survey questions

Introduction to Study 8

Research Method (Spring 2017)

Raha Albeshr

3/29/17

Determinants of Economic growth in United States

Introduction

Economic growth is often considered as Holy Grail of economic policy. However, economic growth is criticized because of its limitations as it do no improve living standard. Some researchers suggest that rather than economic growth we should measure economic development. Economic Development can be measured through Human development Index. But it is true that economic growth has its own importance. It tells us if businesses are growing and prospering or not. It tells about the output of a country. And the growth is measured by GDP growth rate of a country. Gross domestic product is mainly used to measure economic growth, however there are many other variables that measure the economic growth of a country such as national income, investment, exports and education etc.

If we look at demand side we will understand that economic growth takes place by increase in aggregate demand in short term. The increased aggregate demand leads to higher level of real GDP. Economic development as compare to economic growth is considered as broader term. Economic development refers towards the quality of life of the citizens living within the country. Whereas economic growth as mentioned before measure output and earning of a country.

Background

According to World Economic forum 2016, the fastest growing economies in the world are Myanmar, Ivory Coast, Bhutan, India etc. (Myers, 2016) There are many model and theories that explain economic growth and its pattern such as Solow –Swan model. Solow –Swan model is an exogenous growth model. This model explain the economic growth in long run. It is associated with neoclassical economics. It is built upon the foundation of neoclassical aggregate production function such as Cobb Douglas. In this way this model is connected to the microeconomics. (Solow, 1956)

According to a classical growth theory economic growth is dependent on population and resources to an extent that if population will increase more than a certain limit then it will lead to depletion of natural resources which in turn will diminish economic growth.

Purpose of Study

In this paper the determinants of economic growth in United Stated has been analyzed, these determinants are evaluated on the basis of the results.

Literature Review

The economic growth is being analyzed for a long time and vast literature exists related to the economic growth of different countries. The researchers have identified different determinants for short run and long run economic growth. The research on the reasons behind economic growth still continues today as with time the economies of the world are undergoing significant changes. So researcher are working to identify different factors that can help a country to adopt a way of rapid development just like China, Japan and East Asian Tigers.

Asheghian (2010), found out the determinants of economic growth in United States. He particularly analyzed the role of foreign direct investment which is growing continuously in Unites States. Many researchers are interested to know the impact of foreign direct investment on the economic growth of a country. Vast literature in the context of United States is based on measuring the domestic variables that has impact on economic growth of United States. The impact of foreign direct investment was not given much attention. In this study the determinants of economic growth in United States has been examined in overtime. The time series data has been used for this purpose. The model based on the features of de Mello are used in this study. The data of 40 years has employed. Beach Machinnon techniques has been used for model estimation. The major determinants that has identified in the study include total factor production growth, foreign direct investment growth, and domestic investment growth. Unidirectional causal relationship has been found between foreign direct investment growth and economic growth. Similarly, unidirectional causal relationship has been found between foreign direct investment growth and total factor productivity. The findings conclude that foreign direct investment growth has significant impact on economic growth of United States. Moreover, foreign direct investment growth has also significant impact on total factor productivity. So it is suggested to policy makers of United States to form policies that will promote foreign direct investment in the country.(Asheghian, 2010)

Barro (1996), empirically found out the determinants of economic growth in 100 countries. The time period selected from 1960 to 1990. So that data collected was panel data. The variables used were real per capita GDP, schooling, life expectancy, lower fertility, rule of law, inflation and terms of trade. Political freedom depicts weak impact in growth as well as nonlinear relationship is detected between these two variables. However, the standard of living has shown strong impact on country’s propensity to develop democracy. (Barro, 1996)

Gregorio (1992), analyzed the determinants of economic growth in 12 Latin American countries. The selected time period is 1950-1985. The share of labor in growth is found to be lower in sample countries than other developed countries. However, the factor productivity growth has largest share of growth in the countries that are growing fast. The panel data has used in the study. The results shows that macroeconomic stability plays crucial role in economic growth of latin American countries along with investment (which include physical and human). The political instability and government consumption are negatively correlated to the growth of the selected countries. The terms of trade has not significant impact on economic growth of a country. ( Gregorio, 1992)

Bloom Canning & Servilla (2001), analyze the impact of health on economic growth. The contribution of human capital to economic growth is significant. Empirically human capital is defined only by schooling. This study expand the production function models of economic growth by adding two additional variables that are basic components of human capital. These variables are work experience and health of human beings. The results conclude that good health leads to high economic growth. The schooling also has significant impact on economic growth of a country and its national output. ( Sevilla, Canning, & Bloom, 2001)

Nelson (1966), identified he role of investment in humans, technological diffusion on economic growth of a country. The role of education, vocational training and higher education is no doubt very significant in the economy as it enables man to work efficiently and also creates employment opportunity. Education enhance the information and learning. For past few years economic growth theory has been concentrating on the role of education and how is it related to increase in employment opportunities. Vocational training plays very important role in increasing labor productivity.

The literature emphasized greatly on the economic growth and its determinants in different counties. ( Phelps & Nelson, 1966)

Research Question

Our research question is what are the determinants of economic growth in United States?

Data Sources

The data we are going to use will be collected from World Development Indicators, Frasers Institute & Pen Table.

Hypothesis

Our hypothesis is, increase in productivity will increase the economic growth of a country.

Variables

The variables we are going to use are

References

Easterly, W. (1993). Fiscal policy and economic growth An empirical investigation. Journal of Monetary Economics.

Gregorio, J. D. (1992). Economic growth in Latin America. Journal of Development Economics, 59-84.

Phelps, E., & Nelson, R. (1966). Investment in Humans, Technological Diffusion, and Economic Growth. The American Economic Review, 56(1).

Sevilla, J., Canning, D., & Bloom, D. (2001). The Effect of Health on Economic Growth: Theory and Evidence. NBER.

Asheghian, P. (2010). DETERMINANTS OF ECONOMIC GROWTH IN THE UNITED STATES: The Role of Foreign Direct Investment. The International Trade Journal, 63-83.

Barro, R. (1996). Determinants of Economic Growth: A Cross-Country Empirical Study. NBER.

Myers, J. (2016, Apr 18). Which are the world’s fastest-growing economies? Retrieved from World Economic Forum: https://www.weforum.org/agenda/2016/04/worlds-fastest-growing-economies/

Rapport, H., Docquiera, F., & Beinea, M. (2001). Brain drain and economic growth: theory and evidence. Journal of Development Economics, 64(1).

Solow, R. (1956, Feb 01). A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics, 70(1), 65-94.

Zervos, S., & Levine, R. (1998). Stock Markets, Banks, and Economic Growth. The American Economic Review.