(Tiểu luận FTU) THE IMPACTS OF SOME ECONOMIC FACTORS ON THE GDP GROWTH IN CHINA DURING 1994 2018

Among numerous factors that affect China’s economic growth, foreign direct investment such as ODA plays a vital role in the economics growth of China.. Within the scope of this report, w

FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS

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ECONOMETRICS REPORT THE IMPACTS OF SOME ECONOMIC FACTORS ON THE GDP GROWTH IN CHINA DURING 1994-2018

Group 3:

2 Nguyen Hoai Anh ID: 1814450013

Class: KTEE218(1-1920).1_LT

Instructors: Dr Nguyen Thuy Quynh

Dr Vu Thi Phuong Mai

Hanoi, September 2019

TABLE OF CONTENTS

ABSTRACT 4

INTRODUCTION 5

SECTION I OVERVIEW OF THE TOPIC 7

1 Definition and related economic theories 7

1.1 Definitions explanation 7

1.2 Related economic theories 7

1.2.1 Mercantilism 7

1.2.2 Neoclassical Theory 7

1.2.3 Harrod – Domar Theory 8

1.2.4 Supply and Demand Theory 8

2 Literature Review 9

2.1 Related public 9 researches

2.2 Research gaps 10

2.3 Research hypothesis 10

SECTION II MODEL SPECIFICATIONS 12

1 Methodology 12

1.1 Method used to collect and analyze data 12

1.2 Method used to derive the model 13

2 Theoretical model specification 13

2.1 Model specifications 13

2.2 Variables description 14

3 Data description 15

3.1 Data resources 15

3.2 Statistics description 15

3.3 Correlation matrix between variables 16

SECTION III ESTIMATED MODEL, HYPOTHESIS TESTING AND RECOMMENDATIONS 18

1 Estimated model 18

2 Hypothesis testing 19

2.1 Test the significance of individual regression coefficients 19

2.2 Test the significance of sample regression model 21

3 Recommendations 22

CONCLUSION 23

REFERENCES 24

APPENDIX 25

1 The dataset of GDP Indicators of China over the course of 25 years from

1994 to 2018 25

2 The Stata estimation outputs 26 INDIVIDUAL ASSESSMENT 28

Prior to the initiating market reforms and trade liberalization nearly 40 years ago, China maintained policies that kept the economy under poverty, stagnant, centrally controlled and vastly inefficient Since opening up to foreign trade and investment and implementing free-market reforms in 1979, China has become one of the world’s fastest-growing economies, with real annual gross domestic product (GDP) growth averaging 9.5% through 2018 (according to World Bank) Among numerous factors that affect China’s economic growth, foreign direct investment such as ODA plays a vital role in the economics growth of China By utilizing these investments reasonably, China’s economy growths faster every day However, China is also dominated by others like inflation and unemployment Within the scope of this report,

we will discuss about how foreign direct investment, inflation, unemployment, total reverse and trade rate affect the whole economy of China.

When it comes to study about the economy, GDP (Gross Domestic Product) is the talked-about word in the economy Its main function is to track the health of a nation’seconomy When compared with prior periods, GDP could tell us whether the economy isexpanding by producing more goods and services, or contracting due to less output

most-Researching on factors affecting GDP is a necessary and practical topic, especially whilethe globalization is happening in an open economy Besides, in recent years, China has

embraced one of the fastest economic growth, making it an upper middle-income country

For that reason, our group finally decided to choose the topic “Factors affecting the GDP growth of China over the course of 25 years from 1994 to 2018”.

Based on previous research topics of authors from all over the world such as: WorldBank, the International Monetary Fund,… with the purpose of understanding elementsaffect growth rate of a country, having an overview on GDP and proposing solutions

to promote economic growth

Our group’s purpose when doing this paper is to seek whether the relationshipbetween the GDP growth representing of economic growth and the followingexplanatory variables: Unemployment Rate, Inflation Rate, Foreign DirectInvestment, Total Reserve (gold included) and the Trading Rate truly exists Since, aregression model is built up so as to test and prove our initial hypothesis To sum up,our objectives of this paper are following:

To construct an econometric model that will be relevant to the GDP growth towards China and analyze the results from regression model

To determine whether Unemployment Rate, Inflation Rate, Foreign Direct Investment, Total Reserve and Trading Rate are significant indicators for GrossDomestic Product in the China by using econometric theories and principles

To give an insight on what China should do in order to increase the GDP

as well as the economic growth rate

The main source of the data used for this paper is from World Bank whose data set is available until 1960 up to present, however, our group scope of the topic spans over 25

- year period from 1994 to 2018 The data specifically have the setting on China

Annual data was obtained for each variable that is going to be used for the study

During the process of making this report, we tried to get the best result butdefinitely inevitably made mistakes, looking forward to your comments so that ourteam could be better than this report We are sincerely thankful

After conducting the research, our group hope to prove the hypothesis that GDP has asignificant relationship with the given factors comprising unemployment rate,inflation rate, foreign direct investment, total reserves (gold included) and the tradingrate Our implementation results are detailed in three major sections that are:

Section 1: Overview of the topicSection 2: Model specificationSection 3: Estimated model, hypothesis testing and recommendations

SECTION I: OVERVIEW OF THE TOPIC

1 Definitions and related economic

theories 1.1 Definitions explanation

GDP is an economic term short for Gross Domestic Product which is one of the mostcommon indicators used to track the health of a nation’s economy GDP is a

monetary measure representing the total market value of all final goods and services produced within a nation’s territory scope in a specific time period, often annually

GDP can be calculated in three ways, using expenditures, production, and incomes

It can be adjusted for inflation and population to provide deeper insight

The common formula of GDP is:

Y=C+I+G+NX=C+I+G+(X-M)

In which:

C is the household final consumption expenditure

I is the general investment of business enterprises (without exchanges of existing assets and purchasing financial products)

G is the sum of government expenditures on final goods and services X represents gross exports

M represents gross imports

GDP growth rate measures how fast the economy is growing It usually does this

by comparing either one quarter of the country’s GDP to the previous quarter or one year to the previous year Due to its components GDP growth rate has a largelyimpact on the economic development of a nation

1.2 Related economic theories

1.2.1 Mercantilism

Mercantilism is an economic theory and practice common in Europe from the 16th tothe 18th century that promoted governmental regulation of a nation’s economy for thepurpose of augmenting state power at the expense of rival national powers

Mercantilism contained several interlocking principles Precious metals, such as gold

or silver, were deemed to indispensable to a nation’s wealth If a nation did notpossess mines or have access to them, precious metals should be obtained by trading

Therefore, it was believed that trading balances meaning exports excessing importsrelatively affect the economic growth Basically, this theory argued that a countrycould be made better off by seeking to accumulate gold, increasing exports combiningwith minimizing imports

1.2.2 Neoclassical Theory

GDP growth or economic growth supply-side factors such as labor productivity, size ofthe workforce and factor inputs The neoclassical theory suggested that the increasingcapital or labour leads to diminishing returns Therefore, increasing capital or labour

force has only a temporary and limited impact on increasing the economic growth Ascapital increase, the economy maintains its steady - state rate of economic growth.

According to the Solow/Swan model, to increase the rate of economic growth, we need:

An increase in proportion of GDP that is invested, however, this is limited due

to the fact that higher proportion of investment leads to the diminishing returns and the convergence on the steady - state of growth

Technological progress that increases the productivity of capital and labour

It suggests that poor countries investing more should see their economic growth converge with richer countries

However, this theory still has some limitations that were indicated:

It does not explain why countries have different levels of investment

as proportion of GDP

Some developing countries do not attract higher levels of investment because of structural problems such as corruption or lack of infrastructure

It does not explain how to improve rate of technological progress

1.2.3 Harrod - Domar Theory

“The most necessary condition for the growth of an economy is that the demand createddue to newly generated income should be sufficient enough, so that the output produced

by the new investment should be fully absorbed”, said by Harrod - Domar Theory

Harrod - Domar theory is considered as the extension of Keynes’s short-term analysis

of full employment and income theory The Harrod - Domar growth model provides along - term theory of output According to this theory, capital accumulationconstitutes a major factor for the growth of an economy, meaning that the capitalaccumulation not only generates the income but increases production capacity of theeconomy as well As results, the newly generated income from capital accumulationproduces demand for goods and services Then if the output produced by the newinvestment is fully absorbed, there would be excess or idle of production capacity

This condition should be satisfied consecutively to maintain full employment leveland achieve steady economic growth in the long term

1.2.4 Supply and Demand Theory

Last but not least, the seemly simply theory and graph of supply and demand of AlfredMarshall (in Mankiw, 2006) is truly supportive our study As we already knew, thistheory illustrated the relationship between either supply or demand and the price in themarket of goods and services, which has a relatively much correlation with the GDPgrowth Specifically, supply theory indicates the positive relationship between quantitysupplied and the price of goods and services, which means the higher the price is, themore goods and services produced and vice versa Meanwhile, demand theory suggeststhe inverse relationship between quantity demanded and the price of goods and services,meaning that the higher the price is, the less people want to buy goods and services and

vice versa Due to our chosen factors that are relatively correlative with the supply anddemand while they have impact on the GDP, we believe this theory could be wellapplied in our explanatory variables and research results.

2 Literature review

2.1 Related public researches

Many previous studies have been issued to point out the factors affecting GDP:

Studies about the relationship between inflation and GDP:

After the research of Sidrauski (in 1967) suggested that there is no relationshipbetween inflation and economic growth, Fischer’s research in 1983, which is a part ofthe NBER’s research program in Economic Fluctuations, using the model introduced

by Sidrauski, stated that the relationship between these two variables is negative Heargues that higher the inflation rate, lower investments and productivity which related

to lower outputs produced, lower economic growth (GDP)

The same result of negative impacts of inflation rate on the growth of the economicwas drawn in a study of Barro in 1995 after examining the data of almost 100countries for the period between 1960 and 1990 He also showed that even if inflationhas a small impact on growth, this appears to be significant in the long run

Bruno and Easterly found in their research in 1996 that the mentioned relationshipexists only if inflation rates are high Such conclusion was also drawn by Mubarik in

2005 The two researches estimated a threshold level of inflation The inflation abovethis level will cause the negative relationship, but only temporally, and the inflationbelow this level will lead to economic growth

The relationship between inflation and GDP was once again studied by Ghosh andPhillips in 1998, for a large set of IMF countries for the period from 1960 to 1996

The relationship appeared to be negative for very low inflation rates (around two tothree per cent) A negative correlation was also found for higher values but therelationship was convex

Mallik and Chowdhury’s study in 2001 found a positive relationship between inflationand economic growth, while Umaru i Zubariu, in his research in 2011, claimed that GDP(economic growth) is the cause of inflation In 2012, Mamo showed that the relationshipbetween the two phenomenon may be positive, negative and neutral and stated that thequestion is not whether there is a positive or negative relationship but is at which levelwill the effect of inflation to the economic growth be positive or negative

Studies about other factors that affect the GDP:

Recent economic researches revealed that the economic growth is affected by variousinternal factors of the economic system Study of Mervar in 1999, performing regressionevaluation for a large number of countries, claimed that growth was linked with thefollowing economic preconditions: high level of savings and investment, well-

educated labour force and other arrangements that allowed abridgement of existingtechnology gaps.

In 2005, Kitov proposed a model of GDP growth which stated that the growth of GDPdepends only on the change in a specific age group in the population and the attainedlevel of real GDP per capita The real GDP per capita with time, in developedcountries, usually increase with a straight line if there is no significant change in thespecific age population observed in a certain period

be seen in the long term, the consumers tend to spend more, which make the GDP ratehigher Not any cases in which inflation puts a negative impact on the GDP growth This

is the reason why previous researches did not give enough evidences to their studies Inour paper, we established a study with a time - series of 25 years long enough toexemplify the effect of inflation rate especially in China - the country have a relativelyimpressive growth rate of GDP Moreover, in fact, inflation actually affects the supplyand demand of goods and services markets, meaning that the change in inflation rateleads to the quantity supplied and demanded respectively Meanwhile, GDP is stronglycorrelative with the supply and demand of goods and services Therefore, it is undeniablethat inflation has impact on the GDP growth to some extent Besides, we also putted theinflation rate in observation together with other four indicators, which make us easier toillustrate the relationship between them

2.3 Research hypothesis

After studying theories and referring to previous studies related to the topic, we have searched and synthesized hypotheses to study the factors affecting GDP of China:

Unemployment Rate: It’s been noticed that the amount of outputs produced in

the economy is closely depends on the amount of labor used in the productionprocess, so there is positive relationship between output and employment Since the total employment equals the labor force minus the unemployed, then there is conspicuously a negative relationship between output and unemployment

=> the hypothesis is: Unemployment rate has a negative relationship with GDP Higher the rate of unemployment, lower the GDP.

Inflation Rate: Considering the contradictions of previous studies on the

relationship between two phenomena of the economy, inflation and GDP, a study

of Mario Švigir, Josipa Miloš in 2017, based on the actual data and experience

of Italy and Austria, once again redefines whether there is a relationshipbetween the two phenomena in these two countries Coincidentally, they foundthe coexistence of decrease in inflation rates with the recovery of the economy

of both two countries, and the increase of inflation rates with the slowing down

of the economy growth But the result collected from the regressive analysisstated that there is no effect of inflation on GDP So the economic growth isnot dependent only on the low rate of inflation but also on various of otherfactors of the economy and the government’s policies In this paper, we onceagain put this issue to a large country - China

=> Our hypothesis is the negative relationship between inflation and GDP, high inflation rate refers to the slowing down of GDP.

Foreign Direct Investment: FDI is an important tool for the transfer of

technology between countries, contributing relatively more to economic growththan domestic investment So FDI has the effect of increasing total investment

in the economy which leads to the increase in the outputs produced in the

economy Therefore, we make a hypothesis of positive relationship between FDI and GDP Increase in FDI refers to increase in GDP.

Total Reserves: the assets that a bank has immediately available to cover its liabilities Total reserves are negatively related to GDP Increase in total reserves leads to decrease in GDP.

Trading Rate: the special price of trading offered to retailers by wholesalers,

manufacturers, or distributors, by a seller to individuals or organizations in a

related industry, by another country to China The relationship between trading rate and GDP is positive Higher the trading rate, higher the GDP.

SECTION II: MODEL SPECIFICATIONS

1 Methodology

1.1 Method used to collect and analyze data

Recognizing the importance of researching the GDP growth dependence onother factors, our group looked at previous researches, and related economic theories,indicated the pros and cons of these researches in order to generate a model which notonly has higher generality but also could tackle the problems caused by the limitationsand obviously promote the strengths of the previous models

Regarding data collection method, our group makes the most of, processes andanalyzes the secondary public data set from the World Bank, in which the statisticsare available from 1960 to the present, 2019

According to our research and references, one of the relatively complete studies

on assessing the factors affecting the GDP growth is the study presented by the authorCenteno, Alexander M in December 18, 2012 In this study, the author chose toanalyze the following variables: Household of Final Consumption Expenditure,Imports of Goods and Services, and Claims on Central Government His study resultsindicated that Households of Final Consumption Expenditure have a directly positiverelationship with GDP growth while Imports of Goods and Services have an indirectlynegative relation with GDP growth; and at last, Claims on Central Government has acontradictory to its a - priori that it should be negatively related towards GDP growth

as the same study by Elizabeth Kowalski, in her work “Determinants of EconomicGrowth in East Asia: A Linear Regression Model states that it was unexpected to havethis kind of results This can also be the result because of its relationship withgovernment investment As the debts increase because from loaning then economicgrowth could be seen if borrowing involved for production and economic progresspurposes.” (Kowalski, 2000) The author used the linear regression model with thegiven independent variables within a time - series data of 30 years from 1980 to 2010

The results are unquestionable, however, due to the obvious relationship of the GDPgrowth with independent variables, it is thought to be not much helpful

Inheriting the previous research ideas and achievements, our group decided tostudy the GDP growth with some changes as following:

In the model, we did not include the variables that Alexander M used in hisstudy as Household of Final Consumption Expenditure, Imports of Goods andServices or Claim on Central Government because they are too obvious to analyze

Instead, we replace by the variables having relatively similar functions as ForeignDirect Investment, Total Reserves and Trading Rate Besides, we also discussed anddecided to add two other factors that are Unemployment Rate and Inflation Rate due tothe aforementioned related economic theories in the previous part.

1.2 Method used to derive the model

As we have learned, STATA plays an important role in supporting us to derivethe model After researching, we inserted the collected data into a excel sheet in order

to run the commands needed to test our hypothesis

2 Theoretical model specification

2.1 Model specifications

According to the reference of the previous studies, our group established a general linear regression function to carry out the research purpose The general linear regression function consists of one dependent variable and five independent variables.

In which:

: the intercept term of the model : the regression coefficient of the “Unemployment rate” UEM : the regression coefficient of the “Inflation rate” IFT

: the regression coefficient of the “Foreign direct investment” FDI : the regression coefficient of the “Total reserve” TR

: the regression coefficient of the “Trade rate” trade

u : the disturbance term of the model, represents other factors that affect GDPgrowth but not mentioned in the model

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The sample regression model

Dependent variable

1 GDPgrowth GDPgrowth Quantitative measurements of GDP annually for the

country of China for 15 years of 1994 - 2018Independent variable

2 UEM unemployment The percentage of unemployed workers in the total

labor force consisting of all employed andunemployed people of China within 25 yearsIndependent variable

3 IFT inflation an overall increase in the Consumer Price Index (CPI),

which is a weighted average of prices for differentgoods

Independent variable

4 FDI foreign direct an investment made by a firm or individual in other

investment countries into business interests located in China in

1994 - 2018

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