The dependent variable: GDP growth
The purpose of this study is to analyze and forecast the growth rate of gross domestic product (GDP), i. e. of the value of all final goods and services produced in an economy. This is the most widely used measure of an economy's success. The growth rates of total GDP are in focus when international organizations or the media discuss an economy's performance. By contrast, GDP per capita is more useful when comparing the economic situation of individuals. It is often labeled (labor-)productivity and will be the main focus of this study. Table 3.2 on page 40 shows that most studies in the area of growth empirics focus on GDP per capita.
Some studies focus on GDP per capita of the working age population, usually referring to people aged 15 to 64. However, it is not clear why people automatically become unable to work on their 65th birthday. A more meaningful measure of labor productivity is GDP per worker or per hour worked, which also takes into account that working hours differ significantly across countries. While I will not investigate GDP per hour worked, labor input as measured by overall hours will be an important variable to help explain GDP per capita.
It is well known that GDP is not a measure of wellbeing. GDP tends to rise after natural disasters because the rebuilding activities enter GDP, while the value destroyed by, say, a hurricane is not accounted for. Likewise, GDP only measures market production. However, many countries have a significant amount of home and non-market production. In continental European countries, for example, high taxes on labor contribute to a lot of home production while non-market production might be particularly important in emerging markets. If the share of these activities varies over time, then economic fundamentals such as human capital may only explain parts of measured GDP growth. For example, strong growth rates in many Asian economies may stem partly from non-market activities becoming market activities and therefore being included in official GDP estimates – which also may help explain why some countries' incomes have converged to the world leader.
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