NSA Lecture in Statistical Methods

Case Study on the Impact of Defense Expenditures in Developing and Emerging Economies


It is common in economics classes to discuss the guns vs. butter problem. Specifically, in a resource constrained economy the more of either results in reduced amounts produced in the other. Does this mean that countries that increase their defense expenditures do so at the sacrifice of their production of other goods and thus lower their standards of living?

An initial study at Colombia University by Emile Benoit using regression analysis on a large number of developing and emerging economies found little or no stastical verification of the guns vs butter trade-off -- i.e., defense expenditures were insignificant in affecting economic growth rates.

Research at the Naval Postgraduate School extended Benoit's original work and found that sub-groupings of countries produced a significantly different result. The methods used in this analysis involved multiple regression analysis, factor analysis and discriminate analysis. This analysis initially split countries into two broad groups -- those constrained by resource shortages and those relatively unconstrained. For the constrained countries, defense expenditures remained insignificant in affecting growth after other control variables were taken into account. For the unconstrained countries, defense expenditures had a positive and statistically significant impact on economic growth

The readings below start with a brief introduction to regression analysis. This gives you an idea of the theory of regression analysis, the methods used in computation, and an interpretation of the results. The next reading applies regression analysis to the guns vs. butter trade-off. Expanding this analysis requires factor and discriminant analysis which is described in the predicting expropriation in Jamaica article. The final analysis extends the guns vs. butter example using regression, factor and discriminate analysis


Main Readings

Supplemental Readings