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TABLE OF CONTENT
Content Page
1. Introduction
2. Methodology
3. Econometric model
4. Data description
5. Results and test
A. Results and analysis
1. Results
2. Analyze some basic content of results
B. Detect and cure default model
1. Normality
2. Multicollinearity
3. Heteroscedasticity
4. Autocorrelation
C. Detect and cure default new model
1. Normality
2. Multicollinearity
3. Heteroscedasticity
4. Autocorrelation
6.Conclusion and policy implication
a. Conclusion
b. Recommendation
c. Policy implication
APPENDIX
REFERENCES
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1. Introduction
a. Issue: Try to establish an econometrics model to analyse the impacts and influences
of Foreign Direct Investment (FDI) and urban unemployment ratio U on Gross
Domestic Products (GDP).
b. Reason for researching:
• Firstly, this is an issue relating to economics. All the knowledge we can gain from
this researching will be helpful for other economics subjects such as
Macroeconomics, International Economics….and our future jobs as well.
• Secondly, our country started to innovate in 1986; foreign investment law in Viet
Nam was promulgated on 29
th

December, 1987 to make a legal basis for the
investment in Viet Nam from foreign investors. The fact is that since Viet Nam
opened to integrate, foreign investment has become a very important source of
capital for Viet Nam economy in industrialization and modernization. Being a
member of World Trade Organization (WTO), Viet Nam has many chances to gain
more FDI. However, now the issue is that how to use FDI effectively, make FDI be
an important factor to develop the economy.
The study of the effects of foreign direct investment and unemployment on economic
growth helps us to know the extent of the impact of FDI to GDP as well as U to GDP.
According to learning the theories and features, understanding characteristics of this and
trends to develop, we can make the directions and solutions to attract FDI and use FDI in
the most effective way; besides, try to bring back unemployment ratio to nature
unemployment standard in order to help GDP grow up.
That is all the reasons why we choose to research this topic!
2
2. Methodology
*Economic theories:
a. Gross domestic product (GDP) is the market value of all final goods and services
produced within a country in a given period of time.
In the real world, the market values of many goods and services must be calculated to
determine GDP. While the total output of GDP is important, the breakdown of this output
into the large structures of the economy can often be just as important. In general,
macroeconomists use a standard set of categories to breakdown an economy into its major
constituent parts; in these instances, GDP is the sum of consumer spending, investment,
government purchases, and net exports, as represented by the equation:
Y = C + I + G + NX
Because in this equation Y captures every segment of the national economy, Y represents
both GDP and the national income. This because when money changes hands, it is
expenditure for one party and income for the other, and Y, capturing all these values, thus
represents the net of the entire economy.

Four components of GDP:
- Consumer spending, C, is the sum of expenditures by households on durable goods,
nondurable goods, and services. Examples include clothing, food, and health care.
- Investment, I, is the sum of expenditures on capital equipment, inventories, and
structures. Examples include machinery, unsold products, and housing.
- Government spending, G, is the sum of expenditures by all government bodies on
goods and services. Examples include naval ships and salaries to government
employees.
3
- Net export, NX, equals the difference between spending on domestic goods by
foreigners and spending on foreign goods by domestic residents. In other words, net
export describes the difference between exports and imports.
b. FDI is a form of international investment, in which the investors bring the means to
invest abroad to directly organize the production process management and business
profits. FDI plays a huge role in economic development:
• Add to domestic capital.
• Acquisition of technology and management know-how.
• Join the global production network.
• Increase the number of jobs and trained workers.
• Bring a large budget inflow.
c. Unemployment is always a concern of society; long-term macroeconomic policies
of the government are aiming to achieve the natural rate of unemployment in the
economy. It reflects the prosperity of the country in each period of time. The some
following simple analysis shows us that unemployment occupies an important
position, is one of the objectives of government activities:
• High unemployment rate means that GDP is lower – human resource is not use
effectively, we are wasting opportunities to produce more products and services.
• Unemployment also means less production, reducing the efficiency of production
scale.
• Unemployment leads to social demand reduction. Moreover, goods and services are

less consumed, business opportunities are smaller, quality and quantity of product
reduces. Besides, high unemployment ratio can lead to the less consumers’ demand
compared with when they are employed, as the result, the investment opportunities
reduces.
4
d. Relationship between gross domestic product GDP and foreign direct investment
FDI:
The relationship between the GDP and the level of FDI has always been a matter of discussion
between economists. There is a widespread belief among policymakers that foreign direct
investment (FDI) generates positive productivity effects for the host countries.
The neoclassical growth model states that FDI cause an increase in investments and their
efficiency leading to increases in growth. In the long-run, according to the endogenous
growth model, FDI promote growth, which is considered a function of technological
progress, originating from diffusion and spillover effects. The main mechanism for these
externalities is the adoption of foreign technology, which can happen via licensing
agreements, imitation, competition for resources, employee training, knowledge and export
spillovers. These benefits, together with the direct capital financing it provides, suggest that
FDI can play an important role in modernizing a national economy and promoting
economic development.
e. Relationship between gross domestic product GDP and utility U:
GDP only measures production and consumption, not the level of utility people gain from
producing and consuming. There is much economic activity (for example, replacing a low
quality product, or repairing damage from war or natural disaster) that does not improve
quality of life (compared to having a high quality product to begin with, or no war). The
result can be a very high GDP combined with low customer satisfaction.
*We collect the data and statistics of GDP, FDI and U to prove relations between GDP,
FDI and U and by using regression model in econometrics.
3. Econometric model
5
Model includes three variables: dependent variable: GDP (billion dong), independent

variables: FDI( million USD) and U (%)
GDP
i
= β
1
+ β
2
FDI
i
+β
3
U
i
+ V
i
This is multi regression model.
Many economic models express the negative relation between inflation and unemployment
(Phillip curve). Generally, high GDP leads to high inflation because of growth objectives
of government. As the result, relation between GDP and unemployment is negative.
4. Data description
- Data collected from website: www.gso.gov.vn, GDP, FDI and U in Vietnam from
1995-2009.
- Correlated analysis between variables: During one year, if the total capital of foreign
direct investment in Vietnam increases, there will be more capital for other projects. This
will encourage produce more; therefore GDP increases accordingly. Unemployment rate
increasing means GDP decreasing.
- Table of data: see table in the appendix
- Relation between variables: see graph in the appendix
- Description:
Mean Standard

deviation
Minimum Maximum Median
GDP(billion dong)
697572.1
441975.8 228292 1658389 535760
FDI(million USD)
4198.913
3028.292 2334.9 11500 2714.0
U(%) 5.71 0.76 4.60 6.85 5.8800
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5. Results and test
A. Results and analysis
1. Results
Model’s result from the gretl software ( Model-> Ordinary Least Squares )
Model 1: OLS, using observations 1995-2009 (T = 15)
Dependent variable: GDP
coefficient std. error t-ratio p-value
---------------------------------------------------------------------------------------------
const 1.68744e+06 624740 2.701 0.0193 **
FDI 85.6018 23.6463 3.620 0.0035 ***
U -236250 94698.9 -2.495 0.0282 **
Mean dependent var 697572.1 S.D. dependent var 441975.8
Sum squared resid 3.06e+11 S.E. of regression 159783.1
R-squared 0.887974 Adjusted R-squared 0.869303
F(2, 12) 47.55913 P-value(F) 1.98e-06
Log-likelihood -199.3341 Akaike criterion 404.6682
Schwarz criterion 406.7923 Hannan-Quinn 404.6455
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rho 0.525136 Durbin-Watson 0.766908
2. Analyze the basic content of results.

a.
Population regression model:
(PRM) GDP
i
=
β
1
+
β
2
FDI
i
+
β
3
U
i
+ V
i
Sample regression model:
(SRM)
i
GDP
=
∧
1
β
+
∧
2

β
FDI
i
+
β
ˆ
3
U
i
+e
i
( e
i
is estimator of V
i
)
(SRM) GDP
i
= 1.68744e+06 + 85.6018.FDI
i
– 236250.U
i
+ e
i
∧
1
β
= 1.68744e+06 means that if FDI=0 and U=0 then GDP = 1.68744e+06 billion dong
(holding inflation rate, CPI equal to 0, population is constant)
∧

2
β
= 85.6018 means that when FDI increases 1 million USD then GDP increases 85.6018
billion dong (holding other factors constant)
β
ˆ
3
= – 236250 means that when U increases 1% then GDP decreases 236250 billion dong
(holding other factors constant)
b. Measure of fit
+ Intercept:
∧
1
β
Test the hypothesis:



≠
=
0:
0:
11
10
β
β
H
H
624740
0668744.1

)(
1
11
+
=
−
=
∧
∧
e
Se
t
β
ββ
= 2.701
8
With
α
= 5% :

)12(
025.0
)315(
2/
tt =
−
α
= 2.179
Reject H
o

if:
t
>
)12(
025.0
t

701.2=t
 Reject H
0
->
∧
1
β
≠
0 -> intercept is statistical significance
+ Slope:
*
∧
2
β
Test the hypothesis:



≠
=
0:
0:
21

20
β
β
H
H
6463.23
6018.85
)(
2
22
=
−
=
∧
∧
β
ββ
Se
t
= 3.620
With
α
= 5% :

)12(
025.0
)315(
2/
tt =
−

α
= 2.179
Reject H
o
if:
t
>
)12(
025.0
t
3.620 > 2.179
=> Reject H
0

2
β
≠
0 
2
β
is statistical significance
*
β
ˆ
3
Test the hypothesis:



≠

=
0:
0:
31
30
β
β
H
H
9.94698
236250
)(
3
33
−
=
−
=
∧
∧
β
ββ
Se
t
= -2.495
9
With
α
= 5% :

)12(
025.0
)315(
2/
tt =
−
α
= 2.179
Reject H
o
if:
t
>
)12(
025.0
t
2.495 > 2.179
=> Reject H
0

3
β
≠ 0 
3
β
is statistical significance

+ Model
R
2

= 0.887974 indicates that FDI and U explain about 88.7974 % for the variation of
dependent variable GDP.
Test the hypothesis:



>
=
0:
0:
2
1
2
0
RH
RH
(H
0
: the model is significant
H
1
: the model is not significant)
315
0.8879741
2
0.887974
1
1
2
2

−
−
=
−
−
−
=
kn
R
k
R
F
= 47.5590
F
0.05
(2;12)= 3.89
Reject H
0
if F > F
0.05
(2;12)
47.5590 > 3.89
=> reject H
0
 R
2
> 0  model is significant
B. Detect and cure default of model
1. Normality
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H
0
: error is normal distribution
H
1
: error is non-normal distribution
Use gretl software: Test  Normality of residual
Frequency distribution for uhat1, obs 1-15
number of bins = 5, mean = -3.88051e-010, sd = 159783
interval midpt frequency rel. cum.
< -2.010e+005 -2.586e+005 3 20.00% 20.00% *******
-2.010e+005 - -8.598e+004 -1.435e+005 2 13.33% 33.33% ****
-8.598e+004 - 2.908e+004 -2.845e+004 0 0.00% 33.33%
2.908e+004 - 1.441e+005 8.662e+004 9 60.00% 93.33%
*********************
>= 1.441e+005 2.017e+005 1 6.67% 100.00% **
Test for null hypothesis of normal distribution:
Chi-square(2) = 5.815 with p-value 0.05461
11
0
1e-006
2e-006
3e-006
4e-006
5e-006
6e-006
-400000 -200000 0 200000 400000
Density
uhat1
uhat1

N(-3.8805e-010,1.5978e+005)
Test statistic for normality:
Chi-squared(2) = 5.815 pvalue = 0.05461
p-value = 0.05461 > 0.05  accept H
0
← => Error is normal distribution.
2. Multicollinearity
H
0
: No multicollinearity in the model
H
1
: Multicollinearity in the model
Use gretl software
Test collinearity
Variance Inflation Factors
Minimum possible value = 1.0
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