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Health expenditure and gross domestic product: causality analysis by income level

  • Rezwanul Hasan RanaEmail author
  • Khorshed Alam
  • Jeff Gow
Research article

Abstract

The empirical findings on the relationship between gross domestic product (GDP) and health expenditure are diverse. The influence of income levels on this causal relationship is unclear. This study examines if the direction of causality and income elasticity of health expenditure varies with income level. It uses the 1995–2014 panel data of 161 countries divided into four income groups. Unit root, cointegration and causality tests were employed to examine the relationship between GDP and health expenditure. Impulse-response functions and forecast-error variance decomposition tests were conducted to measure the responsiveness of health expenditure to changes in GDP. Finally, the common correlated effects mean group method was used to examine the income elasticity of health expenditure. Findings show that no long-term cointegration exists, and the growth in health expenditure and GDP across income levels has a different causal relationship when cross-sectional dependence in the panel is accounted for. About 43% of the variation in global health expenditure growth can be explained by economic growth. Income shocks affect health expenditure of high-income countries more than lower-income countries. Lastly, the income elasticity of health expenditure is less than one for all income levels. Therefore, healthcare is a necessity. In comparison with markets, governments have greater obligation to provide essential health care services. Such results have noticeable policy implications, especially for low-income countries where GDP growth does not cause increased health expenditure.

Keywords

Health expenditure Gross domestic product Westerlund cointergration Causality analysis Impulse response function Common correlated effects 

JEL Classification

C55 I10 I15 O1 

Notes

Acknowledgements

The paper was part of the first author’s Ph.D. study. The Ph.D. program was financed by the University of Southern Queensland, Australia [USQ International Stipend Research Scholarship and USQ International Fees Research Scholarship].

Compliance with ethical standards

Conflict of interest

The authors declare no conflict of interest.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.School of CommerceUniversity of Southern QueenslandToowoombaAustralia
  2. 2.School of Accounting, Economics and FinanceUniversity of KwaZulu-NatalDurbanSouth Africa
  3. 3.School of CommerceUniversity of Southern QueenslandToowoombaAustralia

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