Econometrics Final Paper

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When analyzing a country’s success, a major indicator of the country is its economic growth. One of the most common ways to gauge a country’s economic growth is the gross domestic product, which is the measure of a country’s overall economic output and for this review we will be using GDP as the dependent variable. GDP is defined as the value of all goods and services produced in a country within a given year. A 2011 estimate ranks Germany as number six in the world when it comes to GDP. A major contributor to Germany’s GDP is its exports, which account for a little more than a third of its GDP and is why we will be studying the results that exports have on it. Germany is a leading exporter of machinery, vehicles, chemicals and benefits from a highly skilled labor force. The main hypothesis for this review will be that the explanatory variable exports will influence the dependent variable GDP because the more Germany exports, the higher its GDP will be. The relationship between exports and GDP growth has be analyzed by various economist and empirical studies. In his article “Exports and Economic Growth In Sub-Saharan Africa”, Ousmanou Njikam discusses whether exports and economic growth are correlated in Sub-Saharan Africa. For most of the Sub-Saharan African countries the 1980s were a decade of slow or negative growth in GDP due to worsening balance of payments, debt and financial crises and declining competitiveness. Because of this, almost all SSA countries initiated economic reforms in the form of export-led growth. The objective of his article is to examine whether there is a causal relationship between exports and economic growth. In order to clarify whether exports cause economic growth, Njikam uses the Granger-causality test by estimating the bivariate autoregressive process for GDP and exports. His results show bidirectional causation between real GDP and total exports in Cameroon, Cote-d’Ivoire and Benin. Therefore in these countries, the economic growth and total exports were complementary. Furthermore, in a study by Abhijit Sharma and Theodore Panagiotidis, they examine exports and economic growth in India from 1971-2001 in their article called “An Analysis of Exports and Growth in India. The focus is on GDP growth and data used from the Reserve Bank of India and investigate empirically the relationship between exports and GDP. To test the hypothesis of whether exports and GDP are related, they use both the Engle-Granger and the Johansen approach. Furthermore, the most relevant hypothesis they test is whether export growth Granger causes GDP growth. The way they test this hypothesis is by performing the Granger causality technique that was mentioned earlier, but the results show that they fail to find support for the argument that exports Granger cause GDP. Although these studies find two different results as to whether exports increase GDP growth, I firmly believe that Germany’s exports increase their GDP growth because they account for a little more than a third of its GDP. In addition to exports, I believe there are some alternative influences to GDP growth that can be used as additional explanatory variables, such as foreign direct investment inflows and exchange rates. Germany has been a global leader when focusing on exports and this data analysis sets out to prove that exports have a strong positive relationship on the outcome of the GDP in Germany. When it comes to FDI inflows, I would expect it to have a positive relationship on GDP growth because the money being invested in the economy will allow it to produce more goods or services. Exchange rates can either have a positive or negative effect on GDP growth. If a country has a weak exchange rate, then it means their currency does not give them as much money against another country. On the other hand, if a country’s currency is strong then they can get more money from their currency against another. For example, consider the US dollar versus the...
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