The role of income, exports and capital flows on domestic income growth: empirical evidence from Denmark

Abstract

This article examines the long-term growth path of the Danish economy from 1980 to 2017. Various developments and changes have emerged over the years to determine the robustness and legitimacy of the balance of payments constrained growth model. One of these changes is that capital flows have an important role in the growth process. In this study, relative prices, exchange rate and capital flows are questioned as important determinants. The study uses autoregressive distributed lag (ARDL) methodology to determine the both short- and long-run relationships among the variables. The outcome reveals that all the variables have significant impacts on both the short-run and long-run growth of Denmark. In the light of these findings, considering that the annual real growth of the Danish economy is 1.75%, it can be concluded that this estimation is correct and is proportional to the growth rate of Denmark from 1980 to 2017. It would be a correct assessment to consider income, relative prices and capital flows as important determinants of the growth of the Danish economy on the demand side. Weakening confidence indices and worsening expectations in Danish export markets could quickly affect Danish exports and trade investment.