(TIỂU LUẬN) ECONOMETRICS i REPORT GDP PER CAPITA AND FACTORS THAT AFFECT GDP PER CAPITA

FOREIGN TRADE UNIVERSITY FALCULTY OF INTERNATIONAL ECONOMIC *** ECONOMETRICS I REPORT GDP PER CAPITA AND FACTORS THAT AFFECT GDP PER CAPITA Instructor: M.Sc Nguyen Thuy Quynh GROUP 11 Group member Student ID Nguyễn Thị Phương Thảo 2013450054 Nguyễn Kim Chi 2013450008 Nguyễn Hồng Hạnh 2013450017 Hà Nguyệt Lan Chi 2014450202 Hà Nội, 2021 ECONOMETRICS KTEE218.1 INDIVIDUAL ASSESSMENT Kim Chi Hồng Hạnh Lan Chi Phương Thảo Kim Chi - 10 10 10 Hồng Hạnh 10 - 10 10 Lan Chi 10 10 - 10 Phương Thảo 10 10 10 - Evaluator ECONOMETRICS KTEE218.1 TABLE OF CONTENT ABSTRACT INTRODUCTION SECTION 1: LITERATURE REVIEW I Gross Domestic Product (GDP) GDP’s Definition The History of GDP II Previous researches the Relationship between GDP and Government Expenditure, Population, Unemployment Rate, Inflation Rate and FDI Inflow 11 Government Expenditure % of GDP 11 Population and GDP 12 Unemployment Rate and GDP per capita 13 Inflation and GDP per capita 13 FDI Inflow and GDP per capita 14 SECTION II: MODEL SPECIFICATION 15 I METHODOLOGY 15 Method used to derive the model 15 Method used to collect and analyze the data 16 II Theoretical Model Specification 16 Specify the model 16 Theoretical Relationship between Dependent Variable and Independent Variables 17 III Data 17 Source of Data 17 ECONOMETRICS KTEE218.1 Descriptive Statistics and Interpretation for each Variables 17 Correlation matrix between variables 22 SECTION III: MODEL & HYPOTHESISTESTING 24 I Multiple Linear Regression Model 24 II Hypothesis Testing 26 The Overall Significance 26 Statistical Significance of Individual Coefficients 27 CONCLUSION 30 REFERENCE 31 ECONOMETRICS KTEE218.1 ACKNOWLEDGEMENT This report is the result of careful study, research and fine-tuning effort of Group 11 – Econometrics (KTEE218.1) We would not be able to this work without the help of our lecturer - M.Sc Nguyen Thuy Quynh Her lectures were not only an input to our project, but also solidified our knowledge of the subject We would like to thank Mrs Quynh for her detailed and dedicated teaching on the real need to understand Econometric, and we believe that it will be of great help to us in the future At the same time, we know that the report is not perfect, and we look forward to receiving constructive evaluation from the teacher We would appreciate your comments on our report and will definitely use that to better our future report Thank you Group 11 – 2021 ECONOMETRICS KTEE218.1 ABSTRACT First of all, economic growth is a decisive condition to promote the economic development of the country and the region All economies are required to achieve and maintain a certain level of growth in order to ensure the development of the former Japan and China today to become an economic power by achieving fast economic growth Vietnam has a GDP of 271.2 billion USD in 2020, with such a very low economic starting point, fast and sustainable economic growth in the long run is a decisive issue to not far behind from other countries in the region and catch up with them in the future If the current growth rate of 2.9 % per year is maintained, then in 24 years the size of GDP will double according to the rule of 70 Second, growth allows to solve social problems with the maintenance of high economic growth, an increase in the volume of GDP or GNP creating a material basis for the government to set and implement policies Social policies and programs aim at improving people's lives, eradicating hunger and reducing poverty, developing health and education, developing agriculture and rural areas, and limiting social evils Third, sustainable growth will contribute to environmental protection The exploitation and use of natural resources such as land, mineral water, oil, etc., and the formation and development of industrial zones and urbanization are carried out in a reasonably controlled manner and efficiency is not only increasing the scale and maintaining that scale increase over time, but also contributing to the protection of the environment On the other hand, when economic growth is fast, creating money to materialize to better protect the environment when financial resources are invested to develop new technology, clean technology, and regeneration Fourth, growth is the basis for the development of education and science and technology In the process of growth, education and technology are extremely important factors to promote the material premise for educational and scientific and technological development based on economic growth results ECONOMETRICS KTEE218.1 With such important issues as above, economic growth is always the top concern of economists and policy makers In recent years, developing countries have had many positive changes With the desire to learn about the factors affecting this important economic indicator, our team chose the following topic: Government expenditure of GDP, population, unemployment, inflation, and FDI inflow to explain the variation in GDP per capita of a country ECONOMETRICS KTEE218.1 INTRODUCTION In an era of peace, instead of an arms race, a nation's strength is affirmed on the economic aspect There are many indicators that have been proposed to assess the country's potential, in which GDP is the most popular name Although there are many controversies regarding GDP's inaccuracies due to the neglect of other externalities, such as resource extraction, environmental impact, etc Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period It is a reliable indicator to rank the economies of countries around the world, as well as to assess the development and progress of a country There are many different approaches to GDP, across production, spending or income Besides, there are also many previous studies on the impact of input factors on GDP as well as GDP per capita Although these studies are extremely valuable, most of them only focus on studying the impact of a single factor on GDP or GDP per capita, or are limited to a single territory Our research expands the scope of research to the whole world with more inputs, which are unemployment, inflation, government expenditure, population, FDI inflow In our study, we used data from The Heritage Foundation, and knowledge in econometrics to determine ways the above factors affect GDP per capita This study is important because it helps us to have a more general view of GDP per capita From there, we have made appropriate adjustments to policies in practice with the relatively low GDP and GDP per capita of some countries, increasing the competitiveness of the economies of developing countries, including Vietnam This report will contain three main section: Literature Review, Model Specification and Estimated the model and statically inferences ECONOMETRICS KTEE218.1 SECTION 1: LITERATURE REVIEW I Gross Domestic Product (GDP) GDP’s Definition GDP definitions are maintained by a number of national and international economic organizations The Organization for Economic Co-operation and Development(OECD) defines GDP as "an aggregate measure of production equal to the sum of the gross values added of all resident and institutional units engaged in production and services (plus any taxes, and minus any subsidies, on products not included in the value of their outputs)" (Anon., 2001) An IMF publication states that, "GDP measures the monetary value of final goods and services-that are bought by the final user-produced in a country in a given period of time (say a quarter or a year)." (Callen, Tim, 2016) The History of GDP William Petty came up with a basic concept of GDP to attack landlords against unfair taxation during warfare between the Dutch and the English between 1654 and 1676 (Anon., 2013) Charles Davenant developed the method further in 1695 (Coyle, 2014) The modern concept of GDP was first developed by Simon Kuznets for a US Congress report in 1934 In this report, Kuznets warned against its use as a measure of welfare After the Bretton Woods conference in 1944, GDP became the main tool for measuring a country's economy (Dickinson, n.d.) At that time gross national product (GNP) was the preferred estimate, which differed from GDP in that it measured production by a country's citizens at home and abroad rather than its 'resident institutional units' The switch from GNP to GDP in the US was in 1991, trailing behind most other nations The role that measurements of GDP played in World War II was crucial to the subsequent political acceptance of GDP values as indicators of national development and progress (Lepenies, 2016) A crucial role was played here by the US Department of Commerce under Milton Gilbert where ideas from Kuznets were embedded into institutions ECONOMETRICS KTEE218.1 The history of the concept of GDP should be distinguished from the history of changes in many ways of estimating it The value added by firms is relatively easy to calculate from their accounts, but the value added by the public sector, by financial industries, and by intangible asset creation is more complex These activities are increasingly important in developed economies, and the international conventions governing their estimation and their inclusion or exclusion in GDP regularly change in an attempt to keep up with industrial advances In the words of one academic economist, "The actual number for GDP is, therefore, the product of a vast patchwork of statistics and a complicated set of processes carried out on the raw data to fit them to the conceptual framework.” (Coyle, 2014) GDP became truly global in 1993 when China officially adopted it as its indicator of economic performance Previously, China had relied on a Marxistinspired national accounting system (Heijster, 2020) GDP can be determined in three ways, all of which should, theoretically, give the same result They are the production (or output or value added) approach, the income approach, or the speculated expenditure approach It is representative of the total output and income within an economy The most direct of the three is the production approach, which sums the outputs of every class of enterprise to arrive at the total The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things The income approach works on the principle that the incomes of the productive factors ("producers", colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes GDP (nominal) per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore, using a basis of GDP per capita at purchasing power parity (PPP) may be more useful when comparing living standards between nations, while nominal GDP is more useful 10 ECONOMETRICS KTEE218.1 Unemployment Rate and GDP per capita The relationship between unemployment and GDP is originally conducted by Okun’s (1962) states that the reduction of one per cent point in unemployment rate will result in increasing of output by nearly per cent Increase in unemployment rate will decrease the GDP of a country Higher jobless is because of the slower growth and less production in the country offer a less job opportunities to the citizen Inflation and GDP per capita Many studies have been conducted in different countries these countries may be developed or under developed or less developed so that the relationship between inflation and GDP could be found Every researcher found different results as according to their data Two theorists named as structuralists and monetarists have different at top of relationship between inflation and GDP Structuralists are of the view point that due to inflation the economic growth increases or decreases with same trend as the inflation increases or decreases While on the other hand monetarists argue that there is an inverse relationship While on the other hand monetarists argue that there is an inverse relationship between inflation and GDP of the country They are of the point that as the inflation increases the GDP of the country decreases in against of inflation If inflation decreases then GDP increases as according to inflation Many other researchers asserted in their researches that inflation leaves harmful impact on the economic growth of the country (Mallik and Choudhry, 2001; Bruno and Journal of Economics and Sustainable Development www.iiste.org ISSN 22221700 (Paper) ISSN 2222-2855 (Online) Vol.5, No.19, 2014 114 Easterly, 1998) Two other researchers conducted a research and found that there is positive relationship between disinflation and economic growth of the country (Ghosh and Phillips, 1998) One other researcher conducted a research and found that there is a negative relationship exists between inflation and GDP He is of the view point that there are extreme values which disturb the association between inflation and economic growth of the country (Dornbush, 1993) One of the researchers concluded that there is a different trend about inflation regarding economic growth A study was conducted by Khan and Qasim in (1998) which 13 ECONOMETRICS KTEE218.1 concluded that inflation has negative relationship with GDP of the country (Abid Hussain*, 2016) FDI Inflow and GDP per capita FDI has become much important for the economic growth of the country because due to FDI financial resources come in the country which reduces many hurdles such as unemployment, poverty and inflation rate Many economists called FDI with the name of economic boosting tool because it strengthens the economy of any country (Muhammad, 2007) FDI brings increment in employment opportunities in the country, increment in export rate, exchange of technology and mass production Adam and Tweneboah (2009) conducted a research in Ghana which concluded that there is positive relationship between FDI and Economic growth and suggested that this relationship will be beneficial for long run time period Abbas et al (2011) tried to find the relationship between FDI and GDP in SAARC member countries and found that overall there is a positive relationship exists between FDI and GDP of the country Another researcher asserted that there is a positive relationship between FDI and GDP They suggested that FDI can play pivotal role in the economic development of the country at that time when initial GDP and Human Capital of that country is sound (Wu and Chiang, 2008) Alfaro et al (2004) insisted after conducting a study that there is a positive relationship between FDI and economic development of the country They provided opinions that those countries which have sound financial system are capable to explore their resources when they receive FDI in their country (Nawaz, 2014) Our goal for this paper is to give a broad view on the relationships and impacts between some macro-economic index and GDP per capita of a country Both provided strong proof of the index being used and gave same results with other previous researches and our expectation Our paper is more specific because it discusses more macro-economic index and analyzes that have the largest effect on GDP Using these results, we can hopefully have some useful recommendations in other fields 14 ECONOMETRICS KTEE218.1 SECTION II: MODEL SPECIFICATION I METHODOLOGY Method used to derive the model We use the Ordinary Least Squares estimation method with the support of Stata software to derive the estimated model of our research Ordinary least squares (OLS) regression is a statiscal method of analysis that estimates the relationship between one or more independent variables and a dependent variable It estimates the unknown parameter in a linear regression model statistically And the method estimates the relationship by minimizing the sum of the squares in the difference between the observed and predicted values of the dependent variable configured as a straight line In this entry, OLS regression will be discussed in the context of a bivariate model, that is, a model in which there is only one independent variable (X) predicting a dependent variable (Y) However, the logic of OLS regression is easily extended to the multivariate model in which there are two or more independent variables (Poston) The linear regression model has to satisfy the basic assumptions in order to be best precise and provide the closest estimation to reality Then, according to the Gauss - Markov theorem, OLS is BLUE, which is stated for Best Linear 15 ECONOMETRICS KTEE218.1 Unbiased Estimator It is a linear function of a random variable, unbiased and has minimum variance in class of all such linear unbiased estimators There are consistent theories and methods which are created for regression by this method, which includes Analysis of Variance & Standard errors, Analysis of Covariance T-test and F-test are merely special cases in this process An advantage of using the OLS estimation is that it is simple to use and understand For instance, we can use it to estimate partial regression coefficients, test the joint effect of regression coefficients, and examine the joint significance of a group of variables and the linear combination of the regression coefficients smoothly Method used to collect and analyze the data The objective of our research is to determine which factors among the independent variables truly have a significant impact on the dependent variable, which means that we have to clarify the difference in the effect of government expenditure % of GDP, population, unemployment rate, inflation rate, FDI inflow that we choose to use in the model to the GDP per capita in different countries or continents Besides, we collect the macro-economies index of these variables, which is calculated, updated and released annually on the official website of The Heritage Foundation II Theoretical Model Specification Specify the model The GDP per capita (output per person) is affected by factors: government expenditure of GDP, population, unemployment rate, inflation rate, and FDI inflow Thus, we have the linear function as follows: GDPperCapita = β0 + β1GovtExpenditureofGDP + β2 Population + β3 Unemployment+ β4 inflation + β5 FDI inflow + ui We assume that this model satisfies the basic assumptions of the Classical Linear Regression Model, because we base on the previous researches other 16 ECONOMETRICS KTEE218.1 authors Thus, we can assume that the GDP per capita is a linear function of the independent variables chosen and we conduct methods to prove that Theoretical Relationship between Dependent Variable and Independent Variables We see that government spending policies like setting up budget targets, adjusting taxation, increasing public expenditure and public works are very effective tools in influencing economic growth Moreover, through the attraction of foreign investment capital, the direct investment country has favorable conditions to link the domestic economy with the international production, distribution and exchange system, promoting the process of economic integration Thus, there can be a positive relationship between Government expenditure, FDI Inflow and GDP per capita Meanwhile, Gross Domestic Product (GDP) per capita shows a country's GDP divided by its total population Besides, we assume the increasing unemployment rate also leads to strongly negative impact on the economy Finally, the effect of inflation rate on GDP per capita depends on other factors Thus, to clarify clearly the relationship between inflation rate and output per person, we have to base it on latter calculation and hypothesis testing III Data Source of Data The research data is aggregated from “2021 macro-economic data” in The Heritage Foundation with 90 samples in 2021 This index is collected and verified to be highly accurate annually and publicized on the official website Descriptive Statistics and Int erpretation for each Variables In this model, we use five independent variables which are: government expenditure of GDP, population, unemployment, inflation, FDI inflow to 17 ECONOMETRICS KTEE218.1 explain the variation in GDP per capita (a country’s economic output per person) We have collected 90 countries including ⅓ of the total countries having highest index of GDP per capita, 30 countries having average index and the left ones having lowest index in 2021 2.1 Government Expenditure % of GDP “Governments spend money to provide goods and services and redistribute income Like government revenues, government expenditures reflect historical and current political decisions but are also highly sensitive to economic developments Government expenditure provides an indication of the size of government across countries The large variation in this indicator highlights the variety of countries' approaches to delivering public goods and services and providing social protection This indicator is measured in terms of thousand USD per capita, and as percentage of GDP” (OECD, 2021) Like private investment, an increase in government spending results in an increase in national income Thus, its effect on national income is expansionary There is a limit to private investment Thus, to stimulate income the gap has to be filled up by government expenditure However, the increase in income is greater than the increase in government spending The impact of a change in income following a change in government spending is called government expenditure multiplier, symbolised by kG.The government expenditure multiplier is, thus, the ratio of change in income (∆Y) to a change in government spending (∆G) Thus,KG = ∆Y/∆G and ∆Y = KG ∆G In other words, an autonomous increase in government spending generates a multiple expansion of income How much income would expand depends on the value of MPC or its reciprocal, MPS The formula for KG is the same as the simple investment multiplier, represented by KI (Dutta, n.d.) Its formula (i.e., K G) is: ∆𝑌 = ∆𝑌 ∆𝐺 𝑜𝑟 = − 𝑀𝑃𝐶 − 𝑀𝑃𝐶 ∆𝐺 18 ECONOMETRICS Or 𝐾𝐺 = 1−𝑀𝑃𝐶 KTEE218.1 = 𝑀𝑃𝑆 The investment multiplier (𝐾1) is also the same 𝐾1 = ; 𝐾1 = 𝐾𝐺 − 𝑀𝑃𝐶 + Government Expenditure % of GDP = 𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝐺𝐷𝑃 𝑥 100 The mean value of this independent variable is 28 The standard deviation is approximately 9.13, score is 12.5 and max score is 50.6 2.2 Population The population of a given area is defined as the number of people usually living in that area, measured on January in a given year The source can be the most recent population census (a census is when the population is counted) Since a census is normally carried out every 10 years, a yearly adjustment has to be made in order to get the population number for a specific year This adjustment consists of the natural population change and the net migration The natural population change is calculated by births minus deaths and net migration is the number of immigrants (population moving into the country) minus the number of emigrants (population moving out of the country) - please see example below In some countries population registers are used instead (Anon., n.d.) The mean value of population among countries is 44.5 and standard deviation is 152.3378 Min population is 0.1 and the max one is 1397.7 2.3 Unemployment Rate The unemployed are people who are out of work and who are actively looking for a job The unemployment rate is calculated by dividing the number of unemployed people by the total number in the labor force, then multiplying by 100 Unemployment is an important issue in developing economies High 19 ECONOMETRICS KTEE218.1 unemployment means that labor resources are not being used efficiently (Meidani, 2011) Unemployment rate = 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝐿𝑎𝑏𝑜𝑢𝑟 𝑓𝑜𝑟𝑐𝑒 𝑥 100 For our data, we have calculated the mean value which is 7.3, standard deviation is 6.094, score is 0.1 and max score is 28.2 2.4 Inflation Rate Inflation is the decline of purchasing power of a given currency over time Inflation is measured in a variety of ways depending upon the types of goods and services considered Inflation rate is typically calculated using the inflation rate formula: (𝐶𝑃𝐼𝑥+1 −𝐶𝑃𝐼𝑥 ) 𝐶𝑃𝐼𝑥 𝑥 100 where CPI is consumer price index The formula requires the starting point (a specific year or month in the past) in the consumer price index for a specific good or service and the current recording for the same good or service in the consumer price index Subtract to find the difference between the two numbers.This difference indicates how much the consumer price index for the specific good or service has increased Divide those results by the starting price (the price reported for the date in the past rather than the current date) This will give you a decimal To convert this number to a percentage multiply by 100 This will give you the rate of inflation Inflation rate indicates an increase in prices When the average inflation rate reaches 100, it means that prices for the analyzed goods or services have doubled When it goes above 100, prices have more than doubled To help keep information clear, when rates escalate over 100, the BLS typically selects a new base year However, when CPI index is over 100, subtract 100 to determine how much prices inflated in that period of time Remember that the data is reflecting an increase on top of the originating price (Team, 2021) 20 ECONOMETRICS KTEE218.1 In this sample data, we found the mean of inflation is equal to 228.9%, the standard deviation is 2097.638%, minimum score is -3.2% and maximum score is 19906% 2.5 FDI Inflow Foreign direct investment net inflow is defined as the total value of inward overseas direct investment made by foreign entities, including nonresident investors It is therefore, investment coming into the domestic country or reporting economy The mean value of FDI Inflow in our sample data is 7,971.3, standard deviation is 30,994.82 The minimum score is -11,420.8 and maximum one is 246,215 2.6 GDP per capital GDP per capita is gross domestic product divided by midyear population GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources Data are in current U.S dollars The mean value of GDP per capita in our sample data is18, 004, standard deviation is 21,362.33 The minimum score is 984 and maximum one is 121,293 ... 12 Unemployment Rate and GDP per capita 13 Inflation and GDP per capita 13 FDI Inflow and GDP per capita 14 SECTION II: MODEL SPECIFICATION 15 I METHODOLOGY ... policies in practice with the relatively low GDP and GDP per capita of some countries, increasing the competitiveness of the economies of developing countries, including Vietnam This report will... (GDP) GDP? ??s Definition GDP definitions are maintained by a number of national and international economic organizations The Organization for Economic Co-operation and Development(OECD) defines GDP