Relationship between Inflation and employment rates and GDP

Relationship surrounded by Inflation and piece of change by reversal vagabonds and megascopic internal harvest-festivalINTRODUCTION1.1 BACKGROUND receipts ho manipulation servant ingathering as an power of wealth and whence quality of life has long been criticized (Mederly, P. and et al. 2003). Gross Domestic Product ( earthy municipal product) is the value of get production of goods and services in a sphere over a specified period, typically a year. The perfect(a) domestic product (gross domestic product) or gross domestic income (GDI) is a prize of a earths overall stintingalalal make gross domestic product evict be de bourneined in ternary ways, all of which should in principle afford the same subject. The intimately direct of the three is the product approach, which sums the emergeputs of every sepa identify of enterprise to arrive at the nub. The exp deathiture approach works on the principle that all of the product must be bought by mostbody, on th at summitfore the value of the supply product must be equal to quite a littles total exp closeitures in buying things. The income approach works on the principle that the incomes of the amentiferous factor must be equal to the value of their product, and determines GDP by finding the sum of all producers incomes (Bureau of Economic Analysis, U.S Department of Commerce, 2007). The most familiar approach to measure GDP is the expenditure methodGDP= mystical consumption + gross investment + government spending + (exports imports)GDP = C + I + G + (X-M)(Equation 1.1)An until nowt in 1975 that remind us the authoritative GDP in our country where the Malaysian prudence slumped into its great recession, with a GDP ripening roam of whole 0.8 percent, comp ard to 8.3 percent in 1974. This is 1 of the cause of amplify in oil equipment casualtys and then substantial toll increase in 1973 were bought virtually mainly shortage of food and mad materials arising from bad weather and increased come demand (subgenus Cheng, M.Y. and Tan,.H.B. 2002).According to the in a higher(prenominal) place circumstances occurred in 1975, the police detective has choosing unrivalled of variants that may relate with wavering of GDP which is flash calculate. Inflation means either an increase in the property supply or an increase in price directs. Generally, when we fall upon about pretentiousness, we atomic number 18 hearing about a rise in prices comp ared to several(prenominal) benchmark.The drive of the perfumes of lump on frugal step-up continues to be an serious and complex egress in scotch science. If rising prices has rattling scotch effects, then governments send word influence sparing movement finished monetary policy (Risso, W.A and Carrera, E.J.S, 2009). Therefore, investigating how pompousness affects sparingal harvest-feast pertains at present to the optimal design of monetary policy. Results from such studies are particul arly important for economies.Besides the lump, the searcher has considered total participation as one of the changeable in the model since scotch harvest-feast and battle are cor associate surrounded by each others. The family kinship amidst unemployment and GDP is called Okuns law. It is the association of a higher case economic produce with the come trim back in content unemployment. This is because in redact to increase the economic output of a country, people al lower-ranking for need to go back to work, thus laborious unemployment.In indian lodge to oppose the kindred exist mingled with GDP and employment, the queryer has found out the issue supporting the possible action that GDP and employment has a ap dappleed blood surrounded by each others. According to Hassan, M.K.H. and et al. (2010), in the period of 1996 -1997, the manufacturing sector experienced a rapid harvest-festival producing the employment appraise in the sector to grow at 7.7 per cent per annum provided later declining to negative 3.6 percent in 1998 due to the economic recession. In addition, in year 2000, the Malaysian manufacturing sector contributed 33.4% to gross domestic product (GDP), 85.2% to total export and 27.6% to total employment.1.2 PROBLEM STATEMENTInflation is a major(ip) source of economic instability because it weakens incentives for work and production, distorts the allocate dexterity of the market mechanism, erodes international competitiveness of the domestic industry, and reduces fruit potential. According to teaching by Fischer and Modigliani (1980) suggested a negative and nonlinear consanguinity between the rate of ostentation and economic crop through the newfound ripening theory mechanism.Furthermore, fanfare also damages economic growth by blueering domestic and impertinent savings, reducing force of resource allocation, and deteriorating the eternal sleep-of payments (Risso, W.A. and Carrera, E.J.S., 2009). Accordin g to Cheng, M.Y. and Tan, H.B. (2002), the delivery has experienced episode of high (1973-1974, 1980-1981) and low (1985-1987) regimes of largeness, and was able to contain low and stable pompousness during the high economy growth period of 1988-1996.The guerrilla problem statement that should be concerns since the employment can affect the economic growth and it is important variable to determine the quality of production for national output and next will influence the GDP of our country. For example, in the proto(prenominal) 1990s, the unemployment rate increased for about a year following the end of the previous recession. Coming out of a recession, companies are thought to be reluctant to hire many more workers until they are convinced about the sustainability of a new economic recovery enchantment people who had leftover the labor force during the recession return to seek to find jobs (Seyfried, W.).Therefore, the detective channelises this research in stray to exami ne the coefficient of coefficient of coefficient of correlation exists between pompousness rate and employment with GDP so that we can help the country to mitigate the problem occurs by supporting the governments policies to increase the countrys GDP. In addition, this research also useful since the results of the studies can be utilise in policys purpose for resource allocation in order to accelerate economic growth.1.3 OBJECTIVESThe objectives of the take up are to1.3.1 Analyze the kindred between Inflation Rate and Gross Domestic Product in terms of magnitude and direction.1.3.2 Analyze the relationship between Total Employment and Gross Domestic Product in terms of magnitude and direction.1.4 SIGNIFICANCE OF THE STUDYThe significances of this orbit are as follow1.4.1 ResearcherThis study will help the researcher to acquit their course requirement and will be as guidelines for their field of work in the future. The researcher can gain many experiences in order to compl ete this research. There are lot of weaknesses may be obtained and this will encourage the researcher to provide the better research in the future. coming(prenominal) researcher will know and more understanding about gross domestic product when conduct this research. It will give the knowledge to the researcher to identify the correlation exist between inflation rate and employment and it always make the researcher briefing to know deeply and utilize the study.1.4.2 OrganizationThis study might help the organization in analyzing the countrys economic condition in order to prevent and reduce the risk during the inflation and know the effects of the crisis occurs to them. This study also may give both(prenominal) guidance to them to protect their company and industry itself.1.4.3 PublicThis study can inform and gives some knowledge to the public the relationship between economic growth, inflation rate and employment. They also can make preparation to wait the increase in inflation rate and able to survive in that situation.1.5 SCOPE OF THE STUDYThe researcher chooses to conduct the research about GDP in Malaysia from 2000 until 2010 In this study, the researcher wants to determine the correlation exist between inflation rate and employment with GDP in Malaysia. It is important because as economic planners and forecasters used the GDP per capita in monitoring economic growth trend for cartridge clip series. The charm of selective information of GDP, inflation rate and total employment were collected from Department Of Statistics Malaysia in quarterly basis.1.6 THEORETICAL clothFigure 1.1 Theoretical FrameworkINFLATIONRATEGROSS interior(prenominal)PRODUCTEMPLOYMENTRATERATEIn figureent variables Dependent inconsistentFigure 1.1 represents the capable variable and breakaway variables in this study. The break down of suppositional framework has been clarified by Sekaran, U. (2003) which is a conceptual model of how one theorizes or makes logical sense of the relationship among the several factors that fix been identify as important to the problem. Figure above clearly discuss the correlation between Gross Domestic Product which is variable unproblematic to the researcher while Inflation Rate and Employment act as independent variable which is influences the dependent variable.1.7 HYPOTHESISIn classical test of probatory, devil kind of shot are used. They are Null Hypothesis and counterchange Hypothesis. Hypothesis is a conjectural statement that describes the relationship among variable even negative or irresponsible. Null supposition which is represent by H0 symbol to channelise that the relationship between independent and dependent variable is non exist. However alternate hypothesis is representing by H1 symbol to show that the relationship is existing between both dependent and independent variable.According to Sakaran (2004), a hypothesis defines as a logically conjectured relationship between 2 or more variables expressed in the form of testable statement. Relationship a conjectured on the basis on the network of associations established in the theoretical framework formulated for the research study.There are two hypotheses that can describes the correlation exists between dependent variable and independent variables. Therefore the hypothesis that can be tested as followsInflation and GDPH0 at that place is no probatory relationship between inflation and GDP.H1 there is a significant relationship between inflation and GDP.Employment and GDPH0 there is no significant relationship between employment and GDP.H1 there is a significant relationship between employment and GDP.1.8 LIMITATION / CONSTRAINTSThe limitations / constraints are1.8.1 era constraintThe length of time is special since the researcher does not bring in much time to make detailed research. The time provided only three months and the researcher need to divide time properly to complete the research because the process of c ollecting data is quite difficult.1.8.2 Cost constraintThe toll involves is quite high since as a student, the researcher only depend on the loan employ. Examples of cost involve in order terminate this research such as cost of printing, cost of maintaining the laptop, cost of surf the internet and etc.1.8.3 Data constraintSince the researcher use the auxiliary data, the collection of data that have been publish are so limited and the related material are not very supporting the topic of research.1.8.4 Lack of experienceThe researcher is less of experience in conducting the research therefore needs to refer the researchers advisor to process the data and instruction the skill that needed as a good researcher.CHAPTER 2lit REVIEW2.1 DEPENDENT VARIABLE2.1.1 GROSS DOMESTIC PRODUCT (GDP)Generally, jibe to Chan, W.W. and Lam, J.C. (2000), gross domestic product is a common measure of the economic well-being of a society. When government officials plan for the future, they consider the various economics sectors contributed to the gross domestic products. In the other study by Ivanov, S. and Webster, C. (2007), they use the growth of genuineistic GDP per capita gr as a measure of economic growth in line with other publications in the field (see Ivanov and Webster, 2007 Lopes et al., 2002 Plosser, 1992). The function of GDP also has been explained by Kosmidou, K. (2008) where gross domestic product (GDP) is among the most commonly used macroeconomic indicators, as it is a measure of total economic activity within an economy. The gross domestic product growth (GDPGR), calculated as the annual change of the GDP, is used as a measure of the macroeconomic conditions.The significance between GDP, external trade and distant direct investment has been discussed by Liu Ying and Cui Riming (2008) where the economy is highlighted by the significant performance of both its economic growth and its foreign trade and foreign direct investment. Under this background, the correlation of foreign trade, foreign direct investments and economic growth in has become an important issue for academic research. prior studies support that foreign trade and foreign direct investment have positive impacts on gross domestic product (GDP). In the study by Malul, M. and et al. (2008), the GDPpc is used mainly to compare the standard of sustainment in several(predicate) countries. It means that the higher of cost of living in a country, the higher earning of gross domestic product of the country. According to Wong, K.Y.(2008),economic growth of an economy refers to the expansion of its production possibility set, as a result of assemblage of primary factors such as labor and capital (physical and human), or amelioration of production technologies. However, because the production possibility frontier (PPF) of an economy is not observable, economic growth is usually measured in terms of the growth rate of some observable variables such as real GDP or real per cap ita GDP.Besides that GDP also one of the result of the countrys economic activities based on the statement of Daly and Cobb (1989), GDP expresses the content of physical flows of capital, industrial production, services, resources and agricultural product. The scientific research has been conducted by Ligon and Sadoulet (2007) using a essay of 42 countries show that GDP growth, which comes from agriculture is at least double as wet in reducing poverty compared to GDP growth coming from nonagricultural areas. In order to know the correlation between inflation and growth, Gokal, V. and Hanif, S. (2004), stated that the tests revealed that a weak negative correlation exists between inflation and growth, while the change in output gap outwears significant bearing. The source between the two variables ran one-way from GDP growth to inflation. art object, consort to some consensus exists, suggesting that macroeconomic stability, specifically defined as low inflation, is positively related to economic growth.2.2 INDEPENDENT VARIABLES2.2.1 INFLATION RATE (INF)Inflation on economic growth continues to be an important and complex topic in economics. If inflation has real economic effects, then governments can influence economic performance through monetary policy. Therefore, investigating how inflation affects economic growth pertains instantly to the optimal design of monetary policy. According to Andres and Hernando (1999), for example, reducing inflation by one percentage point when the rate is 20 percent which results in an increase in the growth rate of 0.5 percent, compared to reducing inflation by one percentage point when the inflation rate is around 5 percent, which results in a decrease in the growth rate by 1 percent. Furthermore, a study by Mallik and Chowdhury (2001), the structuralisms argue that inflation is incumbent for economic growth, whereas the monetarists argue the opposite, that is, inflation is detrimental to economic growth such debate started in the 1950s, focused on developing countries, which had long suffered from low-growth judge with high rates of inflation and larger deficits in the equilibrize of payments.In order of inflation, the monetarists argue that price stability promotes economic growth and protects the balance of payments. They argue that inflation is major sources of economic instability because it weakens incentives for work and production, distorts the allocative efficiency of the market mechanism, erodes international competitiveness of the domestic industry, and reduces growth potential. They also argued that inflation damages economic growth by lowering domestic and foreign savings, reducing efficiency of resource allocation, and deteriorating the balance-of-payments. To monetarists, stable prices are the starting point in the process of economic development. The policy choice of a country would be stabilization with growth, or stabilization without growth. Several papers are typical of the monetarist tradition.To argue that, according to Fischer and Modigliani (1980) suggested a negative and nonlinear relationship between the rate of inflation and economic growth through the new growth theory mechanism proposed a model where the agents decide the level of labor output, and an increase in inflation reduces labor supply, and producing a decrease in economic production. On the other hand, a study by Mundell and Tobin (1965), the structuralizes argue that inflation normally accompanies economic growth in developing countries because structural rigidities and bottlenecks in supply sectors prevent the elastic supply of some basic commodities such as food, housing, energy, and transportation. Increased income as a result of growth would expand demand for such basic commodities, and prices would rise. The structuralize position is that economic difficulties in developing countries have roots deeper than just the results of inflation. Thus, structuralizes thought that infl ationary pressures and adulteration in the balance of payments inevitably are attendant matters of economic growth. In developing countries, there thus would be a trade-off relationship between economic growth and inflation and an attendant deterioration in balance of payments.If a developing country wants stabilization of prices and balance of payments, it must reduce the speed of economic growth, including a sacrifice of employment. Among scholars who support the structuralize position on a positive relationship between inflation and economic performance, predict a positive relationship between the rate of inflation and the rate of capital accumulation, which in turn implies a positive relationship to the rate of economic growth. But, DeGregorio (1996) and Fischer (1926) pointed out, since money and capital are substitutable, an increase in the rate of inflation increases capital accumulation by turns in portfolios from money to capital and thereby stimulate a higher rate of ec onomic growth was the first to establish a negative correlation between inflation and unemployment.According to Grier and Grier (2006), it presents evidence on the real effects of inflation and inflation uncertainty on output growth. Their main findings are as followsInflation uncertainty has a negative and significant effect on growthOnce the effect of inflation uncertainty is accounted for, lagged inflation does not have a direct negative effect on output growth andAs predicted higher average inflation raises inflation uncertainty, and the overall net effect of average inflation on output growth.Differ with theory of Bortis, H. (2004), he argues that inflation is a macroeconomic phenomenon correspond by a gap between worldwide supply and global demand. Inflation affects the money-output relationship, as does deflation both phenomena modify the purchasing power of money over domestic output. In this view, price indices cannot come to grips with the inflation phenomenon. While Che ng and Tan (2002) in their study inflation in Malaysia, suggested that main factors touch Malaysian inflation were external (foreign trade, foreign direct investment and engine room transfer). Malaysia has been comparatively successful in balancing strong economic growth with moderate levels of inflation in the periods preceding and following the Asian fiscal crisis. Actually, empirical results related to low and medium inflation are of a mixed nature some papers (mainly these analysing the developed economies) argues that moderate inflation negatively affects growth (e.g. Alexander, 1997, Gillman et al. 2002 Gillman and Harris 2009 Gillman et al. 2001 Fischer 1993 De Gregorio 1992 and 1993) while other argues that moderate inflation is truly stimulating growth.On the theory side Friedman (1977) in his Nobel lecture argues that a positive relationship between the level of inflation and inflation uncertainty. Friedman points out higher inflation leading to greater uncertainty, whi ch lowers welfare and efficiency of output growth. On the other hand, Ball (1992) formalizes Friedmans hypothesis using an asymmetric information game where public faces uncertainty regarding the type of policymaker in the office. One of the policymaker is volition to tolerate a recession to reduce inflation and the other is not. During the low inflation time, both type of policymakers will attempt and try to foreclose it low. But, when inflation is high, only the tough type or anti-inflation policymaker will bear the economic costs of disinflation. The argument that central banks should emphasize holding down inflation comes from the beliefs that inflation has an adverse effect on macroeconomic variables, such as output and productivity growth.According to Clark (1982), inflation causes misperception of the relative price levels and leads to inefficient investment plans and therefore affects productivity inversely. Furthermore, inflation erodes valuate reductions for disparageme nt and raises the rental price of capital, which in turn causes a reduction in capital accumulation and therefore in labour productivity. In addition, according to Feldstein (1982) inflation disrupts investment plans by imposing a higher tax rate on corporate profits and through higher effective tax rates on corporate income and accordingly affects productivity (Gilson, 1984 Boskin et al., 1980). Finally, inflation distorts price signals and reduces the ability of economic agents to operate efficiently (Smyth, 1995). According to Chen and et al. (1991), it has documented a significant relationship between the US received returns and real economic variables such as industrial production, real GNP, interest group rates, inflation and money supply.Besides that, there are also otherwise arguments that there is no relation between inflation rate and gross domestic product in the long mental test. For instance, Faria and Carneiro (2001) investigate the relationship between inflation a nd output in the context of an economy facing heady high inflation and they find that inflation does not affect real output in the long run, but that in the short-run inflation negatively affects output. In addition, scholars such as Sidrauski (1967) suggest that there is no relationship between inflation and economic growth, supporting the hypothesis of superintendent neutrality of money. On the other hand, Sarel (1995) asserts that there is a nonlinear relationship between inflation and economic growth. Using 87 countries, he finds the population of an inflation sceptre of 8 percent. Above the threshold there is a negative relationship between inflation and economic growth, whereas under the threshold there is a positive but not significant relationship.The others studies in order to prove Sarels result, Judson and Orphanides (1996) divide Sarels sample of countries into three groups, and they find sympathetic results to Sarel, finding a threshold of 10 percent. Ghosh and Phi llips (1998a, b) study 145 countries in the period 1960-1990 again finding similar results. Paul et al. (1997) study 70 countries (of which 48 are developing economies) for the period 1960-1989. They find no causal relationship between inflation and economic growth in 40 percent of the countries, bidirectional causality among 20 percent of the countries, and unidirectional causality for the rest (either inflation to growth or vice versa). Lastly, Mendoza (1998) finds that inflation has had no effect on Mexicos long-run economic growth since he conducted the study of inflation in Mexico.2.2.2 EMPLOYMENTSome of studies have been conducted to examine the relationship between gross domestic product and employment. For instance, according to Okun (1962) and Philips (1958), they found different relationship both of these. Okun found a negative correlation between unemployment and economic growth, then from both propositions it can be deduced a positive relationship between economic growth and inflation while Phillips proposed a positive relationship between inflation and unemployment implying the same type of relationship. In addition, Boltho and Glyn (1995) found elasticities of employment with respect to output growth in the order of 0.5 to 0.6 for a set of OECD countries. While according to Evangelista and Perani (1996) discovered evidence suggesting that restructuring of major economic sectors reduce the relationship between economic growth and employment.A specific research conducted by Seyfried, W., among the G7 countries (Canada was excluded), a positive and significant relationship between growth in value added and employment was found only in Germany and the US. In addition, according to Verdoon (1949) and Kaldor (1966), an increase in output growth of 1 percent leads to an increase in productivity and employment growth of half a percentage point each. It should be noted that the higher the productivity effects of growth, the more difficult it will be to s lip away unemployment from rising. According to Okuns Law an increase of the economic growth rate by 3 percent (above the normal rate) was expected to reduce the unemployment rate by 161 percentage point. Or, to put it the other way round The gain of real GDP associated with a reduction in unemployment of one percentage point was estimated to be 3 percent.Several studies also have been conducted to examine the correlation exists between employment and inflation rate. One of the studies by Spithoven, A.H.G.M. (1995), by the end of the 1960s evidently there was no fixed relationship between unemployment and inflation. Empirical research revealed that the relationship was not consistent over time and varied sharply between countries. This was explained as follows in the short run higher nominal wages attract more labour and perplex a fall in the rates of unemployment. As soon as the workers recognize the wage rise to be purely nominal they give over from work, and unemployment is res tored to the pre-wage-rise level, but with a level of prices higher than before. Secondly, according to Brenner (1991), confronted with a combination of unemployment and inflation (stagflation), many governments abandoned efforts to regulate the economy by the Keynesian instruments. They declared fiscal policies ineffective and sought refuge in a mixture of monetary measures with supply-side economics.According to Keynes (1946), the volume of employment is given by the point of intersection between the aggregate demand function and the aggregate supply function. This was naively interpreted and construed to imply that a rise in costs and with this was meant a rise in costs owing to increasing government expenditure will result in an upward shift of the supply curve and will cause greater unemployment and inflation.CHAPTER 3enquiry METHODOLOGY AND DESIGN3.1 MODEL SPECIFICATIONThis study is to examine the correlation exists between inflation rate and total employment with gross dom estic product. It uses secondary data which is based on time series data. The collection of time series data from 1982 to 2006 and the scope is in Malaysia. The researcher utilise STATA software to process the data and log-log model in this study. The model applied a log transformation, since log transformations help, at least partially, to eliminate the strong asymmetry in the distribution of inflation (Sarel, 1995) and (Ghosh and Phillips, 1998a, b). The logarithm equation is indite in the Equation 3.1.GDP = + 1In(INF) + 2ln(EMP) + (Equation 3.1)Where,GDP = Gross Domestic Product = Constant1 = Inflation2 = Employment = Error termIn above equation, it shows clearly dependent variable that has been applied in this study is gross domestic product, besides that, the researcher also used two independent variables which are quantitative variables, they are inflation rate and total employment.3.1.1 DEPENDENT VARIABLEThe dependent variable is the variable of primary interest to the res earcher. The researchers goal is to understand and describe the dependent variable, and to explain its variability, or predict it (Sekaran, 2006). Dependent variable of this study is factor contributed to the gross domestic product. According to Zikmund (2000), independent variable is a criterion that predicted or explained. It show that the component contributed to improving of gross domestic product depend on the listed independent variables.3.1.2 INDEPENDENT VARIABLESAccording to Zikmund (2000), independent variables that expected to influence the dependent variable. Refer to (Burn and Bush, 2000), independent variables are those variables over which the researcher has some secure and wishes to manipulate. In this study, two independent variables will influence the dependent variables. They are inflation rate and employment.3.2 DATA SET AND METHODOLOGYThe collections of data in this research only gain from secondary data and based on time series data which are from 2000 to 2010. The researcher has considered annual data of real GDP, inflation rate and employment. All the data on the growth rate of real GDP, Inflation and total employment were obtained from Department of Statistics Malaysia database. GDP is considered per capita. In addition, according to Aigenger (2005) per capita real GDP is also used as an alternative measure of productivity, as some theoretical models do. Moreover, according to OECD (2001), living standards as represented by per capita income reflects productivity since the former is determined, to a significant extent, by the latter. CPI consider in weight 100 while employment in number of labor. The variables were selected based on relevant economic theories that allow for the interaction among inflation rate and total employment in addition to response to GDP.3.3 TECHNIQUE ANALYSIS DATAIn this research, the researcher has applied unit SPSS in order to determine time series data is stationary or non stationary about the correlation be tween inflation rate and employment with gross domestic product. The researcher examines the man of a long-run relationship between inflation and employment with GDP using a vector error-correction model (VECM) after applying Johansens (1988, 1990, and 1995) cointegration technique. We conduct a test for weak exogeneity in order to do inference. Then, the researcher conduct stability test by using Jarque Bera test in order to test normality distribution between the variables selected. Finally, a modified rendition of the Granger causality test is applied in order to hit the books causality between the variables.3.4.1.1 Multiple Regression AnalysisMultiple bilinear regression abridgment is an analysis of the relationship between one variable (dependent variable) and set of variable (independent variables). It is used by the researcher to test the hypothesis. As in all hypothesis tests, the goal is to reject the null hypothesis and accept the alternative hypothesis.This technique will identify how much of the sectionalization in the dependent variables can be explained by independent variables. This analysis is used primarily for the purpose of pre