Why does God have a chosen people? Christians as well as Jews believe that God made the Israelites as his "Chosen People." 

Why does God need a Chosen People at all?
The Scripture isn't clear on why, but here are a few suggestions that make sense to me.


Choosing a specific people allowed God to demonstrate His power through all of the military battles, and possibly most dramatically via the release if His people from Egypt.
Choosing a specific people demonstrates His sovereignty - The fact that He can choose Whom he pleases to accomplish great things.
It demonstrates what He values.  He chose the descendants of Abraham because Abraham had faith, and obeyed Him, even to the risk of losing his beloved son.
Choosing one nation allows God to show clearly, through a well-documented, historically verifiable history, His hand moving to guide a nation.  Summing up the history of His people, you can learn a great deal about God and his relationship to man that may not have been as apparent if He had scattered his miracles among the many nations.

He chose a nation and gave them special privileged and assistance
They chose to reject Him and go after other gods
He withdrew His blessing and allowed judgement to come on even those that He chose initially because of their rejection
He forgave them and healed them when the repented of their sin.