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FACTORS INFLUENCING THE GDP OF INDIA

........................................................... OBJECTIVE: ANALYSIS OF FACTORS AFFECTING GDP OF A NATION In this project.................................. 4 REGRESSION ANALYSIS ................................................................................................ 3 VARIABLES USED FOR REGRESSION ANALYSIS........................ Y= C + I + G + (X-M) Our factors are the various factors affecting each of these components......1 TOOLS USED FOR OUR RESEARCH ANALYSIS ....... OBJECTIVE ........................................................................................................................................ 7 TEST OF FIT OF MODEL ............................... 5 TRANSFORMATION .. 12 STANDARDISED COEFFICIENTS .............. 15 CONCLUSION............ Investments................................................................................................................ As GDP is sum of the Consumption............................................................................................................................................................... hence we try to establish a relationship between these factors and GDP and how they could affect it........... 14 VALIDATION OF OUR MODEL.... 8 CORRELATION ........................................................................................................................................................................ Government Expenditure and Net Exports... how the various quantitative factors that affect GDP are correlated to it......... 2 STEPS INVOLVED IN ANALYSIS ................................................................. 1............... 7 CONFIDENCE LEVEL ...................................................................................................................................................................................................................................... 16 1................................................................................................................................................................................................................. 13 R-SQUARED AND OVERALL SIGNIFICANCE OF THE REGRESSION ..................... 10 SIGNIFICANCE TEST ................................. when we know the values of our variable................................ I tried to research and find out......................... These factors are not directly accounted for in GDP calculations..................... This will be useful in predicting an estimated GDP for future years..................Contents 1.............................................

we use some statistical tools. The estimation or prediction of future production. which was again found through secondary data. GNP. Similarly. and if there is some theoretical basis for doing so. M. income etc.org website www.org ((International Monetory Fund) www.indexmundi. it is possible to predict values of one variable from the other. namely REGRESSION and CORRELATION.rbi. This observation leads to a very important concept known as „Regression Analysis‟. Once all the factors are listed. Revenue and Expenditure etc. investments. consumption. sales. profits. prices. STEPS INVOLVED IN ANALYSIS 1) Our first step was screening through secondary data sources in order to understand what are the factors that affect GDP of nation. Prediction or estimation is one of the major problems in almost all the spheres of human activity. Blair as follows: “Regression analysis is a mathematical measure of the average relationship between two or more variables in terms of the original units of the data.imf. and then see its affect on GDP of nation. are indispensable for economists and efficient planning of an economy.com . Our secondary data sources were as following: a) b) c) d) Business Beacon Website www.” If two variables are significantly correlated. Regression analysis was explained by M. are of very great importance to business professionals.Moving ahead with our objective of finding out what are the various factors contributing to GDP of a nation. population estimates and population projections. we had to again screen through secondary data sources to find out the values of these factors for 20 years.

. 2) Population of the country: with the rise in population the availability of the cheap labor increases and attracts more firms to invest in the country increasing the FIIs or FDIs that boosts the GDP of the country 3) Population of country getting Primary Education: higher level of literacy in the country generates more job opportunities in the economy which in turns contribute significantly in the GDP. was ready for regression analysis. 3) The regression analysis was done with the SPSS software used for Business Research Analysis.2) The data on all factors once collected and summarized in a proper way. agricultural of the country significantly depends upon the rainfall.6% of the GDP in and despite a steady decline of its share in the GDP. 4) Rainfall: Agriculture and allied sectors accounted for 16. VARIABLES USED FOR REGRESSION ANALYSIS 1) Interest rate: With the increase in the interest rate of the country the bend will be towards saving since the cost of holding money increases resulting into less consumption decrease in the GDP and secondly the money supply in the market also falls and the GDP goes down.

and A is the value Y is predicted to have when all the independent variables are equal to zero. 7) People Employed: More employment results into greater expenditure. but we have dropped them from regression analysis because of their qualitative nature. it looks like following equation : . + A where Y is the dependent variable you are trying to predict. X2 and so on are the independent variables you are using to predict it. is GDP of the country.5) Exchange Rate: With the appreciation in the value of the national currency the revenue generated from the exports is less which in turn affects the GDP of the country 6) Foreign direct investment: It is theoretically straightforward to argue that inflows of FDI have a potential for increasing the rate of Economic growth in the host country. the value of say. Inflows of physical capital resulting from FDI could also increase the rate of economic growth and the GDP of the country. b2 and so on are the coefficients or multipliers that describe the size of the effect the independent variables are having on your dependent variable Y. b1. We also found that People Employed is a Lagging Variable. Hence. like Business Confidence. There are various other factors. The equation is in the form: Y = b1X1 + b2X2 + . which in turns affects the GDP of the country. X1.. 2001 employment will be regressed against 2002 GDP. will affect the GDP of the subsequent year. REGRESSION ANALYSIS Our Dependent variable in the regression analysis. which means that the change in this variable in one year. In our case. Market Risk which affect GDP significantly. Our Independent variables are the various factors found from secondary data analysis..

Run regression : PATH Analyse Regression Linear Enter Dependent and Independent variables and run regression. . Data tabularized in MS Excel 2003.GDP = a + b1F1 + b2F2 + b3F3 … + bnFn Where F1 to Fn = various factors acting as independent variables Steps : 1. 2.Data is then imported to SPSS Data View.

with data being collected for 10 years.TRANSFORMATION Since our degree of freedom is 9. These variables were 1. 2. GDP Population of Country NRI Deposits Population FDI Other variables since had no great variation among these 10 years. therefore in order to have a better regression. . and to maintain uniformity of variables throughout. 5. we transformed them using the Ln ( Log Natural) function in excel. 3. 4. were taken as it is. CONFIDENCE LEVEL We have taken a confidence level of 80% for our F test and 70% for T test.

This is checked by carrying out the F test or ANOVA test. Regression (Explained Sum of Squares) .20. we can neglect the null hypothesis. as our confidence level is 80%. significantly explain our dependent variable‟s behavior. we need to reject the null hypothesis. When the significance or P value of F test is less than . A good model means that all the variables together.TEST OF FIT OF MODEL The most important part comes where we need to test whether the model developed by us is right or not. In order to prove our model good. Our output was as follows: Significance value of . Hence we moved ahead with further analysis.019 rejected the null hypothesis and proved that the model developed by us is right. This test starts with the null hypothesis that R2 = 0 Which means that correlation is 0.

so are degree of freedom = 10 – 1 = 9 . The model degree of freedom corresponds to the number of predictors minus n (K-n) where n is the number of parameters estimated. Second column represents degree of freedom. This gives you the deviation of fitted regression value around mean. Our value for the same is 1.488.Explained SS gives you the variance that is explained by the Model.496. The part which couldn‟t be captured by our model or Residual Sum of Squares is . The total variation in our model which is given by the Total Sum of Square is 1.008. Data taken are for 10 years .

2. Increase in 1 unit of organized sector employment by activity results in a decrease in GDP by . Increase in exchange rate results in a decrease in GDP by . Here we can deduce that: 1. automation. Increase in 1 unit of NRI Deposits results in a increases in GDP by . . our correlation coefficients tell us by how much does GDP increase or decrease when the corresponding variables increase by 1 unit.906 units. This is because In organized sector with the advent of modern technology. i. is highly needed and hence increase in the labour workforce is decreasing the GDP of the country. 3. the Imports are affected and hence GDP.CORRELATION As we are running regression on a single dependent variable. GDP .164 units Since our money depreciates with increase in exchange rate.e.985 units Deposits in turn increase the investment in our country and hence increasing the GDP.

Increase in 1 unit of FDI results in a increase in GDP by . Increase in 1 unit of Population results in a increase in GDP by . 5. Hence the GDP is directly affected. . Increase in 1 unit of bank interest rate results in a decrease in GDP by . This output table not only shows how the independent variables are correlated to GDP. 7.917 between NRI deposits and Population of the country.932 unit FDI is a direct component of investment. hence an increase in the rainfall results in increase in agricultural productivity and hence the GDP.739 units Increase in bank rate decreases the investment in the country.981 units Population increases the available workforce in the country and hence the GDP of nation. 6. as loans become expensive for investors. On analyzing we find that high correlation of . but also correlations among them. which results in multi co linearity of these variables.315 units Our country is greatly influenced by the agricultural sector.4. and hence increase in FDI increases GDP. Increase in 1 unit of Actual Rainfall results in a increase in GDP by .

From the outpur generated. 1) Organised Sector Employment by Activity 2) Population of Country 3) Bank rate or Interest rate . The null (default) hypothesis is always that each independent variable is having absolutely no effect (has a coefficient of 0) and you are looking for a reason to reject this theory. To carry out this null hypothesis test.30 rejects null hypothesis and shows that variables have significant contribution to dependent variable. we find the following variables to fulfil this condition and qualify as significantly affecting variables. The t statistic is the coefficient divided by its standard error. significance value less than . we carry out T test on the independent variables. a measure of the precision with which the regression coefficient is measured. The standard error is an estimate of the standard deviation of the coefficient. When the test carried out at 70% significance level.SIGNIFICANCE TEST In order to find out whether the coefficients of our independent variables are really different from 0 or if alternatively any apparent differences from 0 are just due to random chance.

The other variables are not unimportant. we should make them unit less. but as a whole. or try and convert them into same unit. they make a significant impact as calculated from ANOVA Test STANDARDISED COEFFICIENTS Our variables are not in uniform unit. These betas are better correlations for predictions. While some are in Monetory terms. do this for us. or mm as in case of rainfall. To carry out a objective comparisons among the variables. they are just not having significant INDIVIDUAL effect on GDP of India. The standardized co efficient in the above table. . others are in number of people.

The R-squared is generally of secondary importance. 975 which means 97. Our output is as follows for the Model Summary: R2 = . unless our main concern is using the regression equation to make accurate predictions. This is a highly satisfying score for making use of model in making predictions. GDP that is accounted for (or predicted by) our independent variables.R-SQUARED AND OVERALL SIGNIFICANCE OF THE REGRESSION The R-squared of the regression is the fraction of the variation in our dependent variable.5% of the variation in GDP is explained by the factors taken. .

91114 6.396030918 6. we clearly see that our model is fit for the first 8 years.75624 13. not affecting the Indian Economy.228885687 6.580512916 6.32619 6.69066 2.730057018 6. This is because our model takes care of variables that are confined to Indian Economy context.7753 By running our model on the past data and finding the value of the dependent variable.86479 2.55636 6.101675972 7.177782416 PRIDICTED GDP 6. provided that the global economy remains reasonably stable. it shows a large deviation of 13%.065445 -1.08729 6.95121 PERCENTAGE CHANGE 6.25516 6.169294783 6.37408 10.855611096 7.421814 2.55968 6. we found out that.32924 0.981153 -1.VALIDATION OF OUR MODEL YEAR 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ACTUAL GDP 6.05146 7.99721 6. .117205503 7. On analyzing this particular Year.506696 -3. Our model hence can Predict GDP with fair accuracy. this year was affected by global economy.131622063 6. In the year 2008.99221 8. especially the recession times in USA.

once the data is available. Population and other variables from the respective departments. . we can use this model to predict the GDP values with knowledge of increase or decrease in the factors known. Interest rate from RBI. we cannot predict the future GDP of 2012-2013.CONCLUSION Since our model is fit. We can obtain future predicted data of rainfall from Meteorological Department. But our model will be useful. and hence predict the future growth in GDP of a Nation. Since these values are not open to common public.

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