Unveiling the Dynamics: A Comprehensive Analysis of Government Expenditure, Foreign Direct Investment and Balance of Trade Effects on Economic Growth in Malaysia Through a Vector Error Correction Model

The intricate relationship between government expenditure, foreign direct investment, balance of trade, and economic growth in Malaysia is being investigated using the VECM model and annual data from 1961 to 2022. This thorough analysis looks at the subtle complications between these core variables. The results of my investigation demonstrate a complex interrelationship between government expenditure, FDI flows, the balance of trade flow, and economic growth. The VECM framework allows us to capture both short dynamics and long equilibrium relations. In particular, FDI turns out to be an important stimulus of economic growth and there is a positive impact found in the long-term trend. In addition, Government spending is recognized as a strong economic catalyst leading not only to the long-term equilibrium. It is found that the trade balance does not contribute significantly to the economic stability and growth sustainability of the Malaysian economy. This study has emphasized the need for aligned policy initiatives towards ensuring that government expenditure is optimal, there are inflows of FDI, and favorable trade conditions to support Malaysia’s economic path. These findings have been beneficial to policymakers, investors, and other stakeholders who want to engage with the Malaysian economy in a challenging global environment.