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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS
The normalized cointegrating equation is presented below.
GDP = 2 .6926 + 1.0135 Edu exp
1
t
t
JUNE 2011
VOL 3, NO 2
S.E. (0.04879)
t-statistic [20.77]
The above equation shows that in the long-run expenditure on education has positive and
significant impact on economic growth.
The Short-Run Dynamic Model of GDP: The Error Correction Approach
Error correction model is used to determine the short run dynamics of the regression
model. The ECM equation is presented below:
t
n
n
0
+ ∑α1∆GDPt
−i
+ ∑α
2∆Edu
exp
t−i
i=
1
i=
1
∆GDP
= α + λEC
+ ε
t−i
t
Where
∆ denotes the first difference operator
ε t is a random error term
EC t–i is lagged error correction term
The results of estimated error correction model are reported in Table 5.
Table 5
Error Correction Model Estimates
Dependent Variable ∆GDP
Regressors Coefficient t-Ratio
Constant 0.05457 5.71277*
∆GDP(–1) 0.107488 0.73744
∆Edu exp(–1) 0.0172 1.58285
EC(–1) –0.2173 –3.60013*
R 2 = 63%, Adjusted R 2 = 60%, F-stat = 17.90
Note: *represents significance at 5% critical values.
The results suggested that none of the regressors is establishing short-term relationship
with the GDP significantly. Moreover, Error Correction Coefficient shows the speed of
adjustment of variables returning to equilibrium. A negative and statistically significant
coefficient of error correction term is an indication of cointegration between the variables. 59 The
error correction coefficient carries negative expected sign, which is significant, indicating that in
Pakistan GDP (economic growth) and expenditure on education are co-integrated. Furthermore,
the estimated coefficient of error correction indicates that approximately 21 percent of the
disequilibrium is corrected immediately, i.e. in the next year.
59 Kremer et al. (1992) have shown that the significant lagged error correction term is a more efficient way of
establishing cointegration.
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