-statistic Obs*R-squared 2.800682 13.41425 Probability Probability 0.058235 0.098369

Test Equation: Dependent Variable: RESID^2 Method: Least Squares Date: 01/12/06 Time: 08:28 Sample: 1982 2001 Included observations: 20 Variable C LNPRICE LNPRICE^2 LNGDP LNGDP^2 LNEXC LNEXC^2 LNVOLUME(-1) LNVOLUME(-1)^2 R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficien t 3.966290 -3.381133 1.430770 -1.287365 0.297219 0.251681 -0.016913 -0.797962 0.099970 0.670712 0.431231 0.020013 0.004406 55.82709 3.094654 Std. Error 1.892556 1.468246 0.621453 0.655899 0.154941 0.392308 0.023774 0.314324 0.038216 t-Statistic 2.095732 -2.302837 2.302297 -1.962749 1.918266 0.641540 -0.711380 -2.538664 2.615927 Prob. 0.0600 0.0418 0.0419 0.0755 0.0814 0.5343 0.4917 0.0275 0.0240

Mean dependent var 0.027901 S.D. dependent var 0.026536 Akaike info criterion 4.682709 Schwarz criterion 4.234629 F-statistic 2.800682 Prob(F-statistic) 0.058235

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AUTOCORRELATION

Breusch-Godfrey Serial Correlation LM Test: F-statistic Obs*R-squared 4.275830 7.935964 Probability Probability 0.037412 0.018912

Test Equation: Dependent Variable: RESID Method: Least Squares Date: 01/12/06 Time: 08:34 Presample missing value lagged residuals set to zero. Variable C LNPRICE LNGDP LNEXC LNVOLUME(-1) RESID(-1) RESID(-2) R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficien t -0.369626 0.048395 0.319741 -0.095441 0.101971 -0.073171 -0.729249 0.396798 0.118397 0.160910 0.336597 12.46724 1.693879 Std. Error 0.662890 0.693455 0.298327 0.117774 0.113848 0.261308 0.249677 t-Statistic -0.557598 0.069788 1.071779 -0.810377 0.895672 -0.280019 -2.920766 Prob. 0.5866 0.9454 0.3033 0.4323 0.3867 0.7839 0.0119

Mean dependent var 3.67E-16 S.D. dependent var 0.171375 Akaike info criterion 0.546724 Schwarz criterion 0.198217 F-statistic 1.425277 Prob(F-statistic) 0.277482

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MULTICOLLINEARITY

LNPRICE LNPRICE LNGDP LNEXC 1.000000 -0.324093 0.808524

LNGDP -0.324093 1.000000 0.101458

LNEXC 0.808524 0.101458 1.000000

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THE ANALYSIS OF FACTORS AFFECTING INDONESIAS TOBACCO EXPORTS TO THE UNITED STATES: A PARTIAL ADJUSTMENT MODEL 1981- 2001 Y X1 X2 X3 Yt-1 year = Volume of Indonesias tobacco export to the United States (ton) = International tobacco price (US$/ pound) = The United States real total GDP (Bill of US$) = Exchange Rate (Rp/ US$) = Volume of Indonesias tobacco export to the United States at previous

VOLUME EXPROTS Year Y LnY

1981 23.56000 3.159550 1982 24.10000 3.182212 1983 24.20000 3.186353 1984 20.50000 3.020425 1985 20.90000 3.039749 1986 24.10000 3.182212 1987 22.90000 3.131137 1988 29.10000 3.370738 1989 49.90000 3.910021 1990 68.80000 4.231204 1991 75.60000 4.325456 1992 109.9000 4.699571 1993 125.2800 4.830551 1994 97.30000 4.577799 1995 77.00000 4.343805 1996 119.4000 4.782479 1997 136.6000 4.917057 1998 84.50000 4.436752 1999 110.3000 4.703204 2000 109.8000 4.698661 2001 126.7000 4.841822 Source: Statistical Year Book, BPS

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TOBACCO PRICE Year 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 X1 LnX1

2.372000 0.863733 2.515000 0.922273 2.771000 1.019208 2.736000 1.006497 2.990000 1.095273 2.994000 1.096610 3.257000 1.180807 3.514000 1.256755 3.726000 1.315335 3.910000 1.363537 3.904000 1.362002 3.918000 1.365581 3.867000 1.352479 3.876000 1.354804 4.012000 1.389290 4.149000 1.422867 3.973000 1.379521 4.030000 1.393766 4.030000 1.393766 4.211000 1.437700 4.233000 1.442911 Source: IFS

87

TOTAL REAL GDP The calculation of X2 and LnX2 Year GDP US (BILLION US$) X2 GDP JAPAN EXCHNG (BILLION US$) RATE (YEN/ US$) GDP JAPAN (BILL US$) [2] 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 3131.30 3259.20 3534.90 3932.70 4213.00 4452.90 4742.50 5108.30 5489.10 5803.20 5986.20 6318.90 6642.30 7054.30 7400.50 7813.20 8318.40 8781.50 9274.30 9824.60 10082.20 1.17 1.15 1.21 1.20 1.60 2.10 2.82 2.95 2.76 3.16 3.60 3.71 4.17 4.70 4.84 4.40 4.02 4.46 5.01 3.45 3.88 219.90 235.00 232.20 251.10 200.50 159.10 123.50 125.85 143.45 134.40 125.20 124.75 111.85 99.75 102.83 116.00 129.95 115.60 102.20 114.90 131.80 1.17 1.15 1.21 1.20 1.60 2.10 2.82 2.95 2.76 3.16 3.60 3.71 4.17 4.70 4.84 4.40 4.02 4.46 5.01 3.45 3.88 254.93 279.04 304.46 325.85 357.34 384.84 423.38 471.43 515.96 551.12 575.32 597.24 630.71 667.37 719.18 762.21 811.07 859.81 901.27 944.91 989.25 1.9080 1.6145 1.4506 1.1565 1.4445 1.4745 1.8715 1.8095 1.6055 1.9280 1.8707 1.5120 1.4812 1.5625 1.5500 1.6980 1.6538 1.6635 1.6164 1.4922 1.4504 486.406 450.510 441.650 376.846 516.178 567.447 792.356 853.053 828.374 1062.559 1076.251 903.027 934.208 1042.766 1114.729 1294.233 1341.348 1430.294 1456.813 1409.995 1434.808 GDP UK EXCHNG GDP UK (BILL OF POUNDS) RATE (US$/ POUNDS) (BILL US$) [3]

88

YEAR GERMANY GDP (BILL OF

EXCHNG RATE (DEUTSCHE

GDP GERMANY (BILL OF US$) [4]

FRANCE EXCHNG GDP (BILL OF FRANC) 3164.8 3626.0 4006.5 4361.9 4700.1 5069.3 5336.6 5735.1 6159.7 6509.5 6776.2 6999.6 7077.1 7389.7 7759.9 7955.2 8206.9 8564.4 1349.5 1408.4 1459.6 5.7480 6.7250 8.3475 9.5920 7.5610 6.4550 5.3400 6.0590 5.7880 5.1290 5.1800 5.5065 5.8955 5.3460 4.9000 5.2370 5.9881 5.6221 1.9954 1.0747 1.1347 RATE (FRANC/ US$)

GDP FRANCE (BILL OF US$) [5] 550.592 539.182 479.964 454.744 621.624 785.329 999.363 946.542 1064.219 1269.156 1308.147 1271.152 1200.424 1382.286 1583.653 1519.038 1370.535 1523.345 676.306 1310.505 1286.331

DEUTSCHE MARK/US$) MARK) 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 1535.5 1586.9 1667.1 1749.6 1826.1 1927.9 1991.2 2094.2 2223.6 2429.4 2647.6 2813.0 2853.7 2977.7 3523.0 3586.0 3666.6 3769.9 1969.4 2025.0 2076.1 2.2548 2.3765 2.7238 3.1480 2.4613 1.9408 1.5815 1.7803 1.6978 1.4940 1.5160 1.6140 1.7263 1.5488 1.4335 1.5548 1.7921 1.6730 1.9954 1.0747 1.1347

680.992 667.747 612.049 555.781 741.925 993.353 1259.058 1176.319 1309.695 1626.104 1746.438 1742.875 1653.073 1922.585 2457.621 2306.406 2045.980 2253.377 986.970 1884.247 1829.647

89

YEAR

AVERAGE GDP OF G4 [2]+[3]+[4]+[5]/4 [6]

NEW X2 [1]/[6] [7]

LnX2

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

429.790 414.647 383.718 347.143 470.332 587.057 763.399 744.716 801.262 990.245 1033.609 980.191 947.969 1088.084 1290.211 1281.019 1190.471 1302.869 781.275 1152.299 1138.666

7.28565 7.86018 9.21223 11.32877 8.95751 7.58512 6.21235 6.85939 6.85057 5.86037 5.79155 6.44660 7.00688 6.48323 5.73588 6.09921 6.98749 6.74012 11.87073 8.52608 8.85439

1.985907 2.061810 2.220532 2.427346 2.192492 2.026188 1.826539 1.925619 1.924332 1.768213 1.756400 1.863553 1.946893 1.869219 1.746741 1.808159 1.944121 1.908078 2.474076 2.143130 2.180913

90

EXCHANGE RATE Year 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 X3 LnX3

644.0000 6.467699 692.5000 6.540308 994.0000 6.901737 1074.000 6.979145 1125.000 7.025538 1641.000 7.403061 1650.000 7.408531 1731.000 7.456455 1797.000 7.493874 1901.000 7.550135 1992.000 7.596894 2062.000 7.631432 2110.000 7.654443 2200.000 7.696213 2308.000 7.744137 2383.000 7.776115 4650.000 8.444622 8025.000 8.990317 7085.000 8.865735 9595.000 9.168997 10400.00 9.249561 Source: IFS

91

LINEAR Year 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Y 23.56000 24.10000 24.20000 20.50000 20.90000 24.10000 22.90000 29.10000 49.90000 68.80000 75.60000 109.9000 125.2800 97.30000 77.00000 119.4000 136.6000 84.50000 110.3000 109.8000 126.7000 X1 2.372000 2.515000 2.771000 2.736000 2.990000 2.994000 3.257000 3.514000 3.726000 3.910000 3.904000 3.918000 3.867000 3.876000 4.012000 4.149000 3.973000 4.030000 4.030000 4.211000 4.233000 Source: IFS X2 7.285650 7.860180 9.212230 11.32877 8.957510 7.585120 6.212350 6.859390 6.850570 5.860370 5.791550 6.446600 7.006880 6.483230 5.735880 6.099210 6.987490 6.740120 11.87073 8.526080 8.854390 X3 644.0000 692.5000 994.0000 1074.000 1125.000 1641.000 1650.000 1731.000 1797.000 1901.000 1992.000 2062.000 2110.000 2200.000 2308.000 2383.000 4650.000 8025.000 7085.000 9595.000 10400.00

92

LOG LINEAR Year LNVOLUME LNPRICE 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 3.159550 3.182212 3.186353 3.020425 3.039749 3.182212 3.131137 3.370738 3.910021 4.231204 4.325456 4.699571 4.830551 4.577799 4.343805 4.782479 4.917057 4.436752 4.703204 4.698661 4.841822 LNGDP LNEXC 6.467699 6.540308 6.901737 6.979145 7.025538 7.403061 7.408531 7.456455 7.493874 7.550135 7.596894 7.631432 7.654443 7.696213 7.744137 7.776115 8.444622 8.990317 8.865735 9.168997 9.249561 LNVOLUME YT-1 NA 2.159550 2.182212 2.186353 2.020425 2.039749 2.182212 2.131137 2.370738 2.910021 3.231204 3.325456 3.699571 3.830551 3.577799 3.343805 3.782479 3.917057 3.436752 3.703204 3.698661

0.863733 1.985907 0.922273 2.061810 1.019208 2.220532 1.006497 2.427346 1.095273 2.192492 1.096610 2.026188 1.180807 1.826539 1.256755 1.925619 1.315335 1.924332 1.363537 1.768213 1.362002 1.756400 1.365581 1.863553 1.352479 1.946893 1.354804 1.869219 1.389290 1.746741 1.422867 1.808159 1.379521 1.944121 1.393766 1.908078 1.393766 2.474076 1.437700 2.143130 1.442911 2.180913 Source: IFS

93

MWD TEST PAM-Linier Dependent Variable: VOLUME Method: Least Squares Date: 01/17/06 Time: 11:36 Sample(adjusted): 1982 2001 Included observations: 20 after adjusting endpoints Variable C PRICE GDP EXC VOLUME(-1) Z1 R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficien t -176.5663 49.23844 5.619510 -0.003210 0.570713 1.000189 1.000000 1.000000 0.004132 0.000239 84.96945 1.824467 Std. Error t-Statistic Prob. 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 72.84400 42.48216 -7.896945 -7.598225 4.02E+08 0.000000

0.014190 -12443.10 0.003389 14527.06 0.000755 7442.714 5.62E-07 -5707.691 3.99E-05 14287.21 6.06E-05 16506.68 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

94

PAM LOG LINIER Dependent Variable: LNVOLUME Method: Least Squares Date: 01/12/06 Time: 08:19 Sample(adjusted): 1982 2001 Included observations: 20 after adjusting endpoints Variable Coefficien t Std. Error t-Statistic Prob. 0.1182 0.0017 0.1019 0.0768 0.0000 4.070560 0.727888 -0.241220 0.007713 63.89970 0.000000

C -1.214545 LNPRICE 2.726410 LNGDP 0.543760 LNEXC -0.248775 LNVOLUME(-1) 0.664566 R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat 0.944567 0.929785 0.192876 0.558018 7.412201 1.878440

0.732832 -1.657331 0.716226 3.806635 0.312051 1.742539 0.130939 -1.899922 0.117012 5.679483 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

95

MWD MULTIPLE-REGRESSION Linier Regression Dependent Variable: VOLUME Method: Least Squares Date: 01/17/06 Time: 11:51 Sample(adjusted): 1982 2001 Included observations: 20 after adjusting endpoints Variable C PRICE GDP EXC Z01 Coefficien t -312.8729 93.78873 7.401650 -0.002862 -45.51280 Std. Error t-Statistic Prob. 0.0014 0.0001 0.0824 0.3321 0.0517 72.84400 42.48216 9.085429 9.334363 16.76341 0.000021

80.25034 -3.898712 17.64639 5.314896 3.976989 1.861119 0.002855 -1.002259 21.53078 -2.113849 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

R-squared 0.817193 Adjusted R-squared 0.768444 S.E. of regression 20.44252 Sum squared resid 6268.452 Log likelihood -85.85429 Durbin-Watson stat 1.326571

Log-Lin Regression Dependent Variable: LNVOLUME Method: Least Squares Date: 01/17/06 Time: 11:52 Sample: 1981 2001 Included observations: 21 Variable C LNPRICE LNGDP LNEXC Z02 R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficien t -3.601563 7.427042 1.157118 -0.488840 0.061895 0.893213 0.866516 0.269187 1.159387 0.616918 1.330902 Std. Error t-Statistic Prob. 0.0053 0.0000 0.0328 0.0444 0.0014 4.027179 0.736784 0.417436 0.666132 33.45776 0.000000

1.116952 -3.224455 1.320272 5.625389 0.495392 2.335763 0.224132 -2.181038 0.016056 3.854932 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

96

Unit Root Test


TEST ON LNVOLUME Null Hypothesis: D(LNVOLUME) has a unit root Exogenous: Constant Lag Length: 0 (Automatic based on SIC, MAXLAG=8) t-Statistic Augmented Dickey-Fuller test statistic Test critical values: 1% level 5% level 10% level -3.952059 -3.831511 -3.029970 -2.655194 Prob.* 0.0078

*MacKinnon (1996) one-sided p-values. Warning: Probabilities and critical values calculated for 20 observations and may not be accurate for a sample size of 19

Augmented Dickey-Fuller Test Equation Dependent Variable: D(LNVOLUME,2) Method: Least Squares Date: 01/12/06 Time: 09:17 Sample(adjusted): 1983 2001 Included observations: 19 after adjusting endpoints Variable Coefficien t Std. Error t-Statistic Prob. 0.0010 0.2030 0.006342 0.353537 0.263125 0.362540 15.61877 0.001029

D(LNVOLUME(- -0.957525 1)) C 0.083907 R-squared 0.478828 Adjusted R-squared 0.448170 S.E. of regression 0.262625 Sum squared resid 1.172526 Log likelihood -0.499689 Durbin-Watson stat 1.978062

0.242285 -3.952059 0.063366 1.324158

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

97

TEST ON LNPRICE Null Hypothesis: D(LNPRICE) has a unit root Exogenous: Constant Lag Length: 0 (Automatic based on SIC, MAXLAG=8) t-Statistic Augmented Dickey-Fuller test statistic Test critical values: 1% level 5% level 10% level -4.043706 -3.831511 -3.029970 -2.655194 Prob.* 0.0064

*MacKinnon (1996) one-sided p-values. Warning: Probabilities and critical values calculated for 20 observations and may not be accurate for a sample size of 19

Augmented Dickey-Fuller Test Equation Dependent Variable: D(LNPRICE,2) Method: Least Squares Date: 01/12/06 Time: 09:18 Sample(adjusted): 1983 2001 Included observations: 19 after adjusting endpoints Variable D(LNPRICE(-1)) C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficien t -0.974812 0.026641 0.490279 0.460295 0.040813 0.028317 34.87321 1.985565 Std. Error t-Statistic Prob. 0.0008 0.0383 -0.002807 0.055554 -3.460337 -3.360923 16.35156 0.000843

0.241069 -4.043706 0.011862 2.245967 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

98

TEST ON LNGDP Null Hypothesis: D(LNGDP) has a unit root Exogenous: Constant Lag Length: 0 (Automatic based on SIC, MAXLAG=8) t-Statistic Augmented Dickey-Fuller test statistic Test critical values: 1% level 5% level 10% level -5.208337 -3.831511 -3.029970 -2.655194 Prob.* 0.0006

*MacKinnon (1996) one-sided p-values. Warning: Probabilities and critical values calculated for 20 observations and may not be accurate for a sample size of 19

Augmented Dickey-Fuller Test Equation Dependent Variable: D(LNGDP,2) Method: Least Squares Date: 01/12/06 Time: 09:18 Sample(adjusted): 1983 2001 Included observations: 19 after adjusting endpoints Variable D(LNGDP(-1)) C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficien t -1.226871 0.008146 0.614746 0.592084 0.200201 0.681368 4.657035 2.007974 Std. Error t-Statistic Prob. 0.0001 0.8614 -0.002006 0.313459 -0.279688 -0.180273 27.12677 0.000071

0.235559 -5.208337 0.045971 0.177199 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

99

TEST ON LNEXC Null Hypothesis: D(LNEXC) has a unit root Exogenous: Constant Lag Length: 0 (Automatic based on SIC, MAXLAG=8) t-Statistic Augmented Dickey-Fuller test statistic Test critical values: 1% level 5% level 10% level -4.068747 -3.831511 -3.029970 -2.655194 Prob.* 0.0061

*MacKinnon (1996) one-sided p-values. Warning: Probabilities and critical values calculated for 20 observations and may not be accurate for a sample size of 19

Augmented Dickey-Fuller Test Equation Dependent Variable: D(LNEXC,2) Method: Least Squares Date: 01/12/06 Time: 09:19 Sample(adjusted): 1983 2001 Included observations: 19 after adjusting endpoints Variable D(LNEXC(-1)) C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficien t -0.986050 0.140609 0.493365 0.463563 0.212735 0.769358 3.503222 1.887927 Std. Error t-Statistic Prob. 0.0008 0.0309 0.000419 0.290456 -0.158234 -0.058819 16.55471 0.000799

0.242347 -4.068747 0.059742 2.353608 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

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