Connection dynamics: exploring trade, consumption, and government spending in emerging economies through ARDL analysis

This study analyzes the nexus of trade, government expenditure, and private consumption with the economic progression of an emerging economy such as India. This could be attributed to a shift in trade, government expenditure, and consumption patterns due to multiple disruptions in the Indian economy in the form of recession, digitalization, demonetization, and the COVID-19 pandemic. The study variables were Real Gross Domestic Product (RGDP), net trade, government expenditure, and private consumption expenditure. The study was conducted on quarterly observations from 2000 to 2022 from India using autoregressive distributed lag (ARDL) and error correction methods to analyze the relationship among the variables. The analysis found net trade and consumption to be significant variables for determining economic growth. RGDP, net trade, government expenditure, and private consumption expenditure do not jointly move together in the long term, and short-run causality exists from private consumption expenditure to GDP. The error correction term was negative and significant, suggesting mean reversion. The residual analysis suggested an unbiased model that is stable, homoscedastic and free from serial correlation.