Exchange Rate Effect on Gross Domestic Product in the Five Founding Members of ASEAN

Abstract

This paper concerns with the effect of exchange rate on gross domestic product (GDP) in the five founding member countries of the Association of Southeast Asian Nations (ASEAN-5) namely, Indonesia, Malaysia, Thailand, Singapore and Philippines. From theoretical perspective, exchange rate depreciation is a sign of economic failure in developing countries. However national economic perspective shows its merit in the increasing size of output. In this paper analysis, a set of panel data is used in which the time period was from 1980 to 2014 for the exchange rate variable of each member country. For the variable of GDP, the time period was from 1981 to 2015. In the pooled ordinary least squares (OLS) estimation, the real exchange rate coefficient had a statistically significant effect on the GDP level in the five member countries. The results showed that exchange rate depreciation would cause an increase in the countries' level of GDP. The implication from this research is that exchange rate depreciation stimulates the countries to increase their output. Increase in output would fulfil the demands of local and foreign markets. The countries' exported goods are expected to increase because they are considered cheap by their developed trading partners.