Growth and Investment in America

Day, Cameron

Growth and Investment in America

Persistent URL

http://hdl.handle.net/10456/35980

Author(s)

Day, Cameron

Date Issued

April 26, 2014

Abstract

The purpose of this study is to examine the determinants of investment in equipment and software in the United States from 1968-2011. Investment in equipment and software is essentially the main driver of growth in the economy; it plays an important role in affecting GDP growth and other major indicators of economic health. This study’s main goal is to find out which variables could be stimulated to best increase investment growth. By increasing investment growth in America, Americans could finally escape the effects of the dragging recession that has led to slow rates of economic growth since 2007. According to Romer, “One of Burns and Mitchell’s key insights was that many economic indicators move together. During an expansion, not only does output rise, but also employment rises and unemployment falls. New construction also typically increases, and inflation may rise if the expansion is particularly brisk” (Romer). This “new construction” that Burns and Mitchell referred to is investment in capital; moreover, investment in equipment and software has a similar relationship in that it moves with many economic indicators. Investment in equipment and software not only directly correlates with overall investment but could have an impact on social returns to equipment and investment. Some possible social returns to equipment and investment are higher standards of living and increased productivity. After evaluating the determinants of investment in equipment and software, I now have a better understanding of the relationships between all of the independent variables used in my study and my dependent variable. Upon running and analyzing a regression, I have found that four independent variables are significant; real manufacturing output during years of expansions and contractions, real wage growth during years of economic contraction, and productivity growth led 1 year ahead of years of economic expansion. This means that the behavior of investment in equipment and software is primarily explained by the behavior of these independent variables. Therefore, in order to best stimulate GDP growth to escape a recession, we should focus on increasing real manufacturing output, decreasing real wage growth, and increasing productivity growth.

First Reader(s)

Casler, Stephen