COURSEWORK SUBMISSION FORM

STUDENT USE STAFF USE

Econometrics First Marker’s
Module Name
(acts as signature)
5ECON012C Second Marker’s
Module Code
(acts as signature)
Lecturer Name Obid Khakimov Agreed Mark
UoW Student IDs For Registrar’s office use only (hard copy submission)
WIUT Student IDs 00009236

Word count 1700

Deadline date 24.11.2022

Assignment Type Group Individual

SUBMISSION INSTRUCTIONS

COURSEWORKS must be submitted in both HARD COPY (to the Registrar’s Office) and
ELECTRONIC unless instructed otherwise.
For hardcopy submission instructions refer to:
http://intranet.wiut.uz/Shared%20Documents/Forms/AllItems.aspx - Coursework hard copy submission
instructions.doc
For online submission instructions refer to:
http://intranet.wiut.uz/Shared%20Documents/Forms/AllItems.aspx - Coursework online submission
instructions.doc

MARKERS FEEDBACK (Continued on the next page)

1
 The impact of Energy consumption on Economic development of the United States of
America.

Table of contents:

Abstract…………………………………………………………………………3

Introduction……………………………………………………………………..3

Literature review………………………………………………………………..4

Methodology……………………………………………………………………4

Results and Discussion………………………………………………………….6

T-test Hypothesis………………………………………………………………..6

Conclusion………………………………………………………………………7

Assumptions…………………………………………………………………….7

Refences…………………………………………………………………………8

Appendices……………………………………………………………………….9

2
 Abstract.

Energy security and efficiency are the significant issues to be solved in any country around the world.
At a current geopolitical situation in the world, the question of sustainable economic growth of the
country becomes significantly dependent on the energy potential of that country. Taking into
consideration that world stands in front of issue to tackle the pollution, previously known ways of
energy supply becomes less popular. As the USA is one of the world leading countries that battles
against the pollution, the sources of energy industry transform into renewable ones. Even though, typical
energy sources such as gas and oil are more available, responsible governments feel the importance of
the climate sustainability. Taking into consideration that sources of natural energy are limited, the more
costly ways to satisfy the demand with renewable energy does not seem unnecessary.

This study investigates on the link between the economic growth (GDP) and the energy consumption
in USA, using data from 1970-2014. The OLS method was implemented to test the connection and
strengths of variables.

Potential benefits that comes from the results of this research will provide future researchers with data
regarding the upcoming problem and its possible solutions. For other parties that will be interested in the
outcomes of this study, the economic determinants of the chosen variables and their connection could be
the source for decision making. In line with energy related company representatives, government
officials and ecological organization workers, this research can provide important data to policymakers
to make decisions on step-by-step transformation of supply of energy system.

Introduction.

By forbidding or penalizing the use of relatively cheap and plentiful fossil fuels, carbon limits would
slow industrialization and economic progress. On the contrary, the USA has implemented the new term,
energy intensity- the ratio of energy consumption to GDP. This system implied effective use of energy
for increasing the economy of the country. The other factor influencing the demand for energy coming
from fossil fuels was the deindustrialization, which occurred in the end of the 20th century in the US`s
economy. The economy was shifting from producing goods to providing high quality service to
consumers all around the globe. In addition to what has been referred to previously, the conclusions of
the impact of energy supplied from accessible fuels to nature pollution and climate change was fearing
the ecologists and population in general.

3
 Literature review.

The link between energy consumption and economic growth is different in various academic sources,
periods and locations. The positive correlation was found in the research conducted by Sineviciene et.
al. (2017). On the contrary, unidirectional causal connection between energy use and economic
development was identified using the Granger causality study (Muhammad, 2012). The reason for that
could be several historical issues: Oil shock, crisis and transformation of US economy to service-
oriented. In support, the Zaharia et. al (2019) concluded that GDP and final energy consumption are
negatively linked between each other.

By the research conducted by Zeng et. al. (2020) in China`s province Zhejiang is concluded that FDI
and energy consumption positively correlated. It is explained by the boost of economic activity in the
country which has capital inflow.

The relationship between energy consumption and inflation was examined by Behname (2013) in the
north European countries and revealed that energy consumption is negatively correlated with inflation.
The author explains it by the fact that increasing demand for energy (oil, fuel etc.) causes rise in the
price of goods and services manufactured in the territory of a country.

Methodology.

The goal of this study is to further the knowledge base about the association between US sectoral
energy use and economic development. Macroeconomic analysis plays a significant role in examining
the dynamics of economic development and energy consumption as well as the overall degree of energy
efficiency in the economy. We pay particular attention to structural diversification and energy efficiency
measures in our results, and this research may provide a strong empirical underpinning for these
strategies.

The time series data was collected from World Bank source covering the period from 1970 to 2014.
Overall, 45 observations and 4 variables used to test the hypothesis. The variables are defined as follow:
Dependent (GDP) and Independent (Energy consumption, Foreign direct investment (FDI) and
Inflation).

Name of variable Description Measure Source

GDP Nominal Gross Domestic Product $ World Bank

Energy Consumption Use of primary energy before Kg of oil equivalent World Bank

4
 transformation to other end-use fuels per capita
FDI Direct cash inflow to the country. $ World Bank

Inflation Change in prices of goods and services. % World Bank

Stata15 program was used to test the empirical assumptions. All variables were converted to natural
logarithmic form to avoid errors. The tested results from the program can be seen in the following table:

Name of variable Obs. Mean Std. Dev. Min Max

Lngdp (GDP) 45 29.37198 0.834859 27.70176 30.49611

lnEC (Energy Consumption) 45 8.944982 0.485821 8.835215 9.040548
lnFDI (FDI) 45 24.43161 1.818018 20.4619 26.5787
lnInflation (Inflation) 45 1.306485 0.568748 0.381741 2.606328

The correlation between our dependent (GDP) and core independent variables (Energy consumption)
is slightly lower due to the reorganization of US economy from industrial to service-oriented, which
demanded less energy during the period covered in the regression. Moreover, the price for fossil fuels
was fluctuating significantly due to Oil shock and several crises, which in its turn reflected on the
demand. Energy may either constrain or contribute to economic growth, therefore shocks or restrictions
to the energy supply will have an adverse influence on it.

FDI – is the next independent variable, substantially impacting the economic growth. As the
Standtmann et. al, (2004) highlighted As the reasons that play the role of FDI in stimulating growth,
possible factors are highlighted: the transfer of financial resources and knowledge, the transfer of
advanced production technologies, development becomes obvious, an increase in the foreign exchange
reserves of the host country (or balance of payments). by increasing exports, acquiring managerial
know-how, taking over facilities, and developing education and workforce education.

The following independent variable in our regression model is inflation. There are several sources
stating there is no systematic relationship between inflation and economic growth. On the other hand ,
some emphasize the negative relationship between the 2 variables. Taking into consideration economic
theory: when there is price increase for goods, people feel unsafe regarding their future. If people feel

5
unsafe, they start to save more, rather than investing their money to the economy. Which in its turn will
result in decreasing the economic activity and slowing down the economy.

In order to check the relationship between the variables, multiple regression model has been created:

lngdp=β 0 + β 1∗lnEC + β 2∗lnFDI + β 3∗lnInflation +ui

Results and Discussions

The results of the regression model can be seen in the below table:

lngdp Coef. Std. Err. T values P>|t|

lnEC -0.986174 0.645819 -1.53 0.135

lnFDI 0.391838 0.019368 20.23 0.000

lnInflation -0.203910 0.065808 -3.1 0.004

At a 95% confidence interval, we can conclude that: there is negative correlation between GDP and
Energy consumption in USA. The 1% change in GDP leads almost the same amount (0.98%) change in
energy consumption with negative sign. As the Zaharia et.al, (2019) also found the opposite effect of
energy consumption on the GDP growth.

The second variable: FDI resulted in substantial positive correlation with GDP. 1% change in GDP
will result in 0.39% change in FDI. This correlation is supported by the finding of Standtmann et. al,
(2004). As it was predicted, the inflation has tiny negative link with Economic growth. The results can
be interpreted that 1 percent change in GDP will cause -0.2% fluctuation in Inflation.

T-test Hypothesis

H0 = 0, There is no relationship between Energy Consumption and Economic growth

Ha ≠ 0, There is a relationship between Energy Consumption and Economic growth

6
 From the Stata output, we can see that T-statistic for Energy consumption variable is equal to -1.53
and lies within the confidence interval, we accept H0 . Need to state that Energy Consumption has no
significant effect on the GDP.

The R2of the regressed module is equal to 0.9578, which means that chosen independent variables
explains the 96% of the changes in dependent variable (GDP).

Conclusion

To sum up, we used multiple regression model to check the relationship between chosen variables.
Energy consumption has no significant impact on GDP or economic growth in the USA during 1970-
2014. However, other factors are all significant at the regressed model and FDI positively and Inflation
negatively correlated with GDP. Almost 96% of changes in dependent variable explained by the
changes in chosen independent variables.

Assumptions

Zero conditional mean of the error term is tested in Stata using “sum ehat” command. The result is in
appendices part. The fact that residuals have a mean value of -1.35e-10, which is almost zero, suggests
that this assumption is met.

Another assumption is the homoscedasticity or the constant variance of error term across explanatory
variables values. The test was conducted using command “hettest” and output is in appendices.

 The Durbin Watson (DW) statistic may be used to check the residuals of regression analysis for
autocorrelation. The range of the Durbin-Watson statistic is always from 0 to 4. The value of the
Durbin-Watson statistic is always in the range between 0 and 4. The absence of autocorrelation in the
sample is indicated by a value of 2.0. Positive autocorrelation is defined as 0 to less than 2, whereas
negative autocorrelation is defined as 2 to 4. The "estat dwatson" function in Stata produced a value of
0.9095643, which indicates positive autocorrelation in this situation.

The last assumption our model should be tested for is absence of perfect multicollinearity between
explanatory variables. In appendices, the “correl” command output is released. There is close to perfect
collinearity link between lngdp and lnFDI , but it is 96%. We can conclude that there is no perfect
multicollinearity between explanatory variables.

7
 Refences

Behname , M. (2013). The relationship between Market Size, Inflation and Energy.

Atlantic Review of Economics–2nd Volume – 2013. Available from:

https://www.google.com/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwjey8bj0MP7AhVpVfEDHR
quBgcQFnoECDIQAQ&url=https%3A%2F%2Fdialnet.unirioja.es%2Fdescarga
%2Farticulo%2F4745331.pdf&usg=AOvVaw3Enpu3ZSdq1G-u0jfiwhLH [Accessed 15
November 2022].

Sineviciene, L. et. al, (2017). Determinants of energy efficiency and energy consumption of Eastern
Europe postcommunist economies. Source: Energy & Environment, December 2017, Vol. 28, No. 8 pp.
87088. Available from: https://www.jstor.org/stable/10.2307/90015689. [Accessed 16 November
2022].

Stadtmann, G. et.al, (2004). A panel analysis of bilateral FDI flows to emerging

economies. Economic Systems, 28(3), pp.281-300. Available from:
https://www.sciencedirect.com/science/article/abs/pii/S0939362504000585 [Accessed 14 November
2022].

Zeng, S. (2010). An Empirical Analysis of Energy Consumption, FDI and High Quality Development
Based on Time Series Data of Zhejiang Province. Available from:
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7246534/. [Accessed 13 November 2022].

Shahbaz, M. (2012). The Dynamic Link between Energy Consumption, Economic Growth, Financial
Development and Trade in China: Fresh Evidence from Multivariate Framework Analysis.

Available from: https://mpra.ub.uni-muenchen.de/42974/. [Accessed 17 November].

Zaharia, A. (2019). Factors Influencing Energy Consumption in the Context of Sustainable

Development. Available from: https://www.google.com/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwjstYyO1sP7AhUnX_EDHcCqCqQQFnoE
CA4QAw&url=https%3A%2F%2Fmdpi-res.com%2Fd_attachment%2Fsustainability%2Fsustainability-
11-04147%2Farticle_deploy%2Fsustainability-11-04147.pdf%3Fversion%3D1564640199%23%3A~
%3Atext%3DThe%2520main%2520results%2520show%2520that%2Can%2520increase%2520of
%2520energy%2520consumption.&usg=AOvVaw19otfsu2Xi-wgwV8Nb6Ud2. [Accessed 12
November].

8
Appendices

9
10