THE ANALYSIS OF FACTORS AFFECTING

INDONESIA’S 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 i

Approval page ii

Legalization page iii

Acknowledgements iv

Devotion page vi

Motto vii

Table of contents viii

Lists of table ix

List of graph x

List of appendices xi

Abstract (in English) xii

Abstract (in Bahasa Indonesia) xiii

CHAPTER 1: INTRODUCTION

1.1 Study background 1

1.2 Problem identification 10

1.3 Problem formulation 11

1.4 Problem limitation 12

1.5 Research objectives 12

1.6 Research contribution 13

1.7 Definition of term 13

CHAPTER 2: REVIEW OF RELATED LITERATURE

2.1 Previous researcher 14

viii
CHAPTER 3: THEORITICAL BACKGROUND AND HYPOTHESIS

3.1 Theoretical background 30

3.1.1 Demand theory 30

3.1.1.A Change in demand 33

3.1.1.B Elasticity of demand 36

3.1.2 Export: demand side 38

3.1.3 Factors affecting export in Indonesia 39

3.1.3.A The Gross Domestic Product 39

3.1.3.B The Exchange Rate 41

3.2 Demand Theory on Open Economy 43

3.3 International Trade as one part of Economic system 44

3.4 Hypothesis formulation 44

CHAPTER 4: RESEARCH METHOD

4.1 Research method 47

4.2 Research subject 48

4.3 Research setting 48

4.4 Data source 48

4.5 Research variable 49

4.6 Technique of data analysis 49

4.7 Analysis tools 50

4.7.1 Classical Assumptions test 50

4.7.1.1 Multicollinearity 50

4.7.1.2 Heteroscedasticity 51

4.7.1.3 Autocorrelation 52

ix
 4.7.2 Time Series Regression 53
4.7.3 T- Statistic Testing 54
4.7.4 F- Statistic Testing 55
4.7.5 PAM regression 55
4.7.6 The Multiple Regression Coefficient of Determination (R²) 55

CHAPTER 5: RESAECH FINDINGS AND DISCUSSIONS

5.1 Data description 56
5.2 Source of data 57
5.3 Data description 57
5.4 Analysis result 59
5.4.1 Multiple Regression Coefficient of Determination 60
5.4.2 F- test 60
5.4.3 Test on Independent Variables (T- Statistic testing) 61
5.4.4 Coefficient PAM 65
5.4.4.1 Result on Data estimation 66
5.4.4.2 Analysis elasticity Short- run and Long- run 68
5.4.5 Violation on Classic Assumption 70
5.4.5.1 Multicollinearity 70
5.4.5.2 Hetroscedasticity 70
5.4.5.3 Autocorrelation 72
5.4.6 Proof of hypothesis 73

CHPATER 6: CONCLUSION AND IMPLICATION

6.1 Conclusion 74
6.2 Implication 75
REFERENCES 78
APPENDICES 79

x
LIST OF TABLE
Page

Table 1.1 Indonesian Export and Import growth

Table 1.2 Important Indonesia’s tobacco exports destination country
Table 5.1 Regression PAM result
Table 5.2 Coefficient of Short- run and Long- run
Table 5.3 Multicollinearity result
Table 5.4 Heteroscedasticity result
Table 5.5 Autocorrelation result
Table 5.6 Autocorrelation test with LM method
LIST OF GRAPH
Graph 3.1 Change on demand
Graph 5.1 Test on price of tobacco
Graph 5.2 Test on USA real total GDP
Graph 5.3 Test on exchange rate
Graph 5.4 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 INDONESIA’S 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 Indonesia’s tobacco to the United States,
the effect of real total GDP of the United States on the export volume of
Indonesia’s to the United States, the effect of exchange rate on the export volume
of Indonesia’s to the United States, the effect of previous tobacco export on the
export volume of Indonesia’s to the United States. The data used in this study are
secondary data consisting of the export volume of Indonesia’s 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 Indonesia’s tobacco is less important to the
USA in the future because in the short- run Indonesia’s tobacco is elastic and
becoming more inelastic in the future. Beside that, the decision of buying
Indonesia’s 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.

xii
 CHAPTER I

INTRODUCTION

I.I STUDY BACKGROUND

The economic growth of Indonesia is now better compared to the

situation before 1970’s. 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

1
 2

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 1980’s 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.

 3

Table 1.1

Indonesian Export and Import Growth

INCLUDE OIL AND GAS NOT INCLUDE OIL AND GAS

YEAR EXPORT IMPORT EXPORT IMPORT

1980 23950.4 10834.4 6168.8 9090.4

1981 2,164.5 13272.1 4501.3 11550.8

1982 22328.3 16858.9 3929.0 13314.1

1983 21145.9 16351.8 5005.2 12207.6

1984 21887.7 13882.1 5869.7 11185.3

1985 18586.7 10259.1 5868.9 8983.5

1986 14805.0 10718.4 6528.4 9632.0

1987 17135.6 12370.3 8579.6 11302.0

1988 19218.5 13248.5 11536.9 12339.5

1989 22158.9 16359.6 13480.1 15164.4

1990 25675.3 21837.0 14604.2 19916.6

1991 29142.4 25868.8 18247.5 23558.5

1992 33967.0 27279.0 23296.1 25164.6

1993 36823.0 28327.8 27077.2 26157.2

1994 40053.4 31983.5 30359.8 29616.1

1995 45418.0 40628.7 34953.6 37717.9

1996 49814.8 42928.5 38093.0 39333.6

1997 53443.6 41679.8 41821.1 37755.7

1998 48847.6 27336.9 40975.5 24683.2

*) Indonesian Statistical Year Book 1998

 4

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 Indonesia’s 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
 5

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.

 6

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. American Tobacco Company (Richmond)

2. Conwood Corporation (Memphis)

3. Culbro Tobacco (Bloomfield)

4. Fader & Son inc (Baltimore)

5. Finck Cigar Company (San Antonio)

 7

6. Lancaster Leaf Tobacco co (Lancaster)

7. Marine marketing of California (California)

8. 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 won’t 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
 8

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 there’s 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.

 9

TABLE 1.2 (Net weight 000 Kg)

COUNTRY OF 1992 1993 1994 1995 1996 1997 1998

DESTINATION

JAPAN 635,0 357,3 206,5 42,6 612,3 15,1 7,4

MALAYSIA 200,4 216,6 164,3 669,3 992,2 25,0 129,2

USA 9476,6 9522,9 4445,7 5756,3 6360,2 6073,0 4081,5

BELGIUM & 1506,9 1465,0 1019,8 1119,0 1199,2 1659,1 1829,0

LUXEMBOURG

NETHERLANDS 3061,7 2191,1 3159,7 3104,5 3242,5 3210,5 3704,5

GERMANY 3839,1 3921,7 3091,4 1657,1 1880,6 1787,2 2801,2

FRANCE 2475,0 2716,6 2211,5 1364,8 1006,3 790,8 1503,8

SPAIN 1483,5 1950,9 11004,3 257,3 3380,9 265,1 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.

Today’s USA import is affected by previous years import in 2 ways. It

might be positive or negative. It is negative if USA import today isn’t

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
 10

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 INDONESIA’S 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

 11

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 Indonesia’s

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

Indonesia’s 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.
 12

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.
 13

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.

14
 15

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
 16

100 percent would increase total tax revenue by 9%, 43%, 82%

respectively. It’s 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
 17

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 (October-

December 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

 18

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

 19

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.

 20

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.

 21

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

 22

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; it’s 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. It’s make tobacco expand globally. The title is:

“Addicted to Profit: Big Tobacco's Expanding Global Reach”.

 23

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 mid-

priced 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
 24

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

 25

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

 27

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 Reuter’s 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.

 29

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

economy’s 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. Product’s 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 people’s 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 don’t talk about the
 32

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

 33

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

 34

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 people’s 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,

 35

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

DI D DII

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

 37

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

costumer’s 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

 38

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

 39

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
 40

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.

1
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.
 41

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.

 43

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
Economics (1995) Paul A. Samuelson and William D. Nordhaus.15th edition.P.442
3
the Microeconomy Today. Bradley R. Schiller. 3rd edition. Random Hoouse. P.88
 44

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

 45

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 Indonesia’s tobacco.

d. Volume export of Indonesia’s 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 = volume export (ton)

X1 = price of international tobacco (US$/pound)

X2 = total real GDP of the United States (Bill of US$) with 1990 as

the based year

X3 = exchange rate (Rp/ US$)

Yt-1 = volume export at previous year (lagged 1 year)

47
 48

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 Indonesia’s 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

 49

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 Price of tobacco (P)

o The United States real total GDP (GDP)

o 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 = lnαо + α1 lnX1 + α2 lnX2 + α3 lnX3 + α4

lnYt-1
 50

Where:

Lnαо = autonomous lnY

αi = 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

 51

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 sub-

collection 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

 52

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 = ß0 + ß1X1+ ß2X2 + ß3X3 + εi………………..(1)

From the regression above, then a regression is done with

auxiliarky regression, the model is:

ε²i = ά0+άo

1X1+ά0X2+ά0X²1+ά0X²2+ά0X1X2+Ui. (2)

The decisions are as follow:

If the Obs* R- squared is less than X²- table at level α=

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 cross-

sectional 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.
 53

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

(χ2) to express that there is no autocorrelation. The rule is

when χ2 statistic is bigger than the value of χ2 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.
 54

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: αi = 0

Ho: αi < 0

Independent variable will positively influence on dependent

variable individually.

Ho: αi = 0

Ho: αi > 0

Two- tail test used when:

Independent variable whether positively or negatively influence on

dependent variables individually.

Ho: αi = 0

Ho: αi # 0
 55

4.7.4 F- Statistics Testing

Testing the overall significance of the sample regression (F-

test) 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 (R²)

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 R² 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 = volume of Indonesian tobacco export to the United States

X1 = price of tobacco

X2 = the United States total real GDP (bill of US $), is weighted by

the average of total real GDP of G5 minus USA

X3 = exchange rate

Yt-1 = 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 = lnαо+α1 lnX1+ α2 lnX2 + α3 lnX3 + α4 lnYt-1

Where:

Lnαо = autonomous lnY

αi = elasticity of each independent variable

56
 57

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. International monetary found (related addition)

2. Statistics yearbook of Indonesia (related addition)

3. 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.

 58

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.
 59

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 R² 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 R²

we can use other than ECM (Error Correction Model).

Hypothesis testing can be summarized as shown in table 5.1

 60

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
Coefficien
Variable Std. Error t-Statistic Prob.
t
C -1.214545 0.732832 -1.657331 0.1182
LNPRICE 2.726410 0.716226 3.806635 0.0017
LNGDP 0.543760 0.312051 1.742539 0.1019
LNEXC -0.248775 0.130939 -1.899922 0.0768
LNVOLUME(-1) 0.664566 0.117012 5.679483 0.0000
R-squared 0.944567 Mean dependent var 4.070560
Adjusted R-squared 0.929785 S.D. dependent var 0.727888
S.E. of regression 0.192876 Akaike info criterion -0.241220
Sum squared resid 0.558018 Schwarz criterion 0.007713
Log likelihood 7.412201 F-statistic 63.89970
Durbin-Watson stat 1.878440 Prob(F-statistic) 0.000000

From table 5.1 we can conclude that:

5.4.1 The Multiple Regression Coefficient of Determination (R²)

The model used in this research is proper, shown by the size of R²=

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 α= 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.

 61

5.4.3 Testing on Independent Variables (T- Statistic Testing)

T- table = tα df (n-k)

Where:

α = level of significant (5%)

n = the amount of data (21)

k = the number of variables (5)

df = 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: α1 = 0 and Ho: α1 < 0

Computed t value = 3.806635

Level 0.02 0.01 0.002 0.0043

of significance
Critical t 2.583 2.921 3.686 3.806

1
See Gujarati, Damodar. Basic Econometrics 4th edition. P.128
2
Ibid. P.127
 62

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 two–tail test3

Ho: α2 = 0 and Ho: α2 # 0

Computed t value = 1.742539

Level 0.25 0.20 0.098 0.10

of significance
Critical t 0.690 1.337 1.742 1.746

3
See Gujarati, Damodar. Essentials of Econometrics.2nd Edition. 168
 63

Graph 5.2

25%
25%

Rejected Ha
20% 20%

10%
10%
9,8% 9,8%
Accepted Ha Accepted Ha

-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: α3 = 0 and Ho: α3 > 0

Computed t- value = -1.899922

Level 0.25 0.20 0.10 0.093

of significance
Critical t 0.690 1.337 1.746 1.899
 64

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

25%

20%
Rejected Ha
9.3% 10%
Accepted Ha

0 0.690 1.337 1.746

-1.899

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: α4 = 0 and Ho: α4 # 0

Computed t value = 5.679483

Level 0.02 0.01 0.002 0.0018

of significance
Critical t 2.583 2.921 3.686 5.679
 65

Graph 5.4

2% 2%

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

-5.749 -3.686 -2.921 -2.533 0 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)

R² = 0.944567

Adj R² = 0.929785

DW = 1.878440

Prob F- Stat = 0.000000

 66

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-δ)

Where δ= coefficient of adjustment = α4 = 0.664566

1-δ = 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:

• α1 = 2.726410

It means if price of tobacco increases 1%, volume of tobacco

export will increase 2.726410%.

 67

• α2 = 0.543760

It means if total real GDP USA increases 1%, volume of

tobacco export will increase 0.543760%.

• α3 = -0.248775

Since the sign is negative means foreign exchange rate have no

effect on the volume of tobacco export.

• α4 = 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

• α1 = 8.128007298

The sign is positive, it means that if price of tobacco decrease

1% the volume of tobacco export will decrease 8.128007298

• α2 = 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

• α3 = -0.741651114

The sign is negative, it means that foreign exchange rate have

no effect on the volume of tobacco export.

 68

• α4 = 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 Long- run
variable

Ln X1 2.726410 8.128007298

Ln X2 0.543760 1.621064054

LnX3 -0.248775 -0.741651114

Ln Yt-1 0.664566 1.981212399

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 Indonesia’s

tobacco is less important to the United States and has

more substitute from others tobacco producer countries.

 69

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 Indonesia’s 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 Indonesia’s tobacco than price of tobacco. The

elasticity in the long- run is greater than 1, meaning that

Indonesia’s 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 Indonesia’s 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.

 70

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 LNGDP LNEXC

LNPRICE 1 -0.324093 0.808524
LNGDP -0.324093 1 0.101458
LNEXC 0.808524 0.101458 1

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 α = 5%,

 71

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 2.800682 Probability 0.058235
Obs*R-squared 13.41425 Probability 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 Coefficien Std. Error t-Statistic Prob.
t
C 3.966290 1.892556 2.095732 0.0600
LNPRICE -3.381133 1.468246 -2.302837 0.0418
LNPRICE^2 1.430770 0.621453 2.302297 0.0419
LNGDP -1.287365 0.655899 -1.962749 0.0755
LNGDP^2 0.297219 0.154941 1.918266 0.0814
LNEXC 0.251681 0.392308 0.641540 0.5343
LNEXC^2 -0.016913 0.023774 -0.711380 0.4917
LNVOLUME(-1) -0.797962 0.314324 -2.538664 0.0275
LNVOLUME(-1)^2 0.099970 0.038216 2.615927 0.0240
R-squared 0.670712 Mean dependent var 0.027901
Adjusted R-squared 0.431231 S.D. dependent var 0.026536
S.E. of regression 0.020013 Akaike info criterion -4.682709
Sum squared resid 0.004406 Schwarz criterion -4.234629
Log likelihood 55.82709 F-statistic 2.800682
Durbin-Watson stat 3.094654 Prob(F-statistic) 0.058235

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 α= 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.

 72

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 4.275830 Probability 0.037412
Obs*R-squared 7.935964 Probability 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 Coefficient Std. Error t-Statistic Prob.
C -0.369626 0.662890 -0.557598 0.5866
LNPRICE 0.048395 0.693455 0.069788 0.9454
LNGDP 0.319741 0.298327 1.071779 0.3033
LNEXC -0.095441 0.117774 -0.810377 0.4323
LNVOLUME(-1) 0.101971 0.113848 0.895672 0.3867
RESID(-1) -0.073171 0.261308 -0.280019 0.7839
RESID(-2) -0.729249 0.249677 -2.920766 0.0119
R-squared 0.396798 Mean dependent var 3.67E-16
Adjusted R-squared 0.118397 S.D. dependent var 0.171375
S.E. of regression 0.160910 Akaike info -0.546724
criterion
Sum squared resid 0.336597 Schwarz criterion -0.198217
Log likelihood 12.46724 F-statistic 1.425277
Durbin-Watson stat 1.693879 Prob(F-statistic) 0.277482

This test uses the level of degree (χ²), Ho expressing that there

is no autocorrelation, with the guidance if the level of degree statistic

bigger than value of χ² tables, hence Ho denied, and also the

contrary.
 73

Table 5.6
Autocorrelation test with LM method

χ² computed Χ 2 0.010 table Decision

7.935964 9.21034 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 α = 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 Indonesia’s 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

Indonesia’s tobacco exports volume. The writer includes the dummy

 74

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 α = 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 R² 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 aren’t 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.

75
 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 Indonesia’s

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 Indonesia’s tobacco

export to USA. The results show that the demand of Indonesia’s

tobacco is elastic and is becoming inelastic in the future. It means

that Indonesia’s 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 Indonesia’s 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.

 77

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 Indonesia’s 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

Indonesia’s tobacco exports to other country or specifically research

on the several type of tobacco Indonesia.

 80

YEAR VOLUME PRICE GDP EXCHANGE

RATE
1981 23.56000 2.372000 7.28565 644.0000
1982 24.10000 2.515000 7.86018 692.5000
1983 24.20000 2.771000 9.21223 994.0000
1984 20.50000 2.736000 11.32877 1074.000
1985 20.90000 2.990000 8.95751 1125.000
1986 24.10000 2.994000 7.58512 1641.000
1987 22.90000 3.257000 6.21235 1650.000
1988 29.10000 3.514000 6.85939 1731.000
1989 49.90000 3.726000 6.85057 1797.000
1990 68.80000 3.910000 5.86037 1901.000
1991 75.60000 3.904000 5.79155 1992.000
1992 109.9000 3.918000 6.44660 2062.000
1993 125.2800 3.867000 7.00688 2110.000
1994 97.30000 3.876000 6.48323 2200.000
1995 77.00000 4.012000 5.73588 2308.000
1996 119.4000 4.149000 6.09921 2383.000
1997 136.6000 3.973000 6.98749 4650.000
1998 84.50000 4.030000 6.74012 8025.000
1999 110.3000 4.030000 11.87073 7085.000
2000 109.8000 4.211000 8.52608 9595.000
2001 126.7000 4.233000 8.85439 10400.00
 81

Year LNVOLUME LNPRICE LNGDP LNEXC LNVOLUME

YT-1
1981 3.159550 0.863733 1.985907 6.467699 NA
1982 3.182212 0.922273 2.061810 6.540308 2.159550
1983 3.186353 1.019208 2.220532 6.901737 2.182212
1984 3.020425 1.006497 2.427346 6.979145 2.186353
1985 3.039749 1.095273 2.192492 7.025538 2.020425
1986 3.182212 1.096610 2.026188 7.403061 2.039749
1987 3.131137 1.180807 1.826539 7.408531 2.182212
1988 3.370738 1.256755 1.925619 7.456455 2.131137
1989 3.910021 1.315335 1.924332 7.493874 2.370738
1990 4.231204 1.363537 1.768213 7.550135 2.910021
1991 4.325456 1.362002 1.756400 7.596894 3.231204
1992 4.699571 1.365581 1.863553 7.631432 3.325456
1993 4.830551 1.352479 1.946893 7.654443 3.699571
1994 4.577799 1.354804 1.869219 7.696213 3.830551
1995 4.343805 1.389290 1.746741 7.744137 3.577799
1996 4.782479 1.422867 1.808159 7.776115 3.343805
1997 4.917057 1.379521 1.944121 8.444622 3.782479
1998 4.436752 1.393766 1.908078 8.990317 3.917057
1999 4.703204 1.393766 2.474076 8.865735 3.436752
2000 4.698661 1.437700 2.143130 9.168997 3.703204
2001 4.841822 1.442911 2.180913 9.249561 3.698661

Where:

Y = Volume of Indonesia’s tobacco export to the United States (ton)

X1 = Price of international tobacco (US$/ pound)

X2 = 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 = Exchange rate (Rp/US$)

Yt-1 = Volume of Indonesia’s tobacco export at previous year

 82

HETEROSCEDASTICITY

White Heteroskedasticity Test:

F-statistic 2.800682 Probability 0.058235
Obs*R-squared 13.41425 Probability 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 Coefficien Std. Error t-Statistic Prob.
t
C 3.966290 1.892556 2.095732 0.0600
LNPRICE -3.381133 1.468246 -2.302837 0.0418
LNPRICE^2 1.430770 0.621453 2.302297 0.0419
LNGDP -1.287365 0.655899 -1.962749 0.0755
LNGDP^2 0.297219 0.154941 1.918266 0.0814
LNEXC 0.251681 0.392308 0.641540 0.5343
LNEXC^2 -0.016913 0.023774 -0.711380 0.4917
LNVOLUME(-1) -0.797962 0.314324 -2.538664 0.0275
LNVOLUME(-1)^2 0.099970 0.038216 2.615927 0.0240
R-squared 0.670712 Mean dependent var 0.027901
Adjusted R-squared 0.431231 S.D. dependent var 0.026536
S.E. of regression 0.020013 Akaike info criterion -
4.682709
Sum squared resid 0.004406 Schwarz criterion -
4.234629
Log likelihood 55.82709 F-statistic 2.800682
Durbin-Watson stat 3.094654 Prob(F-statistic) 0.058235
 83

AUTOCORRELATION

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 4.275830 Probability 0.037412
Obs*R-squared 7.935964 Probability 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 Coefficien Std. Error t-Statistic Prob.
t
C -0.369626 0.662890 -0.557598 0.5866
LNPRICE 0.048395 0.693455 0.069788 0.9454
LNGDP 0.319741 0.298327 1.071779 0.3033
LNEXC -0.095441 0.117774 -0.810377 0.4323
LNVOLUME(-1) 0.101971 0.113848 0.895672 0.3867
RESID(-1) -0.073171 0.261308 -0.280019 0.7839
RESID(-2) -0.729249 0.249677 -2.920766 0.0119
R-squared 0.396798 Mean dependent var 3.67E-16
Adjusted R-squared 0.118397 S.D. dependent var 0.171375
S.E. of regression 0.160910 Akaike info criterion -
0.546724
Sum squared resid 0.336597 Schwarz criterion -
0.198217
Log likelihood 12.46724 F-statistic 1.425277
Durbin-Watson stat 1.693879 Prob(F-statistic) 0.277482
 84

MULTICOLLINEARITY

LNPRICE LNGDP LNEXC

LNPRICE 1.000000 -0.324093 0.808524
LNGDP -0.324093 1.000000 0.101458
LNEXC 0.808524 0.101458 1.000000
 85

THE ANALYSIS OF FACTORS AFFECTING INDONESIA’S TOBACCO

EXPORTS TO THE UNITED STATES: A PARTIAL ADJUSTMENT MODEL

1981- 2001

Y = Volume of Indonesia’s tobacco export to the United States (ton)

X1 = International tobacco price (US$/ pound)

X2 = The United States real total GDP (Bill of US$)

X3 = Exchange Rate (Rp/ US$)

Yt-1 = Volume of Indonesia’s tobacco export to the United States at previous

year

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
 86

TOBACCO PRICE

Year X1 LnX1
1981 2.372000 0.863733
1982 2.515000 0.922273
1983 2.771000 1.019208
1984 2.736000 1.006497
1985 2.990000 1.095273
1986 2.994000 1.096610
1987 3.257000 1.180807
1988 3.514000 1.256755
1989 3.726000 1.315335
1990 3.910000 1.363537
1991 3.904000 1.362002
1992 3.918000 1.365581
1993 3.867000 1.352479
1994 3.876000 1.354804
1995 4.012000 1.389290
1996 4.149000 1.422867
1997 3.973000 1.379521
1998 4.030000 1.393766
1999 4.030000 1.393766
2000 4.211000 1.437700
2001 4.233000 1.442911
Source: IFS
 87

TOTAL REAL GDP

The calculation of X2 and LnX2

Year GDP US GDP JAPAN EXCHNG GDP GDP UK EXCHNG GDP UK

(BILLION US$) (BILLION RATE JAPAN (BILL OF RATE (BILL
X2 US$) (YEN/ (BILL POUNDS) (US$/ US$)
US$) US$) POUNDS) [3]
[2]
1981 3131.30 1.17 219.90 1.17 254.93 1.9080 486.406
1982 3259.20 1.15 235.00 1.15 279.04 1.6145 450.510
1983 3534.90 1.21 232.20 1.21 304.46 1.4506 441.650
1984 3932.70 1.20 251.10 1.20 325.85 1.1565 376.846
1985 4213.00 1.60 200.50 1.60 357.34 1.4445 516.178
1986 4452.90 2.10 159.10 2.10 384.84 1.4745 567.447
1987 4742.50 2.82 123.50 2.82 423.38 1.8715 792.356
1988 5108.30 2.95 125.85 2.95 471.43 1.8095 853.053
1989 5489.10 2.76 143.45 2.76 515.96 1.6055 828.374
1990 5803.20 3.16 134.40 3.16 551.12 1.9280 1062.559
1991 5986.20 3.60 125.20 3.60 575.32 1.8707 1076.251
1992 6318.90 3.71 124.75 3.71 597.24 1.5120 903.027
1993 6642.30 4.17 111.85 4.17 630.71 1.4812 934.208
1994 7054.30 4.70 99.75 4.70 667.37 1.5625 1042.766
1995 7400.50 4.84 102.83 4.84 719.18 1.5500 1114.729
1996 7813.20 4.40 116.00 4.40 762.21 1.6980 1294.233
1997 8318.40 4.02 129.95 4.02 811.07 1.6538 1341.348
1998 8781.50 4.46 115.60 4.46 859.81 1.6635 1430.294
1999 9274.30 5.01 102.20 5.01 901.27 1.6164 1456.813
2000 9824.60 3.45 114.90 3.45 944.91 1.4922 1409.995
2001 10082.20 3.88 131.80 3.88 989.25 1.4504 1434.808
 88

YEAR GERMANY EXCHNG GDP FRANCE EXCHNG GDP

GDP (BILL RATE GERMANY GDP RATE FRANCE
OF (DEUTSCHE (BILL OF (BILL (FRANC/ (BILL
DEUTSCHE MARK/US$) US$) OF US$) OF US$)
MARK) [4] FRANC) [5]
1981 1535.5 2.2548 680.992 3164.8 5.7480 550.592
1982 1586.9 2.3765 667.747 3626.0 6.7250 539.182
1983 1667.1 2.7238 612.049 4006.5 8.3475 479.964
1984 1749.6 3.1480 555.781 4361.9 9.5920 454.744
1985 1826.1 2.4613 741.925 4700.1 7.5610 621.624
1986 1927.9 1.9408 993.353 5069.3 6.4550 785.329
1987 1991.2 1.5815 1259.058 5336.6 5.3400 999.363
1988 2094.2 1.7803 1176.319 5735.1 6.0590 946.542
1989 2223.6 1.6978 1309.695 6159.7 5.7880 1064.219
1990 2429.4 1.4940 1626.104 6509.5 5.1290 1269.156
1991 2647.6 1.5160 1746.438 6776.2 5.1800 1308.147
1992 2813.0 1.6140 1742.875 6999.6 5.5065 1271.152
1993 2853.7 1.7263 1653.073 7077.1 5.8955 1200.424
1994 2977.7 1.5488 1922.585 7389.7 5.3460 1382.286
1995 3523.0 1.4335 2457.621 7759.9 4.9000 1583.653
1996 3586.0 1.5548 2306.406 7955.2 5.2370 1519.038
1997 3666.6 1.7921 2045.980 8206.9 5.9881 1370.535
1998 3769.9 1.6730 2253.377 8564.4 5.6221 1523.345
1999 1969.4 1.9954 986.970 1349.5 1.9954 676.306
2000 2025.0 1.0747 1884.247 1408.4 1.0747 1310.505
2001 2076.1 1.1347 1829.647 1459.6 1.1347 1286.331
 89

YEAR AVERAGE GDP NEW X2 LnX2

OF G4 [1]/[6]
[2]+[3]+[4]+[5]/4 [7]
[6]
1981 429.790 7.28565 1.985907
1982 414.647 7.86018 2.061810
1983 383.718 9.21223 2.220532
1984 347.143 11.32877 2.427346
1985 470.332 8.95751 2.192492
1986 587.057 7.58512 2.026188
1987 763.399 6.21235 1.826539
1988 744.716 6.85939 1.925619
1989 801.262 6.85057 1.924332
1990 990.245 5.86037 1.768213
1991 1033.609 5.79155 1.756400
1992 980.191 6.44660 1.863553
1993 947.969 7.00688 1.946893
1994 1088.084 6.48323 1.869219
1995 1290.211 5.73588 1.746741
1996 1281.019 6.09921 1.808159
1997 1190.471 6.98749 1.944121
1998 1302.869 6.74012 1.908078
1999 781.275 11.87073 2.474076
2000 1152.299 8.52608 2.143130
2001 1138.666 8.85439 2.180913
 90

EXCHANGE RATE

Year X3 LnX3
1981 644.0000 6.467699
1982 692.5000 6.540308
1983 994.0000 6.901737
1984 1074.000 6.979145
1985 1125.000 7.025538
1986 1641.000 7.403061
1987 1650.000 7.408531
1988 1731.000 7.456455
1989 1797.000 7.493874
1990 1901.000 7.550135
1991 1992.000 7.596894
1992 2062.000 7.631432
1993 2110.000 7.654443
1994 2200.000 7.696213
1995 2308.000 7.744137
1996 2383.000 7.776115
1997 4650.000 8.444622
1998 8025.000 8.990317
1999 7085.000 8.865735
2000 9595.000 9.168997
2001 10400.00 9.249561
Source: IFS
 91

LINEAR

Year Y X1 X2 X3
1981 23.56000 2.372000 7.285650 644.0000
1982 24.10000 2.515000 7.860180 692.5000
1983 24.20000 2.771000 9.212230 994.0000
1984 20.50000 2.736000 11.32877 1074.000
1985 20.90000 2.990000 8.957510 1125.000
1986 24.10000 2.994000 7.585120 1641.000
1987 22.90000 3.257000 6.212350 1650.000
1988 29.10000 3.514000 6.859390 1731.000
1989 49.90000 3.726000 6.850570 1797.000
1990 68.80000 3.910000 5.860370 1901.000
1991 75.60000 3.904000 5.791550 1992.000
1992 109.9000 3.918000 6.446600 2062.000
1993 125.2800 3.867000 7.006880 2110.000
1994 97.30000 3.876000 6.483230 2200.000
1995 77.00000 4.012000 5.735880 2308.000
1996 119.4000 4.149000 6.099210 2383.000
1997 136.6000 3.973000 6.987490 4650.000
1998 84.50000 4.030000 6.740120 8025.000
1999 110.3000 4.030000 11.87073 7085.000
2000 109.8000 4.211000 8.526080 9595.000
2001 126.7000 4.233000 8.854390 10400.00
Source: IFS
 92

LOG LINEAR

Year LNVOLUME LNPRICE LNGDP LNEXC LNVOLUME

YT-1
1981 3.159550 0.863733 1.985907 6.467699 NA
1982 3.182212 0.922273 2.061810 6.540308 2.159550
1983 3.186353 1.019208 2.220532 6.901737 2.182212
1984 3.020425 1.006497 2.427346 6.979145 2.186353
1985 3.039749 1.095273 2.192492 7.025538 2.020425
1986 3.182212 1.096610 2.026188 7.403061 2.039749
1987 3.131137 1.180807 1.826539 7.408531 2.182212
1988 3.370738 1.256755 1.925619 7.456455 2.131137
1989 3.910021 1.315335 1.924332 7.493874 2.370738
1990 4.231204 1.363537 1.768213 7.550135 2.910021
1991 4.325456 1.362002 1.756400 7.596894 3.231204
1992 4.699571 1.365581 1.863553 7.631432 3.325456
1993 4.830551 1.352479 1.946893 7.654443 3.699571
1994 4.577799 1.354804 1.869219 7.696213 3.830551
1995 4.343805 1.389290 1.746741 7.744137 3.577799
1996 4.782479 1.422867 1.808159 7.776115 3.343805
1997 4.917057 1.379521 1.944121 8.444622 3.782479
1998 4.436752 1.393766 1.908078 8.990317 3.917057
1999 4.703204 1.393766 2.474076 8.865735 3.436752
2000 4.698661 1.437700 2.143130 9.168997 3.703204
2001 4.841822 1.442911 2.180913 9.249561 3.698661
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 Coefficien Std. Error t-Statistic Prob.
t
C -176.5663 0.014190 -12443.10 0.0000
PRICE 49.23844 0.003389 14527.06 0.0000
GDP 5.619510 0.000755 7442.714 0.0000
EXC -0.003210 5.62E-07 -5707.691 0.0000
VOLUME(-1) 0.570713 3.99E-05 14287.21 0.0000
Z1 1.000189 6.06E-05 16506.68 0.0000
R-squared 1.000000 Mean dependent var 72.84400
Adjusted R-squared 1.000000 S.D. dependent var 42.48216
S.E. of regression 0.004132 Akaike info criterion -7.896945
Sum squared resid 0.000239 Schwarz criterion -7.598225
Log likelihood 84.96945 F-statistic 4.02E+08
Durbin-Watson stat 1.824467 Prob(F-statistic) 0.000000
 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 Std. Error t-Statistic Prob.
t
C -1.214545 0.732832 -1.657331 0.1182
LNPRICE 2.726410 0.716226 3.806635 0.0017
LNGDP 0.543760 0.312051 1.742539 0.1019
LNEXC -0.248775 0.130939 -1.899922 0.0768
LNVOLUME(-1) 0.664566 0.117012 5.679483 0.0000
R-squared 0.944567 Mean dependent var 4.070560
Adjusted R-squared 0.929785 S.D. dependent var 0.727888
S.E. of regression 0.192876 Akaike info criterion -0.241220
Sum squared resid 0.558018 Schwarz criterion 0.007713
Log likelihood 7.412201 F-statistic 63.89970
Durbin-Watson stat 1.878440 Prob(F-statistic) 0.000000
 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 Coefficien Std. Error t-Statistic Prob.
t
C -312.8729 80.25034 -3.898712 0.0014
PRICE 93.78873 17.64639 5.314896 0.0001
GDP 7.401650 3.976989 1.861119 0.0824
EXC -0.002862 0.002855 -1.002259 0.3321
Z01 -45.51280 21.53078 -2.113849 0.0517
R-squared 0.817193 Mean dependent var 72.84400
Adjusted R-squared 0.768444 S.D. dependent var 42.48216
S.E. of regression 20.44252 Akaike info criterion 9.085429
Sum squared resid 6268.452 Schwarz criterion 9.334363
Log likelihood -85.85429 F-statistic 16.76341
Durbin-Watson stat 1.326571 Prob(F-statistic) 0.000021

Log-Lin Regression
Dependent Variable: LNVOLUME
Method: Least Squares
Date: 01/17/06 Time: 11:52
Sample: 1981 2001
Included observations: 21
Variable Coefficien Std. Error t-Statistic Prob.
t
C -3.601563 1.116952 -3.224455 0.0053
LNPRICE 7.427042 1.320272 5.625389 0.0000
LNGDP 1.157118 0.495392 2.335763 0.0328
LNEXC -0.488840 0.224132 -2.181038 0.0444
Z02 0.061895 0.016056 3.854932 0.0014
R-squared 0.893213 Mean dependent var 4.027179
Adjusted R-squared 0.866516 S.D. dependent var 0.736784
S.E. of regression 0.269187 Akaike info criterion 0.417436
Sum squared resid 1.159387 Schwarz criterion 0.666132
Log likelihood 0.616918 F-statistic 33.45776
Durbin-Watson stat 1.330902 Prob(F-statistic) 0.000000
 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 Prob.*
Augmented Dickey-Fuller test statistic -3.952059 0.0078
Test critical values: 1% level -3.831511
5% level -3.029970
10% level -2.655194
*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 Std. Error t-Statistic Prob.
t
D(LNVOLUME(- -0.957525 0.242285 -3.952059 0.0010
1))
C 0.083907 0.063366 1.324158 0.2030
R-squared 0.478828 Mean dependent var 0.006342
Adjusted R-squared 0.448170 S.D. dependent var 0.353537
S.E. of regression 0.262625 Akaike info criterion 0.263125
Sum squared resid 1.172526 Schwarz criterion 0.362540
Log likelihood -0.499689 F-statistic 15.61877
Durbin-Watson stat 1.978062 Prob(F-statistic) 0.001029
 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 Prob.*
Augmented Dickey-Fuller test statistic -4.043706 0.0064
Test critical values: 1% level -3.831511
5% level -3.029970
10% level -2.655194
*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 Coefficien Std. Error t-Statistic Prob.
t
D(LNPRICE(-1)) -0.974812 0.241069 -4.043706 0.0008
C 0.026641 0.011862 2.245967 0.0383
R-squared 0.490279 Mean dependent var -0.002807
Adjusted R-squared 0.460295 S.D. dependent var 0.055554
S.E. of regression 0.040813 Akaike info criterion -3.460337
Sum squared resid 0.028317 Schwarz criterion -3.360923
Log likelihood 34.87321 F-statistic 16.35156
Durbin-Watson stat 1.985565 Prob(F-statistic) 0.000843
 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 Prob.*
Augmented Dickey-Fuller test statistic -5.208337 0.0006
Test critical values: 1% level -3.831511
5% level -3.029970
10% level -2.655194
*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 Coefficien Std. Error t-Statistic Prob.
t
D(LNGDP(-1)) -1.226871 0.235559 -5.208337 0.0001
C 0.008146 0.045971 0.177199 0.8614
R-squared 0.614746 Mean dependent var -0.002006
Adjusted R-squared 0.592084 S.D. dependent var 0.313459
S.E. of regression 0.200201 Akaike info criterion -0.279688
Sum squared resid 0.681368 Schwarz criterion -0.180273
Log likelihood 4.657035 F-statistic 27.12677
Durbin-Watson stat 2.007974 Prob(F-statistic) 0.000071
 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 Prob.*
Augmented Dickey-Fuller test statistic -4.068747 0.0061
Test critical values: 1% level -3.831511
5% level -3.029970
10% level -2.655194
*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 Coefficien Std. Error t-Statistic Prob.
t
D(LNEXC(-1)) -0.986050 0.242347 -4.068747 0.0008
C 0.140609 0.059742 2.353608 0.0309
R-squared 0.493365 Mean dependent var 0.000419
Adjusted R-squared 0.463563 S.D. dependent var 0.290456
S.E. of regression 0.212735 Akaike info criterion -0.158234
Sum squared resid 0.769358 Schwarz criterion -0.058819
Log likelihood 3.503222 F-statistic 16.55471
Durbin-Watson stat 1.887927 Prob(F-statistic) 0.000799