Determinants of Economic Growth: Evidence from a Fixed Effects Panel Data Analysis
Keywords:
GDP, Inflation, Investment, Panel Data, TradeAbstract
This research investigates the determinants of Gross Domestic Product (GDP) using panel data analysis and the Fixed Effects (FE) model. The dataset comprises multiple countries observed across several years, with independent variables including Trade, Gross Fixed Capital Formation (GFCF), Labor Force Participation, Inflation, and Foreign Direct Investment (FDI). The Chow test results support the selection of the Fixed Effects model over the Pooled Ordinary Least Squares (OLS) model.Estimates based on cluster-robust standard errors (by country) demonstrate that Trade, GFCF, and Inflation are positively and significantly associated with GDP, while Labor Force Participation and FDI are not statistically significant.A high within Rsquared value indicates that the model effectively explains the variation in GDP within countries over time. Tests for multicollinearity (Variance Inflation Factor, VIF) and autocorrelation (Durbin–Watson statistic and AR(1) test) confirm the reliability of the estimations. Overall, the Fixed Effects model provides robust empirical evidence that domestic investment and trade activities serve as key drivers of economic growth, with price stability further promoting national output
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