Econometrics Essay

3272 words - 14 pages

MacLaren Dudley
4/21/14
China’s Economic Emergence

Introduction
China and Japan both posses major economies that produce a high annual Gross Domestic Product. The two countries consistently hold the second and third highest GDP’s after the United States of America. Recently, China has overtaken Japan and is now producing the second highest GDP overall. An investigation into the history of the two countries’ forms of governments and economic strategies sheds light on how this change came to fruition. When World War II ended these two countries adopted polarizing government and economic plans. China became a communist nation that stifled capitalism leading to a decrease in ...view middle of the document...

They adopted policies that reduced taxes and welcomed foreign businesses to operate in China. This led to an influx of firms setting up their manufacturing plants in China, which contributed wealth and jobs to the Chinese economy. These reforms sparked economic growth and China began an era of rapid expansion and industrialization. China has realized an average GDP growth rate of 10% annually from 1979-2013 as a result of this policy change leading to China overtaking Japan with the second highest GDP. (Nanto)
Following the end of WW II, Japan was left in utter devastation. Casualties were enormous and the infrastructure was destroyed. Their GDP dropped to levels a tenth of what they were prior to the War and prices became hyper inflated as goods became scarce. Japan cut its military spending and focused the majority of its spending on rebuilding its infrastructure and growing its economy. Through effective budgeting and aid from their new Western allies, Japan experienced “Miracle” growth boasting a 10% rate from 1945-1980’s solidifying itself as the second highest producing economy. (Ostubo) Unfortunately, this growth was unsustainable and failures to realize an impending financial disaster lead to a period of stagnation. Real estate and financial markets formed a bubble that burst in the early 1990’s, causing rapid deflation and accruement of debt. This stagnant growth since the early 1990’s contributes to the 2010 usurping of Japan by China in GDP figures. (Worldbank) This can be observed in the following graphic representation:

There are additional factors beyond politics that contributed to these trends that will be addressed later. This paper remains objective and makes no attempt to show bias toward either nation, but does aim to recognize and understand the factors that contributed to the statistical trends.
Regression Results
China
Ln(GDP/L) = 3.11+.523Ln(K/L)+.220 Ln(RD/L) R Square = .997
[t-stat] [5.95] [2.90] Adj R Square = .996
(p-value) (.000) (.009) F = 3028

95% Confidence Interval
.379<=ln(K/L)<=.787
.062<=ln(RD/L)<=.379

Japan
Ln(GDP/L)=1.970+.421Ln(K/L)+.662Ln(RD/L) R Square = .9804
[t-stat] [11.165] [27.643] Adj R Square = .978
(p-value) (.000) (.000) F = 500.26

95% Confidence Interval
.342<=ln(K/L)<=.500
.612<=ln(RD/L)<=.712

USA
Ln(GDP/L) = 3.947+.176Ln(k/L)+.734Ln(RD/L) R Square = .995
[t-stat] [3.797] [18.004] Adj R Square=.994
(p-value) = (.001) (.000) F = 1980.72

95% Confidence Interval
.079<=ln(K/L)<=.273
.649<=ln(RD/L)<=.819

Regression Description
These regressions are log-linear models that express the elasticity of GDP per unit of labor with respect to either capital per unit of labor or Research and...

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