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 behind the proposed econometric model and the results of the regressions will be presented followed by an in-depth analysis of the findings. Finally, the last section will be the conclusion where the overall paper will be summed up.
Chapter - 2 Literature Review
Here some past literature on the topic of this paper will be introduced. The main theories and determinants believed to have an effect on the economic growth rate will be discussed in turn. In addition the empirical findings of these studies will be discussed.
2.1 Exogenous vs Endogenous Growth Theories
Exogenous growth theory originated from the Harrod-Domar model in 1946. This theory suggests that the rate of growth of GDP is determined by two factors; the savings ratio and the capital input ratio. This model came under criticism by economists as an assumption was that capital and labour are fixed. Subsequently, this lead to the development of the Solow-Swan model which introduced labour as an additional factor and they relaxed the assumption of the Harrod-Domar model. The basic neoclassical growth theory developed by Solow (1956) and Swan (1956) is centred on the idea that, a steady economic growth rate is achieved through three main driving forces; labour,...