Relationship between Real GDP and Labour & Capital by Applying the Cobb-Douglas Production Function: A Comparative Analysis among Selected Asian Countries

Abstract

The paper makes an attempt to explore the relationship between real
GDP (the dependent variable) and labour and capital (the independent variables)
in case of Bangladesh, India, China, Malaysia and Thailand using the Cobb-
Douglas production function and to make a comparison among Bangladesh and the
selected countries. The study uses a time-series data covering the period of 1990-
2014. Ordinary Least Square (OLS) is used to estimate the model. To test for
autocorrelation, Newey-West test has been applied to obtain reliable parameter
estimates. The results show that there is a strong positive and significant
relationship between labour and capital and real GDP in case of all countries
selected. The value of R2 ranges between 0.930 to 0.988, indicating that most of the
variations in real GDP in all these countries are explained by labour and capital
alone. The results are statistically significant at 1% and 5% level of significance.
The study also shows that there are increasing returns to scale in the production
process in case of all the selected countries. It has been found that a 100% increase
in labour will increase real GDP by 301% and a 100% increase in capital will
increase real GDP by 40%. The contribution of both labour and capital is the
highest in case of China followed by Bangladesh. The contribution of capital is
lowest in case of Thailand (10%) and Malaysia (15%) because they both
emphasized investing in human capital by giving importance to education, health
and training of their labour force. The study concludes that investing in the huge
labour force especially the female labour force in case of Bangladesh and India and
proper use of capital by trained labour and management are essential to sustain the
increasing growth process in these countries.