Explaining Economic Growth using Futures Trade in Physical Assets

Abstract

Every country calculates and publishes the figures related to economic growth periodically. In many cases there is a lot of controversy attached to such figures. Economic growth has both economical and political dimensions. But it is difficult to approve or disapprove the growth figures since such figures are the results of a very difficult and time consuming process with high cost implications. Economic growth is stated commonly by Gross Domestic Product figures, which is the value of all goods and services produced in a country during a given period of time. Increase in goods and services produced will lead to increased economic growth. Further we assume that an increased production of goods will lead to an increase in derivative trade in goods because risk averse producers will use derivatives (commodity derivatives) increasingly to cover up possible risks. Thus theoretically we can conclude that an increase in countries economic growth will lead to an increase in derivative trade in physical commodities. Thus there will be some relationships between derivative trade and economic growth. In this paper we explore such relationships using empirical data with the use of econometric tool OLS regression technique. The analysis was done on three asset classes of futures trade such as agricultural, metals and energy which are taken as independent variables and economic growth as dependent variables. The result shows a valid relation among the variables.