GDP vs Rainfall

Scott Rolik
ECO 498C: Water in the West Dean Smith

Scott Rolik GDP vs Rainfall With so many problems arising due to water issues, primarily in the western United States, it seems only logical to determine if the direction we are headed in is healthy. Water is a precious resource and due to the rapidly increasing population of the Earth, the supply is quickly decreasing. The goal of this paper is to determine if the Gross Domestic Products (GDPs) of United States climate regions are directly correlated to those areas population size, population growth, annual indigenous rainfall, and annual water withdrawals. More specifically, is a regions GDP related to any issues based directly on water (annual indigenous rainfall and water withdrawals)? By analyzing these variables in relation to GDP, ultimately two questions will be answered. First of all, is it economically feasible to be urbanizing in arid locations of the western United States? In other words, are regions deprived of adequate rainfall succeeding while transporting water from distant sources? Additionally, research will determine if the majority of our countrys population is settling in locations with high or low rainfall and if westerners are in fact breaking away from the norm of living near water. After gathering and analyzing statistics and data, an attempt at creating a model, which can predict a regions GDP, will be made. As stated above, the potential independent variables for the model are the regions population size (PSi), population growth since the previous year (PGi), annual indigenous rainfall (IRi), and the amount of water withdrawals (WWi). After analyzing the relevance of each variable and discussing how each potentially contributes to the determination of a states GDP, hypotheses testing will be conducted to determine the sign of each independent variables coefficient. Correlation coefficients, r and R2, will also be tested to determine if the variables are

indeed correlated to each other, as well as scatter plot analysis to conclude whether or not each independent variable holds a linear relationship to GDP. Finally, tests for problems such as heteroskedasticity and multicollinearity will be performed to determine whether or not these are a significant source of error. Statistically, Ordinary Least Squares (OLS) is used to generate a model that allows one to predict the GDP of a region based upon water issues. If the OLS meets the first six of the seven classical assumptions, it is said to be BLUE (Best (minimum variance) Linear Unbiased Estimator) (Using Econometrics 107). Since data on the dependent variable, GDP, is required to generate such a model, the regression was generated using data collected from 2000. Through climate analysis, National Climatic Data Center scientists have identified nine climatically consistent regions within the contiguous United States which are useful for putting current climate anomalies into a historical perspective (Karl and Koss, 1984). Since there are 9 climate regions in the contiguous United States, each variable will have 9 observations. All of the data collected was gathered from government-hosted websites that provide regional information such as the U.S. Energy Information Administration, the US Bureau of Economic Analysis, the US Geological Survey, the National Climatic Data Center and the United States Census. However, some data was collected from individual states, which was then summed to determine the figures for the entire region. Table 1.1 illustrates each of the independent variables and their hypothetical importance to the analysis. It is expected that each independent variable will have a positive coefficient. Table 1.2 shows the null and alternative hypotheses and table 1.3 exemplifies the hypothesis to be tested.

Table 1.1 Variable Population Size (PSi) Population Growth (PGi) Indigenous Rainfall (IRi) Theoretical Importance The population size is important because the higher the population is, the more goods and services are expected to be produced in a given region, in turn increasing the regions GDP. The population growth is important because the greater the increase in population, the more goods and services are expected to increase, again resulting in an increase in GDP. The amount of annual indigenous rainfall is important because it would be expected that a region with more rainfall would have greater access to the resource and sequentially be able to increase their goods and services resulting in higher GDP.

Water The amount of annual water withdrawals made by a region is important Withdrawals because the more withdrawals also means more access to water and again (WWi) increases goods and services as wells as GDP. * i represents the ith region in the dataset + + + + GDPi= f(PSi, PGi, IRi, WWi) Table 1.2 Variable Null PS H0:PopulationSize 0 PG H0:PopulationGrowth 0 HA: PG > 0 IR H0:IndigenousRainfall 0 HA: IR > 0 WW H0:WaterWithdrawals 0 HA: WW > 0

Alternative HA: PS > 0 Table 1.3

Variable Hypothesis to be tested PS PG IR WW Regions with a greater population size, all other variables held constant, will have a higher GDP than regions with a smaller population size. Regions with more population growth, all other variables held constant, will have a higher GDP than regions with less population growth. Regions with more annual indigenous rainfall, all other variables held constant, will have a higher GDP than regions with less indigenous rainfall. Regions with more annual water withdrawals, all other variables held constant, will have a higher GDP than regions with less water withdrawals.

The simple correlation coefficient, also known as r, is defined as the strength and direction of the linear relationship between two variables. The closer the absolute value of a variables r is to 1, the stronger the correlation is. The sign on the value of r determines the direction of the correlation between the two variables (Using Econometrics 52). To see the raw data, refer to Appendix A.
1.

The correlation between Gross Domestic Product and Population Size is 0.9750. This means that the two variables are strongly related and proves that the larger the population size, the greater GDP will be.

2.

The correlation between Gross Domestic Product and Population Growth is 0.3463. This means that the two variables are not strongly related and fails to prove that the higher the population growth, the higher their GDP will be.

3.

The correlation between Gross Domestic Product and Indigenous Rainfall is 0.5883. This means that the two variables are somewhat related, but are not nearly as related as the other variables and that more annual indigenous rainfall does not necessarily mean that GDP will be higher.

4.

The correlation between Gross Domestic Product and Water Withdrawals is 0.5321. This means that the two variables are also relatively related and again does not necessarily mean that more water withdrawals will result in higher GDP.

By studying the scatter plots of each independent variable plotted against Gross Domestic Product, each appears to show a non-linear relationship, with the exception of population size as seen in Appendix B.

Having performed Whites Test for Heteroskedasticity as noted in Appendix C, the null hypothesis is rejected and it is concluded that there is sufficient statistical evidence to show that heteroskedasticity is present in the model. Therefore, Classical Assumption V is violated in the equation meaning the variance of the error term is not constant. Additionally, the relationships between GDP and the independent variables were primarily non-linear and the correlation coefficients for most variables were far too low to use in the equation. If a model were to be constructed from this analysis, the following equation would be the end result: GDP = 0 + PPi + i. Population size is the only variable tested that manages to directly affect GDP. Ultimately, the final regression model is unable to predict an accurate GDP, and while the model does indeed fail, many answers can still be obtained from the data. The Southwest and West North Central regions have relatively low GDP as well as annual indigenous rainfall. While still succeeding, they are not as economically successful as other regions of the United States. The West, however, also has low rainfall, but has the 4th highest GDP of the 9 regions. This is primarily due to the fact that California, which is in this region, has the highest State GDP in the country. While it is evident that some regions have both low GDP as well as rainfall, not all regions follow the rule. With a simple correlation coefficient of 0.7670 (Appendix C) and an R2 of 0.5883 (Appendix D, Regression 1), indigenous rainfall is not strongly correlated to GDP. When looking closely at Plot 1.3 (Appendix B), it is clear that the variable is non-linear in association with GDP. However, if it werent for the two outliers, the West and

Southwest regions, the plot would be a lot more linear. Additionally, with the West and Southwest left out, the new R2 value would be .9086 (Appendix B, Plot 1.5). While still not perfectly linear, this variable would better follow our assumptions. This would allow the variable to be included in the model discussed above and potentially aid in the predicted GDP of a region. Unfortunately, the strong empires like Los Angeles, San Francisco and Phoenix that inhabit the regions throw off the numbers and skew the data. Therefore, more rainfall does not necessarily mean more GDP and less rainfall does not mean lower GDP in todays society. There does not seem to be a problem with this scenario as regions are clearly willing and able to get the water they need to prosper. Regardless of the amount of rainfall that a region experiences, it appears as though GDP fluctuates based upon where people want to live. If that means getting water to arid Phoenix or Los Angeles, then that is what will happen to keep the economy thriving. Although short on water, this study has shown that it is economically feasible to build cities in arid locations and pull water in from outside sources. After looking at the data from 2000, it is not evident that water withdrawals are higher or lower in specific regions based specifically on rainfall or population. When comparing water withdrawals with rainfall, R2 is 0.3867 (Appendix D, Regression 2), which means that the two variables are barely correlated and that indigenous rainfall has no direct effect on how much water a region will withdrawal. When comparing water withdrawals with population, R2 is 0.6381 (Appendix D, Regression 3), which means, while not completely correlated, there is some relative relation between water withdrawals and population size. It makes sense however, because the larger a population is, the more water that will be

needed to allow human survival. Based on this analysis, it is safe to say that water withdrawals are based upon the population of the region rather than on how much indigenous rainfall it receives. As discussed in The Great Thirst by Norris Hundley Jr, Los Angeles had a group of engineers and leaders who were driven to make their city grow to an insurmountable size. In order to escalate the town to the size that they wanted, they needed to ensure water for the millions of residents that they would soon been housing. Through hard work and dedication, they succeeded and helped turn Los Angeles into what it is today. With the same motivation as those from Los Angeles, the doors are open for cities to boom anywhere in the world whether wet or dry. When regressing Population based upon indigenous rainfall, R2 is 0.6773 (Appendix D). While this variable is not completely correlated, it does indicate that as rainfall amounts increase, so does population. Peoples perception and thoughts may be skewed due to a particular state however. California was home to 33,871,648 people (12% of the contiguous United Sates) in 2000, helping the region of two states to reach a population of 35,869,905 people. However, the West only received 15.91 inches of rainfall. This area is a large outlier and throws off the entire picture making it seem as though people are populating the arid land. However, every region must be taken into account as both our Countrys empires as well as its farmlands are equally important. Realistically, the majority of our nations population is actually settling in locations with high rainfall. Wallace Stegner once defined the West as the region of the United States that receives less than 20 inches of annual rainfall. Based on this analysis, in 2000, nearly 81% of our contiguous citizens were living in regions with more than 20 inches

per year. This means that the majority of people are not breaking away from the norm and are in fact still living primarily near water. However, westerners themselves are clearly flocking towards arid land and are altering dwelling habits.
Conclusion

Being able to analyze the effects that population, rainfall and water withdrawals have on GDP would allow us to see where the world could be headed due to current water behaviors. Unfortunately, at this scale, it is difficult to decipher much based on the statistics and data collected. However, two questions were ultimately answered. First of all, it clearly is economically feasible to be urbanizing in arid locations of the western United States. Regions, which are deprived of adequate rainfall, are still succeeding economically while transporting water from distant sources. Additionally, the majority of our countrys population is indeed settling in locations with high rainfall, even though it appears differently to those who live in the overpopulated West. In line with that, it is clear that westerners are in fact breaking away from the norm of living near water. Unfortunately, due to time and resource availability, a far more in depth analysis could take place to further determine what individual water variables will have a greater affect on GDP. It would be interesting to look at decades from the past to find out if trends are changing as we head into the future and if our current ways are economically feasible in comparison to our history. It would also be beneficial to look at growth trends to determine if GDP is higher in a particular region when growth is increasing or decreasing. For instance, comparing GDP based on rainfall growth or decay would help us understand if GDP is in fact greater at the end of a drought or after El Nio. It is easy to guess what the answer would be, but it is not proven unless there is data to back it up. Hopefully one day that will be possible.

Appendix A: Raw Data Year 2000:

Region GDP (Billion $) Northwest 376.9 West 1,393.20 Southwest 453.6 Northern Rockies and Plains (West North Central) 138 South 1,175.10 Upper Midwest (East North Central) 796.1 Ohio Valley (Central) 1,566.70 Southeast 1,550.30 Northeast 2,308.30 Population 10,609,473 35,869,905 13,484,108 4,504,284 36,977,926 23,147,922 46,987,525 47,755,771 59,674,464 Population Growth Rainfall (Inches) Water Withdrawals (Mgal/Day) 1,893,711 23.23 31,740 4,908,051 15.91 54,010 3,286,567 13.04 27,560 338,442 16.13 27,428 5,224,343 33.72 62,490 1,809,002 31.15 24,820 3,692,618 41.35 63,240 7,996,344 42.92 63,990 3,417,599 44.48 48,535

Appendix B: Scatter Plots

Plot 1.1
GDP vs Popula on
2500

R = 0.97503 2000

GDP (Billion $)

1500

GDP vs Popula on 1000 Linear (GDP vs Popula on)

500

0, 00

0, 00

0, 00

0, 00

0, 00

0, 00

,0 0

,0 0

,0 0

,0 0

,0 0

,0 0

10

20

30

40

50

60

Popula on Size

Plot 1.2
GDP vs Popula on Growth
2500

2000 R = 0.34627

GDP (Billion $)

1500

70

,0 0

0, 00

GDP vs Popula on Growth 1000 Linear (GDP vs Popula on Growth)

500

0
0 0 0 0 0 0 0 0 0 ,0 0 ,0 0 ,0 0 ,0 0 ,0 0 ,0 0 ,0 0 ,0 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 9, ,0 0 0

1,

2,

3,

4,

5,

6,

7,

Popula on Growth

8,

Plot 1.3
GDP vs Annual Rainfall
2500

2000

R = 0.5883

GDP (Billion $)

1500

GDP vs Annual Rainfall 1000 Linear (GDP vs Annual Rainfall)

500

10

15

20

25

30

35

40

45

Annual Rainfall (Inches)

Plot 1.4
GDP vs Annual Withdrawals
2500

2000

R = 0.53214

GDP (Billion $)

1500

50

GDP vs Annual Withsrawals 1000 Linear (GDP vs Annual Withsrawals)

500

,0 0

,0 0

,0 0

,0 0

,0 0

,0 0

10

20

30

40

50

60

Water Withdrawals (Mgal/Day)

70

,0 0

Plot 1.5
GDP vs Annual Rainfall
2500

2000 R = 0.90864

1500

GDP (Billion $)

1000

GDP vs Annual Rainfall Linear (GDP vs Annual Rainfall)

500

10

15

20

25

30

35

40

45

-500

Annual Rainfall (Inches)

50

Appendix C: Test Diagnostics

Correlation Coefficient: Gross Domestic Product Gross Domestic Product Population Size Population Growth Indigenous Rainfall Water Withdrawals 1.0000 0.9874 0.5884 0.7670 0.7295 1.0000 0.6606 0.8230 0.7988 1.0000 0.4597 0.8083 1.0000 0.6219 1.0000 Population Size Population Growth Indigenous Rainfall Water Withdrawals

Whites Test for Heteroskedasticity: Ho : Homoskedasticity Ha : Heteroskedasticity

Whites Test Statistic P Value Alpha

7.570 0.0227 0.05

0.02 < 0.05 Reject the null hypothesis and conclude that there is sufficient statistical evidence to show heteroskedasticity.

Appendix D: Regressions Regression 1:

Regression 2:

Regression 3:

Regression 4:

Works Cited "The American West as Living Space [Paperback]." The American West as Living Space: Wallace Stegner: 9780472063758: Amazon.com: Books. N.p., n.d. Web. 17 Mar. 2013. "Climatological Rankings." Temperature, Precipitation, and Drought. N.p., n.d. Web. 15 Mar. 2013. "Estimated Use of Water in the United States in 2000Table 2." Estimated Use of Water in the United States in 2000Table 2. N.p., n.d. Web. 15 Mar. 2013. "The Great Thirst: Californians and Water-A History, Revised Edition [Paperback]." The Great Thirst: Californians and Water-A History, Revised Edition: Norris Hundley Jr.: 9780520224568: Amazon.com: Books. N.p., n.d. Web. 17 Mar. 2013. "News Release." GROSS STATE PRODUCT (GSP). N.p., n.d. Web. 17 Mar. 2013. "Search @ Census." Search @ Census. N.p., n.d. Web. 15 Mar. 2013. Thomas R. Karl and Walter James Koss, 1984: "Regional and National Monthly, Seasonal, and Annual Temperature Weighted by Area, 18951983." Historical Climatology Series 4-3, National Climatic Data Center, Asheville, NC, 38 pp. "U.S. Climate Regions." Temperature, Precipitation, and Drought. N.p., n.d. Web. 15 Mar. 2013. "Using Econometrics: A Practical Guide EViews 6.0 (6th Edition) [Hardcover]." Using Econometrics: A Practical Guide EViews 6.0 (6th Edition): A.H. Studenmund: 9780132108577: Amazon.com: Books. N.p., n.d. Web. 31 Mar. 2013.