The analysis in this paper enumerates the determinants of output. The paper organized as follows. Section I provides general information about the factors that impact on level of output. Section II describes the data we employed and presents the effect of major determinant of GDP in a given country. Section III provides some theoretical information about Fiscal policy and impacts of policy to the France. Section IV provides brief information about secondary determinants of output. Section V concludes and gives some recommendations in macroeconomic stability of Uzbekistan. Appendices provide graphs and tables. Introduction Section I Brief literature review on the determinants of output The research papers show that there were done many empirical investigations to test the impact of consumption, investment, government expenditure, net export to the level of output. This approach was also proved by classical and Keynesian economists. The classical economic theory is directed in the concept of leissez-faire economic market, where leissez-faire can be defined as in the free market there is little or no intervention from the side of government. According to them the economic resources are allocated based on the desires of individuals and businesses. Moreover, from the perspective of classical economists, national economic growth is not influenced by government expenditure to much in comparison with the consumer spending and business investments (Investopedia, 2018). However, Keynesian economists theories relies on spending and aggregate demand in the economic marketplace. From Keynesian views government expenditure plays the major role in the national economic growth and in absence of consumption and investment, government spending can improve growth of economy (Investopedia, 2018). There were many researchers who has done empirical research on economic output determinants. According to their research, there are secondary determinants like FDI, technological progress population growth that affect on the economic growth of a county. For example neoclassical economist Solow (1956, p4) notes that the important determinant of short run economic growth is saving, investment ratio. He also states that technological development plays vital role in the growth of economy in the long run and seen as exogenous factor of economic system (cited in Whelan,2005). The simplicity and good fit of data were the main factor of the model and placed it at the core of most empirical research. Furthermore, Romer(1989) notes that innovation and knowledge investment in human capital are significant contributors to the economic growth. Human capital is the main source of growth in several models because the majority of studies indicates that “human capital” includes itself proxies related to education (p22). Therefore, educated population is the key determinants of productivity and economic growth. This extension is in line with Zhang (1999), who established that newly industrialized countries had been developing due to high investment rates, increasing labor force participation rates and improvement in education. Yet some other papers shows a considerable impact of country-specific factors such as the skills and knowledge of population, infrastructure, impediments to trade and the effectiveness of government policies on GDP per capita (Plossner, Levine and Renelt,1992, cited inDritsakis, Varelas and Adamopoulos, 2008,p3). Real-world data analyzed technological progress and productivity as the major determinants of per capita income (Mankiw, Romer and Weil, 1992). 1
Section IIData description, methodology and interpretation of results This paper uses panel data – the data that have both time dimension and space on primary determinants of output net export, consumption, investment, government spending as a percent of GDP in France between 1970 and 2016. We wanted to see the effect of netexport,investment, government spending on GDP. For the empirical estimation, log- logrelationshipbetweenGDP andtheindependentvariables was chosen. The fitted model: lnGDP=-.0886365+.2595*lninvestment+.76927*lnconsumption+.0096*lnnetexport+ 0.121*lngovspending + ui The interpretation ofβ coefficient of independent variables All β parameters and overall model are significant at 5% Independent variable show the elasticity of GDP with respect tonet export, consumption, investment, government spending. In other words, if say, consumption rises by 1% holding other regressors constant, GDP of France on average increases by 0.77%. The same interpretation is applicable to other variables too, but there is two subtle points. First the intercept (β0) is negative. Second, the investment rate’s β coefficient implies that the elasticity GDP with respect to the investment rate is 0.2595, but it does not mean that if the rate of investment increase by 1%, the expected GDP rises by .25%. The reason of this is that variable is already in percentage format. Therefore, the interpretation would be a one percent increase in the investment rate (from 15% to 15.1%) will trigger .25% rise in GDP provided all other regressors remain constant. The error term appearing in the model specifies the effects of the technology(Mankiw, N., Romer, D. and Weil, D. (1992), p 12).By looking at the parameters of our model, we can conclude that all estimates are in line with expectations. Section III Fiscal policy and its effect to France Since Second World War government policymakers are trying to set tools that can affect to economic growth, employment, inflation. Government policymakers are using two set of tools that can affect aggregate economic activity. They are fiscal and monetary policies. Fiscal policy controls government spending and taxes whilst monetary policy controls the interest rate or the money supply. However, according to the European Central Bank there is higher effect of fiscal policy to impact economic growth. Because monetary and exchange rate policies does not 2
truly response to the country specific shocks in comparison with fiscal policy (Bank, 2018). Therefore, fiscal policy is pivotal element of macroeconomic stability and has been seen as a primary factor that affects the main determinants like consumption, investment and government expenditure. The fiscal policy helps to manipulate the aggregate demand by changing the government expenditure and taxes (Ecb.europa.eu, 2018). Government spending affects directly on the output, whilst changes in taxes effect on consumption expenditure and then influence on the economic growth. Fiscal policy is categorized into two: expansionary and contractionary. Expansionary fiscal policy tend to increase aggregate demand by increasing government spending or decreasing taxes. However, contractionary fiscal policy cause aggregate demand to fall by decreasing government expenditure and increasing taxes (Investopedia, 2018). This policy can be explained by IS-LM model. Research shows that in the IS-LM curve aggregate output and interest rate are negatively related to taxes and positively related to government spending (see figure1). According to the paper Macroeconomic effects from government purchases and taxes, changes in taxes has smaller effect on the aggregate demand than equivalent change in government spending (Barro and Redlick, 2018,p4). Additionally, the graphs that represent shifts of IS-LM curve can be found in summary table 1.Observations shows that France enters to G7 countries and has higher GDP. According to the World Bank 2017 report, France GDP constituted 2.465454 mln $US in 2016, which ranked the country in the 6thplace in the world (World Bank, 2018). The research shows that France tried to manipulate output by using fiscal policies and started expansionary fiscal policy in 2002. According to the research of Flynn (2009), France has experienced high budget deficit. According to the statistics provided by OECD, government deficit constituted 7.2% of GDP. France could lower this deficit ratio to 3.4% of GDP in 2016 (OECD, 2018). In 2005, French budget started to cut taxes and increased its spending. According to the statistical research of Flynn(2009) tax cuts of civil sectors, public job sectors, households lead to decrease budget deficit and increase economic growth rate by 2.5% (p17).These tax cuts attracted inward and outflow investment. Direct inflow investment rose from 16.4 to 45.3 Bln $US from 1993 to 2003. Likewise, in these decade outflow investment rise from 19.7 to 55.2 Bln $US. Observations of Flynn(2009) shows that France increased its total tax revenuegradually from 1975 to 2003. In 1975 tax revenue represented 35.9% of GDP, whilst in 2003 it amounted 44.2% of France GDP (p22). Section IV Secondary determinants of output Nowadays, besides primarydeterminants, some secondary figures also stay at the core of country’s Gross Domestic Product(GDP).Increase or decrease in these factors can stimulate GDP or, on the contrary, lead to growthretardation; therefore, it is necessary to measure their significance each.Within the national economy, thesedeterminantsare interconnected links of chain.Allstatistical analysis is based on different literature articles and aimed to reckon up how it does work in the context of France. One of the secondarydeterminantsis a population growth.Becker, GlaeserandK.Murphy conducted an empirical analysis comparing countries and concluded that there is a relation betweeneconomic growth, investments in human capital and the level ofeconomicdevelopment.They began analysis from the consideration of ThomasMalthustheory.Accordingto his model, higherpopulationreduces incomesper capitathrough diminishing marginal productivity.However, modernestimationsshow that increase in average incomeper capita caused most likely by accumulation of human capital and new technology development.Authorsarguethat poorer economies of agrarian typewith alimited human capital, the simplest technologies and abigpopulationusually experience the downward tendency of average earningsper capitaaccording toMalthusand neoclassical assumption of 3
diminishing marginal productivity with growth of labor supply.In more developed countries, the Malthusian effects are slight.Moreover, in such economies, the higher population density and strong urbanizationpromotejob specialization, human capital investments andfastaccumulation of new knowledge, and economic growth.When economy starts booming, people invest in human capital.The cities are becoming more preferable forpopulationto live.Concentration of people in the cities is one the mostimportantfactors ofeconomic growthas the densepopulationleads to market expansion and, as a result,togrowthin income per capita.Authors particularlyemphasize that therateof technology development practically does not depend onpopulationgrowthrate(Becker,Glaeser, Murphy,1999).Applyingthis to France, gradual increase in GDP andpopulationwith some insignificant fluctuations is observed from 1990 till 2008(Fig.2, Fig.6).Taking into account the diversifiedeconomywith well-developed agriculture and industry sectors, it is reasonable to assume thatpopulationrise together with otherdeterminantshad apositiveimpact onFrenchGDP.However, from 2009 French economy has been experiencing long fluctuations caused by the world economic crisis of 2008.In addition, a big tide of immigrants and refugees coming from North Africa and the Middle East led to the population explosion, aggravated a situation in the country and broughtFrencheconomyinto recession. Not primary, but worth to consider determinant is the ageing of the population. Before starting the discussion about ageing of the population effects on GDP, this term must be explained briefly. Ageing of the population stems from the declining fertility rate and excessive life expectancy. Ageing of the population is the positive indicator of welfare, living standards and health care, but at the same time, it is considered an economic problem for countries, since people who are getting old generally lose labor productivity. Ageing of the population is the cause of an increase in the number of people who are above the retirement age and an increase in the number of pensioners, which leads to more government spending on pensions, health care and benefits, related to old age. In the case of France, retirement age is 60 and 25.3 % or 16.9 million of France’s population is over 60. France is considered to be one of the countries which spends more than 10% of GDP on pensions and it is almost 14%. Fast and wide spread of information technology(IT)is another secondary influential factor of economic growth, and it is closely associated with labor force.The question regarding the impact of IT development on economy wealth of the countries is quite controversial.Some researchers believe that innovation impulses economic growth and stimulates it.In particular,W.NordhausandM.Castells have acommonview on IT influence.In their literature works they argue that application of IT to social life and production creates new jobs, promotes increase of efficiency of a business sector and productivity.However, R.Solowconducted statistical andempiricalanalysis by the example of USA, and observed no any economic boom and productivity during the 1970-90s in the US even if the government spending on IT were going up by 20-25% every year(Solow, 1987).The growth rates were unsteady and fluctuating from - 2% to 4% at that period(World Bank, 2018).This case is known as “Solow’sparadox.”Afterwards other scholars could find explanations of this phenomenon.One of the evident ones belongs toP. Davidand were known as “David delay hypothesis”(David, 1999).He supposed that country could benefit from IT application after some period just as it happened during the last technology renewal when impact of power industry on other sectors was observed in 40 years after beginning of use of electric power.Concerning France, ITsectorprovides 5.2% of its GDP, 3.7% of an employment and 7.9% of all value-added ofprivatesector.French government spends 2-2.5% of GDP every year to develop IT within its digital development strategy(Fig.4)(OECD, 2017).Obviously, it is reasonable to state that there are less quantitative changes than qualitative ones in French economy.For instance, new types of 4
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