Financial System According to Basic Term Paper

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Coefficients reflect to a rate of change in the dependant variable which leads to one point change in dependant variable. For example, coefficient of -0,05 infers small negative influence of this explanatory variable on the dependant variable, while coefficient of 1.5 implies that 1.5 rate growth of this variable will lead to positive growth by one point of the explanatory variable.

The results of the regression model are as follows:

GDP ($, billions)= 568.04 + 16.07*Interest_Rate + 1.19*Disposable_Personal_Income -64.75*Personal_Savings_Rate + 0.5*Personal_Expenditure_On_Nondurables - 0.26*Personal_Expenditure_On_Durables.

Coefficients

Standard Error

Stat

P-value

Intercept

1.384E-16

Interest rate

4.089E-13

Disposable Personal Income

2.327E-88

Personal Savings Rate

5.196E-34

Personal Expenditure Nondurables

1.085E-05

Personal Exp Durables

The result suggest, that autonomous value of the GDP is rather high, or that explanatory variable that has big negative affect on GDP was not included in the model. Interest rate has the biggest positive affect on the GDP, while simple calculation of correlation between these two variables reflect large statistically significant negative correlation of -0.77.But the P. value of this variable is large negative which implies that the probability of not finding influence of this variable on GDP while there is influence, is very small. The results thus are misleading and not reliable.

Personal savings rate in the long run have large negative affect on the GDP, or the more people save rather than consume, the larger is the growth of the economy as this money is used by firms for growth.

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This is explained as majority of USA economy is services and financial services, while people consume durable, non-durables and services and thus there is positive rather than negative affect of personal savings and company growth. Personal disposable income has positive affect on GDP, while personal expenditure on non-durables has small positive affect on GDP. The latter and the fact that expenditure on durables has small negative affect on GDP is explained by the fact that the majority of products, both durables and non-durables, consumed within the economy, are imported instead of being domestically produced. Thus, as durables usually cost more than non-durables and the funds used to consume them usually are USA based, while they are produced abroad, in other words, the finances in the economy are used to consume outside produced goods, the impact of growth in non-durable consumption is negative on GDP.

To conclude, there is no statistically reliable proof that Interest rate had big effect on GDP rate in the economy of the U.S.A. during Greenspan years, while this factors is the most significant on the GDP if such factors as personal disposable income, savings rate and expenditure structure, or only households related variables are considered. If taken alone, interest rate has big negative affect on GDP, or growth in one percent interest rate has -0.77% growth in GDP, and visa versa......

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