Investment and Economic Growth in China and the United States : An Application of the ARDL Model

Abstract

This paper examines empirically the long-run relationship between real gross domestic product (GDP) and gross domestic investment (GDI) for the first two largest economies in the world - China (1961-2014) and the United States (1965-2015) using annual time series data. The analysis uses the autoregressive distributed lag (ARDL) approach to test for cointegration between investment and economic growth, followed by the Grangercausality to estimate the direction of causation in each country. The results reveal that a long-run relationship exists among variables in the case of China, in which GDP has a positive impact on GDI. Whereas no evidence of long run relationship to exist in the case of the United States. Besides in short term, the importance of investment on economic growth is confirmed as one percent increase in investment raise GDP by 0.34% in China. The findings further show a unidirectional Granger causality between GDP and GDI and runs from US economic growth to investment growth.