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Will the encouragement of increased investment lead to higher GDP?

 

Introduction:

GDP and investment are two major factors that affect the United States economy.  The question I will discuss is, will the encouragement of increased investment lead to higher GDP?  GDP is the primary measure of production within the United States.  So I will be measuring the effects of increased investment on the dependent variable realGDP.  I hypothesize that as investment increases so does GDP, therefore a positive correlation between the two variables exists.

Model:

            The economic model I have used to demonstrate the relationship that I believe exists between real GDP and investment is the Keynesian Model. The equation for this model is Y=C+I+G+X.  This model states that a rise in any one of the independent variables will result in an increase of Y, which is GDP.  The independent variables in which I focused on were government spending, Investment and interest rates.  Interest rates have a large impact on investment because as interest rates increase, investment decreases.

Data:

            The variables used in the unrestricted regression were realGDP, interest rates (Government interest rates and corporate bond interest rates), Government Spending (budget deficit, tax receipts and expenditures), and investment.  After dropping some variables the restricted and final regression consisted of corporate bond interest rates (percentage), government expenditure (billions), budget deficit (Billions), and Investment (billions).  All data was macro data and was obtained by using e-views with the correct DRI codes.  The data was measured quarterly from 1947-2002. 

Results:

            The final equation established after dropping variables that were significantly close to zero is:

RealGDP = b0 + b1*interestrate + b2*expenditures+ b3*budgetdeficit + b4*investment + e

Variable

Coefficient

Std. Error

T-Statistic

FYAAAC

-32.02186

5.252451

-6.096556

REALGGFNET

-2.174607

0.087877

-24.74594

REALGGFEX

4.219815

0.099642

42.34979

REALGPI

0.821223

0.124429

6.599938

C

582.8759

25.89328

22.51071

When the interest rate increases by one unit it decreases realGDP by 32.04. This makes sense because as interest rate up it will in turn decrease investment, and a decrease in investment will decrease realGDP.  When the real government expenditure increases by one unit realGDP increases by 4.22.  This makes sense because expenditures are part of the GDP equation; therefore as expenditures increase so does GDP.  When the budget deficit increases by one unit it increases realGDP by 2.04.  This makes sense because as the budget deficit goes up there is more money for the government to spend.  When real investment increases by one unit it increases realGDP by 0.82.  This makes sense because Investment is part of the GDP equation and as investment increases so does GDP.

Conclusion:

            After viewing the results of the final regression, which excluded the variables of government interest rates, and tax receipts, my results due in fact parallel my hypothesis. Real interest rates have a coefficient of 0.82; therefore for every one-unit increase of investment, there is a 0.82 increase in real GDP.  Thus, a positive correlation does exist between these two variables.