# The goal of this article is to check theory of growth rate of GDP. According to the theory growth rate of GDP is negatively related to the initial level of real per capita GDP and positively related to the size of the country

GPD growth rate

Introduction

Level of GDP is considered to be one of the most important macroeconomic indicators of a country’s development. Therefore government officials, investors and scientists are interested in determining the key growth characteristics of GDP.

The goal of this article is to check theory of growth rate of GDP. According to the theory growth rate of GDP is negatively related to the initial level of real per capita GDP and positively related to the size of the country (geometric mean for the period). Growth rate is positively related to stability of property rights (represented by the rank in the index “rule of law”) but inversely related to government consumption and fertility rate.

In some growth models a countries GDP growth rate is negatively correlated to the starting per capita GDP. The main explanation is that the lower the starting per capita GDP, the higher the marginal return on the capital. Thus, countries with lower per capita GDP tend to grow at higher rates.

The size of the country is positively related to the growth rate of GDP. This is because the larger the labour market of the country, the more favourable the country is for new investments in production facilities.

Investments in the economy are also determined by the stability of property rights. Intuitively clear that the more an investor is sure in property rights the larger the investments in the country. As a proxy for stability of property rights I used Rule of Law rank that indicates the country's rank among all countries covered by the aggregate indicator, with 0 corresponding to lowest rank (poor legal protection), and 100 to highest rank (the best legal protection).

Government consumption in theory is inversely related to the growth rate of GDP. One reason for that is because government expenditures tend to be less economically effective when compared to private expenditures. Another reason is that to support high level of expenditures the government withdraw part of GDP in form of taxes, thus, decreasing private investments.

The fertility rate is negatively correlated to the growth rate of GDP because the higher the growths rate of GDP, the higher the value of worker’s time. Therefore the opportunity costs of rising children are larger for parents in countries with higher growth rate of GDP then in countries with modest growth rate. Another explanation is that in countries with high growth rates of GDP people have more options to accumulate wealth then people in countries with lower growth rates of GDP. As a result people in countries with modest GDP growth rates tend to “invest” in their children.

Descriptive statistics

Table 1. Descriptive statistics

The table shows mean, median, maximum, minimum and number of observations for variables

Name

Description

Mean

Median

Maximum

Minimum

N

GDP_GR

Average growth rate of GDP from 1991 to 2010

2.15

1.84

9.51

-1.31

89

GDP_PC

GDP in 1991 in millions

10.14

6.50

45.75

40.54

89

Fertility

Average fertility rate per woman for the period from 1991 to 2010

2.83

2.28

6.75

1.28

89

Population