Hi,
I am writing an academic paper based on foreign aid and GDP. Using annual time series data of real GDP and foreign aid as percentage of GDP, I found that Aid/GDP ratio has a negative correlation coefficient with real GDP. Is it reasonable to get such negative correlation coefficient or could there be some error on my data set?
Thank you in advance!
:)
There is reverse causality, so probably a low GDP is what is causing foreign aid in that case lower GDP would be observed with high foreign aid. Moreover, it is difficult to determine the causal effect of aid on GDP or GDP growth. Usually, aid is sector specific and effects might not extrapolate to the whole country leading to growth or overall positive changes in GDP.
I think that if the GDP is high the country doesn't need foreign aid. In this case it's obvious that the foreign aid is practicly non existent. So correlation coefficient between Aid/GDP and real GDP can be nagative.
Thank you Monika Avila Márquez for the answer. I really appreciate it.
Vitalii Nitsenko I see your point. But the data I have for is literally a least developed country so the country's GDP is definitely not that high. But could it be may be foreign aid is relatively very very small compared to GDP (because total foreign aid is 5 percent and less than that of GDP)?
Yashoda:
Without getting into the theory of aid, and looking at the correlation from strictly a statistically point of view, the negative correlation is not unreasonable. There are two possibilities: 1) aid/GDP ratio is stationary but GDP is non-stationary. This will give a spurious correlation. But most likely is: 2) GDP is growing faster over time than aid, resulting in a declining aid/GDP ratio while GDP is growing.
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