The Effects of Clustering and Entrepreneurship on

Industries and Regions

The purpose of this study is to examine the effects of the finance industry on the Gross
Domestic Product in the United States. The study examines factors that cause fluctuations in GDP
growth, including the growth of the financial sector, technological shocks, changes in the size of the
capital stock, and demand side shocks that affect GDP over time.

These fluctuations are studied through various variables that explain GDP growth, such as
the changing output shares of finance, insurance, real estate, rental and leasing (FIRE), services, and
manufacturing; mortgage debt; technological change; inventories; labor force participation rates;
wealth effects; and investment.

There are three important subperiods into which the explanatory variables are broken down
and tested: the period before the Great Moderation; the Great Moderation; and the Great Recession
era. The study further examines potential causes of the recent increase in economic volatility, with a
focus on the instability in the housing market, and especially the financial sector.

In addressing the effects of the finance industry on GDP, a regression model is employed to
provide empirical evidence of determinants that are significant to economic growth. The regression
model results suggest that the ratio of FIRE share relative to manufacturing share in periods one and
three, investment, inventories, and interest rates in the first period, all are statistically significant in
determining GDP growth. Conversely, the coefficients for the ratio of FIRE share relative to service
share, mortgage debt growth, inflation in the first period, labor force participation rate, interest
rates in the second and third periods, and increases in personal wealth in the second and third
periods, are statistically insignificant in determining GDP growth.

Based on this evidence, the study makes use of the theoretical and empirical findings to
address conceivable recommendations on how GDP growth can be best stimulated in the years to
come.

Source : http://sites.allegheny.edu/econ/senior-project-abstracts-2012/

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