Factors Determining Economic Growth Rate

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Why does economic growth rate vary across countries over long periods of time? There have been a large number of empirical studies that attempt to address this question by identifying the underlying factors that determine this rate of growth. Most of these empirical studies have in common that only a few explanatory variables are included in their analysis but differ in the variables selected. This study will include some of the more common variables found in previous papers such as; investment ratio, government expenditure, inflation, openness ratio, life expectancy and fertility, but differs by the additions of foreign direct investment, education expenditure and health expenditure variables in the analysis. The motivation behind the inclusion of these specific explanatory variables is due to the lack of conclusive findings in past literatures and to examine if these variables have a significant effect on the growth rate GDP per capita. This paper differs to existing literatures in that the pooled countries used in the study will be split into two additional OLS regressions categorised by 34 OECD member countries and 34 developing countries. The purpose of this is to see if there is clear evidence of the relationships between the variables and the economic growth rate of the two groups and how they differentiate. The paper will be split into five sections; the next section will consist of an analysis and comparisons of past studies in the form of a literature review. The third section will explain the key variables and data for this study along with some preliminary analysis in the form of a descriptive statistics table and a correlation matrix. The fourth section will cover the specific methodology including the reasoning behi... ... middle of paper ... ...ator used for his regressions are in fact robust and his results suggest that a more open country will experience faster productivity growth, thus enhancing the economic growth rate. Historically, academics and policy maker have devoted enormous amounts of energy to the question of whether openness is good for growth. Most evidence is based on regression analysis but these are heavily affected by endogeneity issues. A paper of significance by Rodriguez and Rodrik (2000) criticises the conclusions of a number of statistical studies that openness is associated with higher growth rates. They show that openness in the sense of liberal trade policies seems to have no guarantee on faster growth rates. In the main, they state - “the nature of the relationship between trade policy and economic growth remains a very much open question” (Rodriguez and Rodrik, 2000, p.266)
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