Question

Assume that an officer from Economic Planning Unit (EPU) approaches you for policy advice on the government expenditure on health sector post Covid 19 pandemic. The officer intends to know the impact of health expenditure on economic growth of Malaysia for policy recommendation at later stage.
You are required to propose relevant econometric approaches with the aims to study the impact of the health expenditure on economic growth of Malaysia.

a. Propose appropriate model specification based on the scenario above.
[5 marks]
b. Justify the selection of the dependent and independent variables used in the model. [5 marks]
c. Justify the selection of the sample period. [5 marks]

Answer 1

a. In this case, the officer from the Economic Planning Unit(EPU) primarily intends to examine the impact of healthcare expenditure in Malaysia on the economic growth of the country. In this instance, as a statistical or econometric indicator of the economic growth of the country, it would be theoretically or conceptually appropriate to choose or select the growth rate of the real GDP of the country which essentially reflects or highlights the economic growth of the country as well. Therefore, the researcher can basically examine the statistical or ecnometric relationship between the healthcare expenditure and the growth of real GDP in the country over a specific period of time which would expectedly manifest any practical impact of healthcare expenditure on the growth rate of real GDP or the economic growth in Malaysia. Therefore, the researcher can possibly construct a time-series regression model to analyze the chronological impact of healthcare expenditure on the economic growth of the country over a specific time period that is relevant to the specifications of the concerned research or study. In this regard, the time-series regression model would reflect the variation in the economic growth/growth in real GDP that can be statistically explained by the variation in healthcare expenditure in the country during the concerned time period or range.

b. As the officer and the researcher at the EPU are interested in examining the impact of healthcare expenditure on the economic growth or real GDP growth in Malysia, the independent variable, in this case would be the healthcare expenditure in Malysia and the dependent variable would be growth rate of real GDP in Malaysia. Therefore, in the time-series regression model, the dependent variable or the growth of real GDP in Malaysia can be represented as a function of the independent variable or the healthcare expenditure in Malaysia over a certain concerned timeline or period considering that the latter variable affects or impacts the former variable. Furthermore, other independent variables that could be included in the model could be aggregate consumption expenditure on goods and services by the domestic consumers or buyers in the country, other areas/sectors of government spending such as public education, national defense, infrastructural growth and development, etc., growth rate of aggregate investment expenditure by domestic businesses and companies, growth rate of net export of the country, and so forth considering their direct and strong economic association with the economic growth or real GDP growth of the country. It would essentially allow the researcher to understand the practical impacts of factors and attributes in the domestic economy that could affect the economic growth or real GDP growith of the country other than the healthcare expenditure by the government thereby, in a way highlighting the importance of healthcare expenditure in the economic or real GDP growth of the country. In particular, the selection of the independent variables in the concerned time-series regression model must account for any possible serial autocorrelation or any periodic or chronological statistical correlation between the respective independent variables.

c. Now, as mentioned in the question the officer at the EPU is potentially interested in policy framing pertaining to the healthcare expenditure of the government during the post COVID-19 phase or era. Hence, an appropriate timeline for the time-series regeression analyais could be the pre-COVID-19 period as it can be reasonably assumed that the officer is interested to understand the effectiveness of healthcare expenditure in the economic growth of the country especially when there is no health or medical emergency. Therefore, an appropriate time period chosen to conduct the time-series regression analysis could be few years prior to the COVID-19 pandemic in the country when the economy was in a relatively better condition and there was no health or medical emergency in the country implying a relative economic normalcy. The researcher can collect sample data pertaining to actual healthcare expenditure amounts of the government and other independent variables considered in the study and the dependent variable or percentage growth rate of real GDP in the country during the selected time period for the time-series regression model. Thus, the selected time-period for the time-series regression model could appropriately incorporate the main subsequent motivation or the objective of the concerned study which is to examine the practical effectiveness of the healthcare expenditure by the Malysian government in the economic growth or progress of the country.