International Economic Effects of Natural Rubber Price Shocks: Based on VAR Model

The problem:

Natural rubber is one of the four industrial raw materials, the other three are steel, coal and oil. As an important industrial raw materials, its’ price, supply and demand conditions for the development of the national industrial policy, and have a great impact on import and export, the study of relationship of natural rubber market price fluctuations associated with the GDP has a certain value.

Growing restricted by geographical factors, the main production of natural rubber land is near the equator. (Allen, Kirkham, Padget & Price, 1971) From a global perspective, the characteristics of the flow of natural rubber is flowing from the equator around the world, especially North America, Asia, Western Europe. On industry structure, consumption of natural rubber is the largest automobile industry, because the development of the automobile industry led to advances in tire manufacturing. Therefore, the development of the automotive industry is directly related to the production of tires, thus affecting global prices of natural rubber.

Theoretical framework and background information:

Demand and supply determine equilibrium price of commodities in the competitive market, a so-called equilibrium means the unchanged trend, which is a persist state. Equilibrium yield is the yield when the demand equals to the supply of production. (Walras, 1874) Equilibrium theory includes local equilibrium theory and general equilibrium theory. There are two important assumptions to achieve general equilibrium state: the first is the assumption of perfect competition; the second is resource scarcity assumption. The former ensures the full role of the market mechanism in theory, so that the general equilibrium can be achieved. The latter brings allocation of resources and economic efficiency into economic activities, so that the study of general equilibrium process is necessary. Based on this theory, in the question this paper discussed, the framework of rubber price, GDP, import and export has relationship as Figure 1 shows.

Figure 1. Theoretical framework

Design and method:

Depending on how much natural rubber imports, this paper selected needing countries as United States, India, Japan, China. Depending on how much natural rubber exports, this paper selected producing countries as Thailand, Indonesia, Malaysia, Vietnam.

In the data selection, this paper selected the year 1991 – year 2015 as sample year, which is annual data. Prices of natural rubber in various countries, GDP, imports / export volume of natural rubber are all come from DATASTREAM database. And, for the computing of natural rubber price, this paper selected average natural rubber prices as the year data.

Data analysis (for empirical projects):

Considering the relationship between rubber price, GDP, import and export is complex, this paper chose VAR model to analyze, whose main object of study is multi-variable dynamic relationship. VAR model does not need to distinguish between endogenous nature of exogenous variables, this method directly studied the dynamic relationship between multiple variables, the ultimate result is simultaneous equations.

Containing n variables, lag = p, VAR model as follows:

,

Where is the k-dimensional of endogenous variables, is the d-dimensional exogenous variables, p is the lag order, dimensional matrix and dimensional matrix is the un-estimated coefficient matrix. And, is a k-dimensional column vector who is perturbed random, and the disturbance is not self-related, but do not reject the same period of the correlation, which is not related to the RHS variables. Because of the complex interaction between data, VAR variables in the model established in this article default endogenous variables, without considering the impact of external factors.

In the specific operation, the different effects / sensitive of rubber price of countries can be shown on the two models of needing countries and producing countries.

Work Plan:

Period Objectives

March 2016:Submit the first draft to the supervisor

April 2016: Development of research proposal and submission to the supervisor

May 2016: Work on any corrections proposed by the supervisor regarding the research proposal, and start working on the first chapter of the dissertation

June 2016: submit the first chapter to the supervisor

July 2016: Work on the literature review while collecting data for the analysis. Submit the second chapter to the supervisor and the proposed data already collected. Methods of data analysis and estimation will be discussed with the supervisor

Reference:

Allen, G., Kirkham, M. J., Padget, J., & Price, C. (1971). Thermodynamics of rubber elasticity at constant volume. Transactions of the Faraday Society,67, 1278-1292.

Alom, F., Ward, B. D., & Hu, B. (2013). Macroeconomic effects of world oil and food price shocks in Asia and Pacific economies: application of SVAR models. OPEC Energy Review, 37(3), 327-372.

Walras, L. (1874). Elements of pure economics. Routledge.

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Posted on May 18, 2016Author TutorCategories Question, Questions