Relationship between GDP and Inflation - Example

Student’s name Course code+name Professor’s name University name City, State Date of submission 1.0 Introduction This section explains how each variable will be used in the analysis as well as its importance. Where needed, the reasons for using a particular value will be described. At the end of the section the sources of data will be given. Development and growth is the main aim of many countries, Oman is not excluded from this policy of industrialization and development, the core principal of most macroeconomic policies is to come up with and develop high economic growth with if possible no inflation at all cost. Many scholars have continuously debated over the same issue of any existence between growth and inflation. Bothe classical and neo classical economist agree that low inflation rate in an economy is positively related to economic growth. (Bradley, 2007) In this study we want to find out the relationship between the inflation and the growth in Oman country. The variable to be study include Gross domestic product at current prices Gross domestic product ppp Gross domestic per capita ppp Real Gross domestic product growth Current account balance Current account balance Gross domestic product Goods and services expenditure Gross domestic product Inflation rate 1.1.1 Gross domestic product at current prices This GDP is also called nominal GDP and is always calculated at the current market prices. While calculating nominal GDP changes in prices which has taken place due to inflations or deflation are factored in that current year. Inflation can be said to be the general increase of price level of goods within a given economy while deflation can be said to be the general fall in prices of goods within the economy. This GDP is very important in knowing the currency stability within the economy and also the economic growth of a country since it factor in the changes in price within the year. (Krugman, 1987) 1.1.2 Gross domestic product purchasing power parity GDP purchasing power parity is one of the economic theories used to calculate and determine the general currency value. It is used to estimate the amount which needs to be adjusted to a given exchange rate among countries for them to be equal or at par with each other. If you take two countries like united state and England, one need to know how much US dollars is needed to purchase the same goods at 10 England pound and that will give as the purchasing power (Krugman, 1987). . After getting the purchasing power parity rate, one is able to calculate the exchange rate of different countries. 1.1.3 Gross domestic per capita purchasing power parity As stated earlier, purchasing power parity is an economic theory used in determining the exchange rate. The Gross domestic product purchasing power parity per capita is the total number of final goods and services produced within a country in a given year then dividing the total with the average country population of that year. Purchasing power parity is very important in computing the GDP of different countries and comparing the general difference in the living standards between different countries as a whole since it take into consideration majorly cost of living and also consider the price changes due to inflationary and deflationary factors. 1.1.4 Real Gross domestic product growth Real gross domestic product is a GDP calculated at the market prices with reference to a given base year. After choosing a given base year the GDP for the current year is calculated by quantities of all goods and services and multiplying them with the prices of the base year. 1.1.5 Current account balance In terms of economics, current account can be said to be one of the primary parts of the balance of payment account. Balance of payment is the record which a country records all its transaction it does with foreign countries. The accounts include current account, capital account and the financial account. Current records transactions for goods and services, income of the country and the current transfer are also recorded here. The balance in the current account normally gives us the information whether the country is having deficit or a surplus. Components of current accounts include; Goods: these are just physical goods which are portable and movable from one place to another. Goods can either be exported or imported hence changing the ownership from one country to another. Import represents money out goods in while export represents money in goods out. Services: business normally needs services like banking, transport and money others, the transactions which takes place from intangible actions of the traders from one country to another is called services. Income: the money going out of the country that is on the credit side and other monies which gets into the business through salaries, investments and are recorded on the debit side. Current transfer: these the unilateral transfer of assets by the government through mutual agreement without getting anything in return. 1.1.6 Current account balance gross domestic product This is the sum of net export of the country in terms of goods and services, net income and net transfer divided by the total population of that given year. 1.1.7 Goods and services expenditure gross domestic product This is the total net inflow of goods and services both exported and imported in country within a given time period. 1.1.8 Inflation Inflation is the general price increase of goods and services within a given time period in the country. Price of goods can even reduce and in such a case it is called deflation. Oman inflation The government of Oman has put in place financial measures to control the inflation rate within the country, the spending plan is so candid in addressing the inflation rate within the economy, though it faces challenges such maintaining high growth rate within the country, and high inflation rates among the fast growing economy like Oman, it is clear that regardless of the challenges the government has managed to create jobs for more than 96 thousand people within the financial year 2011and 2012, this show that the country is on the path of development and prosperity and. The government through budgetary control measures provided more money which was used to provide civil expenditure and the security of the country which form part of capital expenditure. The expenditure has steadily increases for the past one year at the rate of 20.1% annually more so in the current expenditure. Revenue from oil has help in maintaining steady growth and keeping inflation low. The government is using all the necessary measures to control the inflation within the country. It is believes that high inflation rates can negatively impact on the real GDP, not only for Oman government but any other government, the threat for high inflation rate may be attributed to high rate of growth in public expenditure in both current and capital expenditure more especially in the year 2012 budget. Another problem is over reliance on the imported goods which leaves the country with deficit in the balance of payment, these imported goods include, raw materials, ready made good. Since the local currency is not stable and keeps on fluctuating, the prices of these commodities also keep on changing from to time and since the Oman government is operating in the open economy the changes in prices are not easy to control hence inflation rates. Currently the inflation rate stands at 4% on the GDP and the growth rate is at 7%, while the growth is steadily growing, the inflation rate also increases with time. This can only signifies that increase in GDP will positively increase the inflation rate in the economy. Since the government is planning in create more jobs through improvement of the infrastructure and other social amenities like hospital and schools, expenditure as greatly increase to 23% from 2011 budget represent 8.7% increase, in economics, increase in public expenditure means there is increase in money in circulation this might lead to expansionary inflation within the economy. Since the current expenditure by the Oman government constitutes 64% of the total budget, this is very harmful since it stimulates inflation growth though it helps in the short term employment creation but it cannot sustain steady economic growth. Deficit which is reflected on the Oman budget is as a result of the more import compared to the export which is majorly from the oil export, the overall balance of payment is experiencing disequilibrium. This occurs when there is either a deficit or surplus in the balance of payment. Factors causing disequilibrium includes; Fall in the volume of export of the country this leads to decline in earning hence deficit Increase in the volume of import, while export remains the same this will lead to disequilibrium in the balance of payment Restriction by trading partner Less capital inflow compared to outflow Hypothesis There is direct relationship between GDP and the inflation Increase in the economic growth and spending does not increase inflation in the country. The limitations of the paper There are some limitations in this paper. Firstly, this assignment does not have enough to grand any economic findings. Consequently, the data chosen is probably not the best choice of available data. For economic analysis spss is not the best software for doing the analysis but Eviews could be the most appropriate, the relationship of GDP and inflation can not only be measured using the above variables but other factors like economic stability and political stability also affect the inflation rate of a country.. Moreover, this essay only try to explain the data, hence the causes of the changes of the variable might not be perfectly given. Thirdly, the time limitation is another constraint of this paper. In some cases, the result of analysis will be improved if some data can be adjusted, for instance, the effect of the financial crisis should be eliminated in order to investigate the real effects of the variable. However, with the limitation of time these cases will be left as they are, but possible reasons will be given. Moreover, if a larger time scale was given different and more complex methods could have been usefully be applied for this set of data, for example, multiple regressions. 2.0 Descriptive data analysis This analysis intends to find out the relationship between the gross domestic product and the inflation within Oman country for a time period of time. Descriptive analysis will be used to explain the general characteristics of the variable, tables and charts will be employed to help in the analysis. Inferential statistics will be used to analysis the relationship where factor analysis will be done and correlation analysis. Data analysis Descriptive statistics analysis of variable In the fig. 1.1 it shows the gross domestic product at current prices as it moves from the first year upto the last year that is in year seven. Year five the Oman recorded the lowest volume of GDP current prices and later it grows steadily up to years even. Fig 1.1 Fig 1.2 the pie chart showing the GDP purchasing power parity From the chart above it is clear that GDP PPP in year seven is quite high compares to year 5 and 1. Fig.1.3GDP P per capita purchasing power parity Figure 1.3 From the above figure the gdp per capita ppp increases steadily showing economic growth form year one downwards between year three and year four it reduces drastically up to year five when t stated to rise steadily up to year seven. It shows consistency in the growth. Inflation rate Figure 1.4 Figure 1.4 show the growth in the inflation through out the period in the Oman the bar graphs show that the inflations are highest in the year three and lowest in year 5 and 7. This does not necessarily shows positive economic growth. The real GDP Fig 1.5 The real GDP shows a steady growth of economy from the year one up to year three, then it decline sharply in year three and four, it later picked up towards year seven. Descriptive Statistics N Minimum Maximum Mean Std. Deviation YEAR 7 2006 2012 2009.00 2.160 GDPCURPR 7 40.00 80.00 57.5429 15.19132 GDPPPP 7 60.00 90.70 74.4000 11.49565 GDPPERC 7 1456.00 25152.00 15154.5714 9820.45314 GDPPCPP 7 22458.00 44532.00 28528.8571 7334.61186 REALGDP 7 3.90 13.10 6.6429 3.08483 CURACBAL 7 599.00 12152.00 5555.1429 4480.84893 CARACBGD 7 1.20 16.70 8.4571 5.37862 GDSEVGDP 7 .00 67.70 54.3286 24.13474 INFLATIO 7 3.20 12.60 5.2714 3.36141 Valid N (listwise) 7 From the above figure represent the general descriptive of the different variable giving the different values of the variable mean, median, maxima, minima and the standard deviation of the variables. Inferential analysis of data In this section the relationship between the variables and growth is illustrated. The main method used in this section is regression analysis and correlation analysis of variables. However, before the simple regression analysis is presented, it would be useful to examine the relationship between key variables using the above table. The empirical out come presented in here shows a strongly relationship between inflation and the growth in the economy and it exert positive pressure on the growth. Since the beta in the gross domestic product in purchasing power parity is positive that is 0.232 signify that there is positive relationship between purchasing power and the inflation level. If people are able to spent, that is they have more disposable income, the demand of good will increase causing shortage in supply, this in turn will push prices hence inflation rate increases. “The law demand states that lower prices will lead in increase in demand”. But when demand increases supply decreases causing shortage which will in turn stimulate price increase hence inflation in an economy. Gross domestic product per capita also is directly related to inflation due to increase in more disposable income and this can lead to inflation. The significance here is 0.132. Real GDP has the significance of 1 showing strong relationship of the growth and development. Has seen earlier the growth in economy if not checked well can lead to high inflation rates within any given economy. Model R R Square Adjusted R Square Std. Error of the Estimate 1 1.000(a) 1.000 1.000 0.00 The R, R squre, and adjusted R are both 1.00 while standard error will be 0.00 this shows that there are close relationship. Probably, there are at least two points to note about this insignificant result. Firstly, because the data used covers the period of the Oman financial crisis, this includes the time that saving cannot be mobilized to fund the investment and the net import was high. As a result, of course, saving cannot generate growth. In other words, insignificant of the result does not guarantee that there is no relationship between the GDP and inflation. However, in this case, it probably is a consequence of the failure of the financial system to allocate and manage inflation in the country that causes the insignificance. Secondly, financial liberalization allowed foreign capital to flow out hence causing inflation. Domestic investment did not any longer rely heavily on domestic saving. As a consequence, the effects of foreign capital and its volatility on growth dominate the impact of the domestic savings. . Coefficients (a) Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) -7.898 .000 0.00 0.00 GDPPPP .068 .000 .232 0.00 0.00 GDPPERC 4.697E-05 .000 .137 0.00 0.00 GDPPCPP 1.370E-05 .000 .030 0.00 0.00 REALGDP 1.099 .000 1.008 0.00 0.00 CARACBGD -.152 .000 -.243 0.00 0.00 GDSEVGDP .018 .000 .132 0.00 0.00 a Dependent Variable: INFLATIO Conclusion In conclusion we can say that there is a close relationship between the GDP and inflation. This is caused by the fact that, when there is spending from the government to stimulate economic growth, there is a lot of money left in circulation hence purchasing power increases which in turn causing high demand on goods and services which later pushes prices up hence increase in the inflation rate. Government need to put in place good control measures and monetary policies to ensure that increase in the inflation is in proportionate with increase in economic growth. Bibliography Bradley, T. (2007) Essential Statistics for Economics, Business and Management, Great Britain: John Wiley and Sons Krugman, P. R. (1987) ‘Is Free Trade Passed?’, Economic Perspective, 1:131-144 World Bank of Oman. (2007), Economic Data. Available from: www. Worldbank.co.ke Appendices ANOVA Sum of Squares df Mean Square F Sig. GDPCURPR Between Groups 1384.657 6 230.776 . . Within Groups .000 0 . Total 1384.657 6 GDPPPP Between Groups 792.900 6 132.150 . . Within Groups .000 0 . Total 792.900 6 GDPPERC Between Groups 578647799.714 6 96441299.952 . . Within Groups .000 0 . Total 578647799.714 6 GDPPCPP Between Groups 322779186.857 6 53796531.143 . . Within Groups .000 0 . Total 322779186.857 6 REALGDP Between Groups 57.097 6 9.516 . . Within Groups .000 0 . Total 57.097 6 CURACBAL Between Groups 120468042.857 6 20078007.143 . . Within Groups .000 0 . Total 120468042.857 6 CARACBGD Between Groups 173.577 6 28.930 . . Within Groups .000 0 . Total 173.577 6 GDSEVGDP Between Groups 3494.914 6 582.486 . . Within Groups .000 0 . Total 3494.914 6 Variables Entered/Removed(b) Model Variables Entered Variables Removed Method 1 GDSEVGDP, GDPPCPP, REALGDP, CARACBGD, GDPPERC, GDPPPP(a) . Enter a Tolerance = .000 limits reached. b Dependent Variable: INFLATIO Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 1.000(a) 1.000 1.000 . a Predictors: (Constant), GDSEVGDP, GDPPCPP, REALGDP, CARACBGD, GDPPERC, GDPPPP ANOVA(b) Model Sum of Squares Df Mean Square F Sig. 1 Regression 67.794 6 11.299 . .(a) Residual .000 0 . Total 67.794 6 a Predictors: (Constant), GDSEVGDP, GDPPCPP, REALGDP, CARACBGD, GDPPERC, GDPPPP b Dependent Variable: INFLATIO Correlation Matrix YEAR GDPCURPR GDPPPP GDPPERC GDPPCPP REALGDP CURACBAL CARACBGD Correlation YEAR 1.000 .915 .992 .532 -.376 -.425 .793 .723 GDPCURPR .915 1.000 .939 .641 -.286 -.090 .918 .868 GDPPPP .992 .939 1.000 .536 -.306 -.379 .809 .731 GDPPERC .532 .641 .536 1.000 -.540 .195 .568 .517 GDPPCPP -.376 -.286 -.306 -.540 1.000 -.165 -.112 -.149 REALGDP -.425 -.090 -.379 .195 -.165 1.000 -.111 -.026 CURACBAL .793 .918 .809 .568 -.112 -.111 1.000 .984 CARACBGD .723 .868 .731 .517 -.149 -.026 .984 1.000 GDSEVGDP -.535 -.564 -.550 -.388 -.069 .257 -.466 -.356 Sig. (1-tailed) YEAR .002 .000 .110 .203 .171 .017 .033 GDPCURPR .002 .001 .061 .267 .424 .002 .006 GDPPPP .000 .001 .107 .252 .201 .014 .031 GDPPERC .110 .061 .107 .105 .337 .092 .117 GDPPCPP .203 .267 .252 .105 .362 .406 .375 REALGDP .171 .424 .201 .337 .362 .407 .478 CURACBAL .017 .002 .014 .092 .406 .407 .000 CARACBGD .033 .006 .031 .117 .375 .478 .000 GDSEVGDP .108 .094 .100 .195 .442 .289 .146 .217 Read More