Exports, capital inflows, relative prices, and income growth in South Korea: An application of the balance of payments constraint growth model

The main objective of this paper is to use the balance of payment constraint growth model to examine the major determinants of income growth in South Korea, emphasizing the importance of exports, capital inflows, and relative prices. The autoregressive distributed lag approach to cointegration is employed to specify the short- and long-run determinants of income growth. The main empirical results suggest that beside the growth in exports, which is the emphasis of the export-led growth models, growth in capital inflows and relative prices have also played important roles in the growth process in South Korea. A formal test of the model confirmed the validity of the results. We also found that growth in capital inflows has the greatest effect on income growth in South Korea.