Economic growth is a term that been used to indicate an increase in gross domestic product (GDP) per capita or measure of aggregate income. This is frequently measured as the rate of change in GDP. Economic growth refers to the amount of goods and services produced. Economic growth can be either positive or negative. Negative growth can be seen from economic recession or depression. Economic growth also can be seen as positive change in the level of production of goods and services by a country during specific period time. The nominal growth of the country can be defined as economic growth including inflation, while real growth is the nominal growth minus inflation. (Investor word, 2010)
Inflation can be defined as the increases in the overall general price of the goods and services in an economy, usually as considered by the consumer price index and producer price index. Normally when inflation happen price of dollars currency will be fall because a person not be able to purchase as much with dollar or in other word power of dollars have been falling. If the country has seen small percentages of this problem will be happen at the countries so that government and central bank of that country will take action to stabilize it. (wiseGEEK, 2010)
1.2 The relationship between economic growth and inflation
Economic growth and inflation is a study of economy, two of this study can affect economy in the countries if the country has face this problem. Between Economic growth and inflation can have positive and negative relationship. An increase in economic growth will affect an increase in inflation and decrease in economic growth will reduces inflation (Henderson, D. 2007). According to tutor2 in the economic theories said that Economic growth can be affected by increase in aggregate demand could cause the acceleration of inflation as the economic use of scare resources and short-run aggregate supply becomes inelastic. When SARS is elastic, the shift to the right of aggregate demand can be met easily by the increase in GDP. But when SARS becomes inelastic, the trade-off between growth and inflation worsen, an increase of AD tends to results in a higher price than the increase in output and employment. For example, LRAS can be improved by achieving sustainable improvement in productivity, technological progress and the benefits that come from innovative products and processes. Potential output is also increased by expanding the supply of capital goods and through increased in supply of workers available. The shift to the right in LRAS means that the economy can meet the higher level of aggregate demand without providing upward pressure on general price level.
1.3 US economy background
US are the largest country and the most powerful country also the stronger country in the world. They have GDP per capita of $46,400. In the business firm US enjoy the greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant, to lay off surplus workers, and develop new product. Moreover US also have good technology by using that technology US can become stronger to control business world. Most of the currency in every country will see from US currency or will make comparison with US currency because US is the strong country that handle all the country in the world. But US also has faced the economy problems in 2008 this is current economic problem that US faced, economy of US on 2008 is very unstable because of that many others country in the world also be affected. The problems of US on 2008 also affected the economic growth and inflation at that country. (CIA, 2009)
The economic growth will affect the inflation level at US. Factor that can influence the economic growth is by increase in the interest rate. Increasing in the interest rate will cause the growth for the US country. The increasing in interest rate will make the item in the country become expensive. So the export will become expensive and the import will become cheaper. This will cause the inflation for the US country. The demand for the foreign currency will become higher than the demand for the local currency. So the US currency will depreciated at the end and the foreign currency will be appreciated. (Voice of America, 2010)
Refer to the diagram 1 above show that the gross domestic product within 30 years in US. US have stable graph line within 30 years in GDP. The highest GDP on 1984 around 7.186 and the lower GDP in US since 1982 around -1.983, and the graph also show that the average GDP in US around 4. But US still have the stronger GDP since 30 years.
From the diagram 2 above show that the inflation rate in the US is not stable. The highest inflation rate in US in year 1980 is 13, 58% than the lowest inflation rate in year 2009 is-0.34. The spread of the highest and the lowest inflation rate is very big spread. This spread show that inflation rate in US are totally unstable depend on how government can handle the inflation rate to make the inflation rate become stable. However, US have unstable inflation rate government of US also can handle and know how to arrange the economic problem to make economic become better in their county.
As the table 1 show that the current economic indicator above show that the inflation rate in year 2010 is 1.11% and GDP growth is 2.70% so that economic in the country now is good or they have stable economic growth. Current information that show in the table above of unemployment is 9.50% US have very low percentage of unemployment in their country so the graph above show that they have very good economy performance in the year 2010.
2.1 Problem statement
The research have obtain the result, result that can show many problems between economic growth and inflation in real life economic. They have state some issue from malik,G and Anis,C said that the relationship between inflation and growth remains a controversial one in theoretical and empirical find that originating in the Latin American context in 1950s, this problem has generated an eternal debate between structuralize and monetarists. Structuralizes believe that inflation is very important for economic growth, while the monetarist view of inflation as harmful to economic progress. There is two aspect of this debate: first aspect is the nature of that relationship if any, and second aspect is direction of causality. Friedman has briefly explained unconvincing nature of the relationship between inflation and economic growth, with or without inflation growth there is no inflation with and without economic growth.
Another issue said that the relationship between economic growth and inflation remains a controversial one in this leads to a more conventional investment strategy than will occur, eventually leading to bottom level of investment and economic growth. Inflation can also reduce internationally competitive country, by making exports relatively more expensive, so the impact on balance of payment. In addition, inflation can interact with the tax system to distort the lending and credit decision. The company may have devoted more resources to deal with affect of inflation. For example: monitoring they are more aware competitor prices to see if there is a part of the increase in general inflation trends in the economy or because it causes more industry specific. (Hanif,S , 2004)
Furthermore, Europe country that have face inflation and economic problem on 31 august 2000, Europe Central Bank (ECB) raised interest rates 0.25%, while the ECB is right to worry about inflation, it is the wrong action. The fact is, an increase in CPI is very likely in Europe, thanks to the continuing weakness of the euro, and the logical solution would be to strengthen the currency and create a mechanism for future stability. Instead of stabilizing the value of the euro, by contrast, economic growth ECB attack as the bearer of inflation, hitting with a growth rate higher. (Andrew West, 2000)
2.2 Research Question
What are the relationship between economic growth and inflation rate in the country?
What is the strength between the relationship of the economic growth and inflation?
2.3 Research objective
To find out the relationship between economic growth and inflation in the US and also want to know how strong is the relationship between economic growth and inflation in the country.
To find out is there any other variable which affect the economic growth and inflation.
2.4 Hypothesis
H0: There is no relationship between inflation rate and economic growth
H1: There is relationship between inflation rate and economic growth
Literature review
3.1.1 INFLATION AND ECONOMIC GROWTH: EVIDENCE FROM FOUR SOUTH ASIAN COUNTRIES
Girijasankar Mallik and Anis Chowdhury (2001)
This paper seeks to examine the relationship between inflation and GDP growth for four South Asian countries. It shows a long- run positive relationship between GDP growth rate and inflation for those countries. The moderate inflation is helpful to growth, but the faster economic growth feeds back into inflation. There are two aspects to this debate: (A) the nature of the relationship if one exists; (B) the direction of causality. (Friedman, 1973). Bruno and Easterly is note that the ratio of people who believe inflation is harmful to economic growth to tangible evidence is unusually high. Their investigation confirms the inflation- economic growth relationship is influenced by countries with extreme values which very high or very low inflation. Also, they found a robust empirical result that growth falls sharply during high- inflation crises, then recovers rapidly and strongly after inflation falls. (Bruno, Easterly, Fischer, 1993)
To examine the extent to which economic growth is related to inflation and vice versa, the theory of co integration and error correction models (ECM) is introduce. This theory help of this procedure it is possible to examine the short-run and long- run relationships between two variables. If both time series are integrated of the same order then it is possible to proceed with the estimation of the following co integration regression:
yt = a11 + b11pt + μt
pt =a21 + b 21yt + nt
Where yt = economic growth rate, pt = inflation rate at time t, and μt and nt are random error term. If μt and nt measure the extent to which yt and pt are out of equilibrium. If co integration exists, then this information on one variable can be used to predict the other. In theory, there can be a long run or equilibrium relationship between two series in a bivariate relationship only if they are stationary or if each series is at least integrated of the same order. (Johansen, 1988)
In this paper, the authors used co integration and error correction models to empirically examine long run and short run dynamics of the inflation- economic growth relationship for four South Asian countries using same annual data. The main objective in this paper is to examine whether a relationship exists between economic growth and inflation and, if so, its nature. In additional, to significant feedbacks between inflation and economic growth, the authors found two interesting results. First, inflation and economic growth are positively related. Second, the sensitivity of inflation to changes in growth rates is larger than that of growth to changes in inflation rates. These findings have important policy implications. (Bruno and Easterly 1998) Contrary to the policy advice of the international lending agencies, attempts to reduce inflation to a very low level or zero are likely to adversely affect economic growth. (Engle Granger,1987)
However, attempts to achieve faster economic growth may overhead the economy to the extent that the inflation rate becomes unstable. The challenge for them is to find a growth rate which is consistent with a stable inflation rate, rather than beat inflation first to take them to a path of faster economic growth. We need inflation for growth, but too fast a growth rate might accelerate the inflation rate and take us downhill.
3.1.2 Does Inflation Depress Economic Growth? Evidence from Turkey
Erman Erbaykal (2008)
Balikesir University Faculty of Economics and Administrative Sciences
Bandirma, Balikesir
H. Aydın Okuyan (2008)
Balikesir University Faculty of Economics and Administrative Sciences
Bandirma, Balikesir
The purpose of this study is to examine the framework data of the relationship between the inflation and the economic growth in Turkey. The relationship between the economic growth and the inflation is one of the most important macroeconomic problems. This study aims to explain the relationship between the inflation and the economic growth in Turkey in view of the data from the selected periods. Using data of 21 countries covering 1961-1987, Grimes (1991) has found a positive
relationship between inflation and the economic growth for a short term, and a negative relationship between them for a long term. The study uses the quarterly time series data of Gross Domestic Production (Y hereafter) and Consumer Price Index (INF hereafter), for Turkey from 1987:1 to 2006:2. Empirical studies show that most of the time series are not stationary. Since facing a spurious regression problem among these series which include a unit root, some methods are suggested to solve this problem. The co-integration approach developed by Engle and Granger (1987) overcame this problem. According to this approach, time series which are not stationary at levels but stationary in the first difference can be modelled with their level states. In this way, loss of information in the long run can be prevented.
Before testing for cointegration and causality, they tested for unit roots to find the stationary properties of the data. Augmented Dickey-Fuller (ADF) t-tests (Dickey and Fuller 1979) and Phillips and Perron (PP) (1988) tests were used on each of the two time series for Turkey. Akaike information criterion is used to determine the duration of delays in both tests. According to ADF and PP test results, both tests are found to be first difference stationary. In this case, the maximum cointegration levels of the variables take place in the model has been found as (dmax=1). Secondly, the number of delays to be used in the VAR model should be determined. For that reason, maximum duration of lag has been taken as 8 and duration of lag which minimizes the critical values like LR (Likelihood Ratio), FPE (Final Prediction Error), Akaike (AIC), Schwarz (SC) and Hannan Quinn (HQ) has been tried to be determined.
In this study, the relationship between the inflation and economic growth in Turkey has been examined with the data covering 1987:1-2006:2 periods in the framework of Pesaran et al. (2001) Bounds Test approach and Toda Yamamoto (1995) causality analysis approach. The existence of a cointegration relationship between the two series has been detected following the Bounds Test results. Later, ARDL models have been established to determine long term and short term relationships. Whereas no statistically significant long term relationship has been found, a negative and statistically significant short term relationship has been found.
3.1.3 Inflation and Economic Growth in Nigeria
Omoke Philip Chimobi (JUNE 2010)
Department of Economics, Ebonyi State University, Abakaliki, Nigeria
The main purpose of this study is to justify the relationship between Inflation and economic growth in Nigeria. The research of this study spanned from 1970 to 2005. A stationary test was carried out using the Augmented Dickey-Fuller test (ADF) and Phillip-Perron test (PP) and found at difference at 1% and 5% level of significance. The result of the test showed that for the periods, 1970-2005, there was no co-integrating relationship between Inflation and economic growth for Nigeria data. Further effort was made to check the causality relationship that exists between the two variables by employing the VAR-Granger causality at two different lag periods. The results showed the same at different lags. The first test was conducted using lag two (2) and in the result unidirectional causality was seen running from Inflation to economic growth. Further test at lag four (4) was carried out and it only supported the first by also indicating a unidirectional causality running from Inflation to economic growth. Various studies as reviewed in the literature came out with the result that high inflation is and has never been favorable to economic growth. Hence, the study through the empirical findings maintain the fact that the causality that run from inflation to economic growth is an indication of relationship showing that Inflation indeed has an impact on growth.
However, much less agreement exists about the precise relationship between inflation and economic performance, and the mechanism by which inflation affects economic activity at the macroeconomic level. This has generated a significant debate both theoretically and empirically. A series of studies found no conclusive empirical evidence for either a positive or a negative association between inflation and economic growth, notable among these studies are Wai, 1959; Bhatia, 1960; Dorrance, 1963, 1966) Johansen (1967). The second strand of the literature found a negative correlation between inflation and economic growth. Among these studies are Fisher (1993) De Gregorio (1993) Barro (1995, 1996); Brunno and Easterly (1995); Malla (1997); Faria and Carneiro (2001) Dewan & Hussein (2001). While the third strand of the literature found a positive relationship between inflation and economic growth. Despite these plethora of studies both for developing and developed countries, the literature on inflation and economic growth in Nigeria is scanty. The purpose of this paper is therefore to empirically examine the relationship between inflation and economic growth in Nigeria. This paper is organized as follows; section one is the introduction while section two reviews the empirical literature on inflation and economic growth; section three discusses the model and methodology while section four provides data and empirical evidence and the final section which is section five provides the summary and conclusion of the study.
For the conclusion, the objective of this study is to find out the existence of a relationship between Inflation and economic growth in Nigeria. It should be borne in mind that the study did not consider if the relationship between inflation and growth was negative or positive; however, various studies as reviewed in the literature has come out with the result that high inflation is and has never been favorable to economic growth. Hence it will be good to maintain the fact that the causality that runs from inflation to economic growth is an indication of relationship showing that Inflation indeed has an impact on growth.
4.1 Significance of study
From our research that has been done we found that solution for inflation and growth for the economic can benefits people and countries in several factors such as:
Improvement of living standards, economic growth is an important road through better living standards and lower lack levels can be achieved. This is particularly true for countries that consider growth as a key route for reducing poverty among their populations. However, if inflation is too high it will bring the negative effect to the standard living of the poverty level of the people because there are facing the high price of the product.
Greater business confidence: growth and inflation has a positive impact on corporate profits and confidence in the business good news for the stock market and for the growth of small and large business because when the inflation and growth happened will increase the interest rate therefore for those investor that invest at that country will get more benefit from increasing of the interest rate.
Dividend tax for the government: government finances in the natural cycle because economic growth increased tax revenues flowing on the Treasury and also provide the government with more money to finance expenditure project.
Potential environmental benefits: richer countries have the resources available to invest in clean technology. And, as a country and then moved into development phase, the energy intensity level began to fall. Much depends on how much economic resources are willing to devote to environmental improvement and protection. As we can see over the last thirty years in UK, the ratio of energy consumption per unit GDP has decreased significantly. Decline in energy intensity is a reflection of improvements in production technology and also a gradual switch towards a low carbon economy.
4.2 Methodology
Methodology is methods which use it as a manner to help our study or business in research information. The secondary market research which are using as our research method in this project is where use information from other people have collected through primary research. The data gathered by using secondary market research is someone else has collected before so that can found all the sources from books, magazines, journals, trade newspapers, CD-ROM encyclopedias, and from internet which is more famous in now a day. Secondary method of research are choosing in this huge project it is because that this type of research is cheaper than primary research, as a student don't have so much money to spending in study project so choosing secondary research as our research method while it's may not accurate and specific.
The data had found by using secondary research which like the data from the book which related to the skill in how to using SPSS software to find out the average data, correlations, and regression between inflation rate and economic growth over 30 years. We were really enjoin and have fun in learning SPSS to calculate the correlations and regression between inflation and economic growth over 30 year, and found out the significant value, the relationship between inflation and economic growth, variables value, model summary, and so on. In addition, in this project also use secondary research to find out the main points in journal. From the SPSS come out the result that refereed journals is a very good source which these journals have been stringently reviewed for accuracy, reliability, freshness, and interrelated to our project. For example, there are three journals which are taking about the evidence of inflation and economic growth from South Asian countries, the evidence from Turkey does inflation depress economic growth, and the evidence from Nigeria.
And also, a strategies test have using as a method in this project which is ANOVA test, ANOVA test is use to test between two or more differences independent groups. From the ANOVA test know that the Ho between inflation rate and economic growth is no relationship, also others way, H1 show that there is relationship between inflation rate and economic but after done all the collection for study in this project can realize there is no so strongly relationship between inflation rates and economic growth. So, there is no relationship between inflation rates and economic growth.
After that, the skewness and kurtosis are used with interval and ration level data and determine the distribution is normal or not normal. And following, the tests of normality has continuous the skewness and kurtosis jobs. This tests result in two statistics which are kolmogoroy- smirnov and shpiro- wilk. Those are look for the normal or not normal in significance level. Besides that, Q-Q and box plot is also chose as strengthen the result which out from the tests of normality to make sure the answer from the tests are normal distribution or not. After used this method, the result show that the distribution of this project which the data from economic growth and inflation rate is positively skewed.
In conclusion, have to thanks for the entire source, it is really helpful in this project and actually learned a lot of things from doing research in this project by using all the methodology method. From all of research in this project, can know that there are many kind of method for research haven't seen before and even know it in the future times. So we are very happy and enjoy doing this project by using all the methodology method to finish this project.
4.3 Results and Discussion
From table 2, descriptive in skewness and kurtosis are used with interval and ration level data, and determine the distribution is normal or not. So from this table descriptive in skewness the result show are -2.482 and 0.427. Since this result are not in -1 < x > +1 so the data for economic growth is not normal and the result negative value for skewness indicate a negative skew. And for kurtosis the result are on 8.280 and 0.833, Since this result are not in -3 < x > +3 so the data for economic growth is not normal and the result is positive value for kurtosis indicate a positive skew.
From this tests of normality, there have two statistic are Kolmogorov-smirnov and shpiro-wilk, this two statistic are to look significance level, when is significance the date is not normal. And either look into Kolmogorov-smirnov and shpiro-wilk when the sample size is less that 100 sample size, so we use shpiro-wilk. As can look into this tests of normality table, the sample size is 30 less than 100 so look into shpiro- wilk, and in this Shapiro-wilk the significant result is 0.000 since the result is less than significant result at 0.05, so can say that significant, and when significant the data for economic growth is not normal.
In this histogram is to measure the diagram 3 are having bell shape, positive shape, or negative shape, and also to measure this data is normal distribution or not. Base on histogram of Economic growth.the shape of the distribution is considered not normal distribution, because from this histogram show the shape is on negative shape, since when the data is normal data, so the histogram show the shape is on bell shape.
This stem and leaf plot are very similar to the histogram, but this stem and leaf plot are provide more information about the actual values in the distribution than the histogram. And from this stem and leaf plot show that the length of each row corresponds to the number of cases that fall into a particular interval, and that represents each case with a numeric value that corresponds to the actual observed value. Look into this stem and leaf plot the stem of the graph corresponds to the first digit of a score (-0), while the leaf is the trailing digit (001111111344).
In a normal probability plot, each observed value is paired with its expected value from the normal distribution. From this plot the sample are not in the straight line, so as can say that this normal Q-Q plot of economic growth is not normal data, because when the sample are more in a straight line so it can call the data is normal data.
From diagram 5 shows that the plot is also possible to plot the actual deviation of the points from a straight line. As can look into this plot the more sample are not around a horizontal line, so as can say that this detrended normal Q-Q plot of economic growth is not normal data, because when is normal data the more sample around a horizontal line.
From this box plot at diagram 6 can also determined for make sure is normal distribution or not, as can look in this box plot the line, the line in the box is closer to the top of the box, so as can say that the distribution is negatively skewed and also the data is not normal distribution, because when the data is normal data so the line is on the middle box.
From table 4 descriptive in skewness and kurtosis are used with interval and ration level data, and determine the distribution is normal or not. So from this table descriptive in skewness the result show are 2.482 and 0.427. Since this result are not in -1 < x > +1 so the data for inflation is not normal data and the result is in positive value indicate a positive skew. And for kurtosis the result are on 7.803 and 0.833, Since this result are not in -3 < x > +3 so the data for inflation is not normal data and the result is in positive value indicate a positive skew.
From this tests of normality, there have two statistic are Kolmogorov-smirnov and shpiro-wilk, this two statistic are to look significance level, when is significance the date is not normal. And either look into Kolmogorov-smirnov and shpiro-wilk when the sample size is less that 100 sample size, so we use shpiro-wilk. As can look into this tests of normality table, the sample size is 30 less than 100 so we will look into shpiro- wilk, and in this Shapiro-wilk the significant result is 0.000 since the result is less than significant result at 0.05, so can say that significant, and when significant the data for inflation is not normal.
In this histogram is to measure the diagram are having bell shape, positive shape, or negative shape, and also to measure this data is normal distribution or not. Base on histogram of infaltion .the shape of the distribution is considered not normal distribution, because from this histogram show the shape is on positive shape, since when the data is normal data, so the histogram show the shape is on bell shape.
This stem and leaf plot are very similar to the histogram, but this stem and leaf plot are provide more information about the actual values in the distribution than the histogram. And from this stem and leaf plot show that the length of each row corresponds to the number of cases that fall into a particular interval, and that represents each case with a numeric value that corresponds to the actual observed value. Look into this stem and leaf plot the stem of the graph corresponds to the first digit of a score (1), while the leaf is the trailing digit (559).
In a normal probability plot, each observed value is paired with its expected value from the normal distribution. From this plot the sample are almost not in the straight line, so as can say that this normal Q-Q plot of inflation is not normal data, because when the sample are more in a straight line so it can call the data is normal data.
Detrended normal Q-Q plot is also possible to plot the actual deviation of the points from a straight line. As can look into this plot the sample are almost not around a horizontal line, so as can say that this detrended normal Q-Q plot of infaltion is not normal data, because when is normal data the more sample around a horizontal line.
From this box plot can also determined for make sure is normal distribution or not, as can look in this box plot the line, the line in the box is closer to the bottom of the box, so as can say that the distribution is positively skewed and also the data is not normal distribution, because when the data is normal data so the line is on the middle box.
This table 6 get from using economic growth data and inflation data in US of 30 years start from 1980-2009, and the sig (1-tailed) result is 0.474.so from this result is mean not significant, because of significant result is 0.05 or confidant 95%. And when not significant is reject alternative hypothesis that mean inflation and economic growth not having relationship between each other.
From this table seven, the result of ANOVA sig. is 0.947 so that mean not significant, because of significant result is 0.05 or 95% confidant, so from this table said that inflation and economic growth not having relationship between each other. And because of not significant so the R Square not need to explain, because this R- Square is explain the significant is strong or not strong. After that we can look in the Coefficients sig. result in Economic growth and the result is 0.947, this mean not significant, becaue the significant result is 0.05. When is not significant the economic growth is not longer significant in the inflation.
5.1 Discussion
The idea that an increase in economic growth leads to an increase in inflation - and that decreased growth reduces inflation - is reflected endlessly in the media. On April 28, for example, AP writer Rajesh Mahapatra claimed that "high economic growth" of more than 8.5% annually in India since 2003 "has spurred demand and caused prices to rise." This makes no sense. (David Henderson, 2007)
All other things being equal, an increase in economic growth must cause inflation to drop, and a reduction in growth must cause inflation to rise. In his congressional testimony yesterday, Federal Reserve chairman Ben Bernanke thankfully did not state that the higher economic growth he expects will lead to higher inflation. Although he didn't connect growth and inflation at all, Mr. Bernanke has long understood that higher growth leads to lower inflation.
Here's why. Inflation, as the old saying goes, is caused by too much money "chasing" too few goods. Just as more money means higher prices, fewer goods also mean higher prices. The connection between the level of production and the level of prices also holds for the rate of change of production (that is, the rate of economic growth) and the rate of change of prices (that is, the inflation rate). (David Henderson, 2007)
The effect of inflation and economic growth is manifested in the following cases:
I) Investment:
If the price of goods increases and people has to compensate for the increase in price, they usually make use of their savings. In the event when savings are depleted, fund for investment is no longer available. An individual tends to invest, only if savings of an individual is strong and has sufficient money to meet his daily needs.
II) Interest rates:
Whenever inflation reigns supreme, it is a well known fact that the value of money goes down. This leads to decline in the purchasing power. In the event, when the rate of inflation is high, the interest rates also rise. With increase in both parameters, cost of goods will not remain the same and consequently people will have to shell out more money for the same goods.
III) Exchange rates:
Inflation and economic growth are affected by exchange rates as well. Exchange rates denote the value of money prevailing in different countries. High rate of inflation causes severe fluctuations in exchange rates. This adversely affects trade (export and import), important business transaction across borders, value of money also changes.
IV) Unemployment:
Growth of a nation depends to a large extent on employment. If rate of inflation is high, unemployment rate is low and vice versa. This theory is propounded by economist William Philips and this gave rise to the Philips Curve.
V) Stocks:
The returns a company offer, on investment fully depend on the performance of the company. Past performance, current position of the company and future trends decide how much(money, in form of bonus or dividend) is to be returned to theinvestors. Owing to inflation, several monetary as well as fiscal policies are impacted.
6.1 Summary
The objective of this paper was to determine whether a significant connection between inflation and economic growth exits, according to theory and empirical literature. The literature survey provided some useful insights into effects of inflation on growth. This survey using economic growth data and inflation data in US of 30 years start from 1981-2010. After run the test in SPSS, the result show out there is no relationship between inflation and economic growth. That is because the result of in sig (1- tailed) is 0.474, and this result is higher than 0.01 (significant result) so from this we said that both of this variance are having not relationship. Even in the ANOVA also not significant, because of the result is 0.947, since the significant result is 0.05. We can conclude this result because of economic growth is going very fast but the inflation is not increase very high.
In Erman Erbaykal's paper (2008), he found out the same conclusion as our survey. From this journal we get the same result. That study approach with the data covering 1987:1-2006:2 periods in the framework of Pesaran et al. (2001) Bounds Test approach and Toda Yamamoto (1995) causality analysis. The existence of a co integration relationship between the two series has been detected following the Bounds Test results. Later, ARDL models have been established to determine long term and short term relationships. Whereas no statistically significant long term relationship has been found, a negative and statistically significant short term relationship has been found. Because our study is testing long term relationship, so we get the same result with this journal.
Other author's journal also has discussed much information about our study. Some study test out there is relationship between inflation and economic growth. Because of the limitation exist; we can't get the same result in the entire journal.
7. CONCLUSION
7.1Overall conclusion
Economic growth and inflation is a study of economy, two of this study can affect economy in the countries if the country has face this problem. US are the largest country and the most powerful country also the stronger country in the world. They have GDP per capita of $46,400. The research have obtain the result, result that can show many problems between economic growth and inflation in real life economic.
These results have important policy implications for both domestic policy makers and the development partners. First, taking into consideration that the inflation rate is not indexed in the wages and salaries, inflation will lead to a decrease in the purchasing power and an increase in the cost of living. Second, given that the country frequently has to balance the credit requirements by the private and public sector against both inflationary and balance of payments pressures, it is not always possible for the monetary authority to increase the nominal interest rate above the expected inflation rate through contractile monetary policy. In this regard, the monetary authority can think of an alternative way by working on the expectations channel to reduce inflation. This requires credibility of the monetary authority in following through its monetary program as communicated in advance to the stakeholders.
We are facing many limitations, such as resource and technology. We use SPSS to run our test and get our result. SPSS is fundamental software for this study. Because of this our study cannot fully detail. Another limitation is we only focus on one country that is US. US is a develop country; there are many different character in other country. Because of time consuming, we cannot made other country historically data include to our research. Another limitation is we only focus on how inflation effect economic growth. But from my knowledge, government and central bank will try to decrease inflation by using adjust the interest rate. We only focus on inflation no go through interest rate of US.
Some caveats are in order. For example, in the context of America, the results provided in this paper do not address the following important issues:
It does not estimate how the economic growth rate will behave as the rate of inflation rises, but remaining contained within the threshold level.
Does higher inflation lead to greater inflation uncertainty? In particular, what is the relationship between inflation and inflation uncertainty?
Whether inflation uncertainty adversely affects economic growth.
What are the determinants of high inflationary pressure?
Future research should extend in the above directions in order to derive firm policy relevant conclusions.
