Consider the following regression equation: GRO= a+ b1PPP+ b2BNK+ b3TRD+ b4SSE+
ID: 1114545 • Letter: C
Question
Consider the following regression equation:
GRO= a+ b1PPP+ b2BNK+ b3TRD+ b4SSE+ b5GOV + b6INF+ u
What sign, if any, do you expect each of the coefficients b1 to b6 to take? Explain your reasons.
A. GDP per capita growth (annual %) [GRO]
B. GDP per capita, PPP (constant 2011 international $) [PPP]
C. Trade (% of GDP) [TRD]
D. School enrollment, secondary (% net) [SSE]
E. General government final consumption expenditure (% of GDP) [GOV]
F. Inflation, GDP deflator (annual %) [INF]
G. Domestic credit to private sector by banks (% of GDP) [BNK]
H. Investments financed by banks (%) [PIB]
Explanation / Answer
b1 should be +ve since GDP per capital PPP is a reflection of GDP and should be positively aligned to GDP per capita
b3 is also positive since with trade efficiencies increases and has a positive impact on GDP growth
b4 should also be positive since higher education resulting into technological progress and higher innovation leading to higher growth
b5 should be positive as with government spending increases it gives boost to infrastructure ,social benefits and resulting into higher investment by private sector resulting into higher growth
b6 should be negative as hugher inflation decrease the real GDP per capital growth as it also leads to monetary tightening by central banks leeding to lower capital availablity and lower growth
b2 Domestic credit will increase spending and hence in return will bosst GDP hence it should be +ve
Investments financed by the bank also increase capital and increases GDP growth