The Effects of Inflation Change and Increase in Investments in GDP Growth in US - Lab Report Example

The Effects of Inflation Change and Increase in Investments in GDP growth in US February Table of Contents Table of Contents 2 List of Tables 2List of Figures 2 Statement of the Problem 3 Data 3 Model Formulation 3 Descriptive Statistics 4 Model Estimation 4 Conclusions 11 Reference 12 List of Tables Table 1: Model 1 Heteroskedasticity Test 4 Table 2: Model 1 table of Estimates 5 Table 3: Model 2 Heteroskedasticity Test 7 Table 4: Model 2 Table of Estimates 8 Table 5: Model 2 Heteroskedasticity Test 9 Table 6: Model 3 Table of Estimates 10 List of Figures Figure 1: GDP growth over the years 4 Figure 2: Histogram of Residuals for model 1 5 Figure 3: Model 1 Line of Best Fit 6 Figure 4: Histogram of Residuals 7 Figure 5: Line of Best Fit of Model 2 9 Figure 6: Residuals Plot for Model 3 10 Statement of the Problem The paper wishes to test the impacts of total investments (in billion dollars) and the rate of change of inflation from one year to the other. Increasing inflation rate means slowing growth in GDP since the prices of commodities and services increase gradually while the strength of the currency weakens. Further, increase in investments leads to higher growth due to market confidence and the increase of physical resources. Data To analyze the problem further, secondary data which is downloadable from: http://www.wto.org/english/res_e/statis_e/quarterly_world_exp_e.htm and made up of three variables; the GDP (in billion dollars based on 2005 chained dollar), the change in inflation rate and investments in Billion Dollars was used. Model Formulation In this case, three models will be estimated and they include; GDP =β+β1I…………………………………………………………………..1 GDP =β+β1IR………………………………………………………………..2 GDP =β+β1I+β2IR……………………………………………………………3 Model 1 aims at determining whether an increase in investments leads to an increase in GDP, and the hypothesis is; H0: Increase in Investments leads to an increase in GDP H1: Increase in Investments does not lead to an increase in GDP Model 2 aims at determining the impact of change in inflation rate on GDP, and the hypothesis is; H0: An increase in inflation rate leads to a decrease in GDP H1: An increase in inflation rate does not lead to a decrease in GDP Model 3 on the other hand aims at determining the impact of change in inflation rate and increase in investments on GDP, and the hypothesis is; H0: A decrease in inflation rate and an increase in investments lead to an increase in GDP H1: A decrease in inflation rate and an increase in investments does not lead to an increase in GDP Model 3 is referred to as the full model (since it contains all) Descriptive Statistics The mean GDP change is 5,164.25 billion dollars with a standard deviation of 3,777.53 billion dollars. The mean of investments is 3305.083 billion dollars with a standard deviation of 4201.91 billion dollars while inflation rate change has a mean of 4.27% and a standard deviation of 4.35. Figure 1: GDP growth over the years Model Estimation GDP =β+β1I The first step in this model estimation is carrying out a heteroskedasticity test. Table 1: Model 1 Heteroskedasticity Test The test above shows that the model has unrestricted heteroskedasticity [Chi-square = 11.07, p = .0039] and thus the robust standard errors are used to minimize heteroskedasticity effects (see figure 2 also). Figure 2: Histogram of Residuals for model 1 Table 2: Model 1 table of Estimates From table 2, the model estimated is; GDP = 2285.498 + .871I……………………………………4 From equation 4, a unit increase in investments leads to .871 units increase in GDP; one billion dollars of investment leads to 871 million dollars growth in GDP. Testing investment coefficient Investment = 0 F (1, 79) = 1209.53 Prob > F = 0.0000 The coefficient of investment is found to be significant at .05% level of significance [F (1, 79) = 1209.53, p F = 0.0075 The coefficient of inflation is found to be significant at .05% level of significance [F (1, 78) = 7.53, p = .0075] Test investment estimate Investment = 0 F (1, 78) = 860.43 Prob > F = 0.0000 The coefficient of investment is found to be significant at .05% level of significance [F (1, 78) = 860.43, p Read More