Estimating Dynamic Equilibrium Level of Economic Growth

The economic condition in each country can be determined based on two ratios. One of them is inflation and the other is economic growth. The inflation level is an indicator of economic stability in the country; however, sustainable development is an indicator of economic development and the welfare of the country. Due to the fact that economic development is a vast phenomenon, it consolidates social, ecological, ethical and other factors. The main point here is provision of a fecund environment for sustainable economic development. We would like to note that economic growth cannot provide an adequate approximation of the long-term development; therefore, the provision of the dynamic equilibrium level of economic growth is essential. The research covers a time span of 1996 through 2010 and has the following goals: • Evaluation of the country’s economy and the determination of its dynamic equilibrium level of economic growth using Keynesian Domar model; • Determination of changes in the basic economic determinants by the conduction of Domar table; • Effect of application of obtained results in measurements dedicated to the support of economic growth. The models of economic growth reflect the real economic processes using some simplifications, but holding the main concepts. These models analyze the different points of the economic development and make possible the identification of certain consistencies and rules. We would like to note that the differentiating features of the economic growth models are their ability to grow only in account of capital and labor forces. We know that the economic development is possible under various circumstances such as quality and quantity of economic resources and their changes, economic technologies, technical progress and etc. However, it is not possible without an initial investment. For this reason, the Keynesian model is considered to be the most basic model of economic growth. Thus the main point in this model is determination of factors enabling the dynamic equilibrium growth model. During the modeling of the economic process the simplification and identification of initial inputs is also important. The Domar model is considered a simple Keynesian model and reflects this in the following way [3, 180], [2, 519-520], [4, 250]: (1) here, - the speed of the economic growth t period; - the capital efficiency limit; and - saving norm. As we can see the capital efficiency limit and saving norm are the basic variables of the model and can be estimated using the following quotations: (2) (3) Where - output growth in t period, - investment in the capital in t period, - savings in t period, - output level in t period, and σ - constants. It is obvious that all models are estimated under conditions of predefined limitations. This is due to the fact that a model cannot account for all conditions and terms of actual economic process, which can bring about additional complexity and inconsistencies. From this point of view, the Domar model consists of the following initial conditions [1, 231], [2, 519], [4, 249-250]: 1. The model is based only on the products/goods market; 2. The technology of the production is reflected by the Leontyev function, i.e. the limit of capital efficiency is constant; 3. The labor market is in a saturation condition and there is no lack of labor force; 4. The excessive supply on labor market supports the stable prices; 5. The growth in investments reflects the growth in total supply and total demand, i.e. both total demand and total supply increase only due to increase in investments; 6. There is no amortization of capital; and 7. Correlation between capital (K) and quantity of goods (Y) is (K/Y) reflecting the saving norm Due to the initial terms of the model ( ) is constant. The major conclusions drawn from the model are that limits of product output, investments and capital growth are equal to each other [2, 520], [4, 250]. In other words, (4) During the composition of this model for the Azerbaijani economy we considered the specifics of economic growth and the oil factor of the economy. Considering that the oil and natural gas resources are scarce and limited and the national economy cannot fully rely on it (Holland syndrome), necessary measurement and changes in the national economic policy should be taken. A number of policy measures were implemented in this direction such as establishment of oil fund, saving of oil revenue in foreign banks and etc. However, in order to continue the obtained economic growth, we need to establish and realize the complexity of the necessary measurements. The major role in the establishment of sustainable economic development in Azerbaijan is the identification of the dynamic equilibrium levels of economic growth and the qualitative and quantitative evaluation of actual deviations from this level. It will play a crucial role in the formation of the national economic policy. In order to evaluate the Domar model we should determine its basic inputs – saving norm and the efficiency limit of the capital. Therefore the econometric evaluation of equation (2) was as following: Table 1. the results of econometric evaluation of saving norm Variable ratio Standard deviation t-statistics Probability R_GDP 0.627099 0.0416 15.06642 0.000 C -561.353 300.9516 -1.86526 0.095 Determination ratio 0.94583 Average of the variable 4346.899 Clarified Determination ratio 0.94166 Standard deviation of variable 3197.992 Standard deviation of regression 772.393 Akayk information factor 16.260 Sum of squares of deviations 775568 Schwartz factor 16.355 Log relevance to reality -119.95 F-statistics 226.100 Statistics of Durbin-Watson 1.22534 Probability (F-statistics) 0.00003 Source: the valuation was made by author It can be seen from the results that the model is significant from an economic point of view. According to the determination ratio, 95% of increase in real savings during 1997-2000 can be explained by the increase in real GDP during this period. At the same time, the high level of t-statistics (15.066) shows that the GDP taken as an explanatory variable has a really large impact on other variables within the model. The model supports the stability test and coefficient test at the required level and provides the basis for the economic conclusions. According to the results of the model increase in GDP by one million Azeri Manat (AZN) brings about an increase in savings by 0.62 million AZN. In other words, if our country’s population spends one AZN, it reflects as 38 kopeks of consumption and 62 kopeks for saving. From the population’s point of view this result seems unrealistic. In reality, an increase in income brings about an increase in consumption. It is explained by the fact that the consumption demands of the population are not met yet. However, considering that the inputs of the model contained information not only about population, but also about the government, companies and other organization, we believe that the obtained results can be considered as reliable. Thus the governmental bodies and companies direct their revenues to savings rather than consumption, which forms the savings base of our country. Now let us identify the limit of capital efficiency. For this purpose we observed the relation between the growth of real GDP and capital investments using the econometric evaluation tools: Table 5. The results of evaluation of limit of capital efficiency Variable ratio Standard deviation t-statistics Probability R_CI 0.153436 0.024873 6.168736 0.0000 Determination ratio 0.377072 Average of variable 978.5786 Clarified Determination ratio 0. 377072 Standard deviation of variable 844.4061 Standard deviation of regression 666.4543 Akayk information factor 15.91057 Sum of squares of deviations 5774098. Schwartz factor 15.95622 Log relevance to reality -110.3740 Statistics of Durbin-Watson 0.97980 Source: the valuation was made by author