Goal
The goal of this exercise is to explore the growth rate of the Gross Domestic Product and the Dow Jones Industrial Average between 1980 and 2015 and to determine whether there is a relationship between the two variables.
Method: Application of Statistical Methods
Step 1: Mean, Standard Deviation and Coefficient of Variation
Step 2: Graph of Down Jones Industrial Average and Gross Domestic Product
Figure 1 showing the graph of the Gross Domestic Product and the Dow Jones Industrial Average between 1980 and 2015
Figure 1 above shows that during the period considered, the Dow Jones Industrial Average experienced a more pronounced variation in its growth rate compared to the growth rate of the gross domestic product. Even though the two variables had periods of negative growth, the Dow Jones Industrial Average had the most significant periods of negative growth.
Step 3: Correlation Coefficient
The correlation coefficient between the gross domestic product and the Dow Jones Industrial Average is 0.093508573 or approximately 0.1. The correlation coefficient shows that the correlation between the gross domestic product and the Dow Jones Industrial Average between 1980 and 2015 was very weak and almost negligible (McFedries 93).
Step 4: Hypothesis Testing
The hypothesis is that in the period between 1980 and 2015, the Dow Jones Industrial Average experienced a faster growth rate compared to the gross domestic product.
Null and Alternative Hypothesis
Null Hypothesis
H0 = There is not statistically significant difference between the average growth rates of the Dow Jones Industrial Average and the gross domestic product between 1980 and 2015.
Alternative Hypothesis
H1 – There is a statistically significant difference between the average growth rates of the Dow Jones Industrial Average and the gross domestic product between 1980 and 2015.
Test Statistic
Reporting the Results
Even though the results show that very minimal to negligible correlation exists between the gross domestic product and the Dow Jones Industrial Average, there are comovements in the two variables where a reduction in the growth of the Dow Jones Industrial Average causes a slump in the growth of the gross domestic product. Additionally, the gains in the Dow Jones Industrial Average cause the reduced growth rate of the gross domestic product to change and improve (Stockhammar 25).
Summary and Report
The calculation of the coefficient of variation showed that the average growth and the standard deviation were both bigger for the Dow Jones Industrial Average. When the correlation between the two countries was determined, a correlation coefficient of 0.1 was found. This indicates that there is no correlation between the Dow Jones Industrial Average and the gross domestic product. The hypothesis that Down Jones Industrial Average experienced a faster growth rate compared to the gross domestic product was also tested.
The null hypothesis stated that there is not statistically significant difference between the average growth rates of the Dow Jones Industrial Average and the gross domestic product between 1980 and 2015. The alternative hypothesis states that there is a statistically significant difference between the average growth rates of the Dow Jones Industrial Average and the gross domestic product between 1980 and 2015. The results of the t-Test performed lead to the rejection of the null hypothesis because the difference between the growth rates of the gross domestic product and the Dow Jones Industrial Average was significant. The conclusion is that the Dow Jones Industrial Average experienced a higher growth rate compared to the gross domestic product.
I have learnt that the Dow Jones Industrial Average is an important indicator of the economy. Nonetheless, its performance does not necessarily predict the trends in the gross domestic product in a direct and proportional manner. This is to mean that a unit increase in the Dow Jones Industrial Average will not necessarily result in an increase in a unit increase in the gross domestic product. It is possible to get growth in the gross domestic product even when the Dow Jones Industrial Average is experiencing negative growth.
Works Cited
Madu, Christian. Statistics As Easy As 1, 2, 3 with Microsoft Excel for Windows. Fairfield, CT: Chi Publishers, 2003. Print.
McFedries, Paul. Excel Data Analysis: Your Visual Blueprint for Analyzing Data, Charts, and Pivot tables. Indianapolis, IN: John Wiley & Sons, 2013. Print.
Stockhammar, Par. Comovements of the Dow Jones Stock Index and US GDP. Department of Statistics, Stockholm University. Web. 19 Apr. 2016.
