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Which Comes First: GDP Growth or Investment? The Case of a Small Open Economy

ISSNISSN/ISBN: 0041-3011
ISSNYear: 2018
EditorialEditorial: El Trimestre Económico - Vol. 85, Núm. 337
Background: Investment is a key factor to analyze an economy’s growth, as it increases the productive capacity, either by expanding the capital stock or by incorporating new technology that makes the production process more efficient. In Uruguay, investment has substantially increased in recent years, both overall and in the sectoral domain. This would have occurred because of strong growth
in the period, as well as on account of government policies on investment promotion. 
Growth and investment evolution, together with employment, have undergone a long history in economic theory, with some empirical studies supporting the principle that investment precedes growth, and others providing evidence to the hypothesis that growth determines investment.
Methods: Through a model with vector error correction (VECM), we found a longterm relationship between non-agricultural GDP, investment, and urban workers of Uruguay.
Results: In this model, we observe a positive relationship between GDP and the other two variables, where GDP precedes both urban workers and investment. 
Conclusions: The relationship between employment and investment is not so clear and, in some cases, appears to be negative, which could be showing a phenomenon of saving labor investment, or investment in less labor-intensive sectors.Uruguay, as a small open economy, depends on FDI to increase investment, and this kind of investment is mostly attracted by high growth rates.
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