The Association and Impact of Inflation and Population Growth on GDP: A Study of Developing World

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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT © 2013 Institute of Interdisciplinary Business Research

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VOL 4, NO 9

The Association and Impact of Inflation and Population Growth on GDP: A Study of Developing World

Zaigham Abbas Khan

Lecturer, Lahore Business School, University of Lahore, Pakistan

Farzan Yahya (Corresponding Author)

Lahore Business School, University of Lahore, Pakistan

Muhammad Nauman


Ayesha Farooq


Abstract

The effects of inflation are negative and can upset economy as it causes an increase in tax bracket, lowers

national savings, currency debasement and rising prices of imports. This paper focuses on relationship and

collision of inflation and population growth with GDP. Data of 40 developing countries from year 2009 to 2011

had collected and further analyze with statistical tools and techniques. This paper also possess the consistent

years of all variables. Moreover, the results show negative relation of inflation and positive relation of

population growth with GDP. The positive relation of GDP with population growth could have comes true if

marginal productivity increases so supplementary human capital can improve economy.

Keywords: inflation, GDP, ANOVA, Correlation, regression

1. Introduction

Financiers are probable to hear the stipulations, gross domestic product (GDP) and inflation, just about on a

daily basis. They often feel that these facts must have reviewed as a surgeon would study a patient's map before

surgery. National income deals the money worth of the flow of productivity of goods and services formed within

a financial system over a period, where Inflation can indicate either a raise in the currency supply or enhancing

in price level. Commonly, when there is increase in inflation there is increase in prices too. If the money supply

has been augmented, then there is enlargement in price levels.

1.1 Effects of Inflation

Most effects of inflation are depressing, and can hurt economy alike:

Inferior national saving (when there is a lofty inflation, saving money would mean surveillance your cash

diminish in value relentlessly, so people lean to pay out the cash on something else).

Fixed income recipients will be hurt (as inflation augments, their incomes do not rise, and as a result, their

income will have not as much of value over time).

Causes a rise in tax bracket (people will be taxed a higher proportion if their income increases following an

inflation boost).

Currency degradation (which lowers the significance of a legal tender, and occasionally become a source of

new currency to be born)

Growing prices of imports (if the currency has desecrated, then its purchasing power in the global market is

lesser).

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1.2 GDP and Inflation

Money has considered as storage of value. When money grasps its worth, people feel secure saving it. Inflation

declines the utility of money as storage of value, since every unit of money is value less with the passing of time

and enhance of inflation, so people lean to pay out money on something else that can play the role of “the

storage of value”. In the meantime, the inflation has negative connection with national income and at the same

time have negative impact on national savings because of the lower purchasing power. The majority of

economists nowadays agree that 2.5-3.5% GDP growth per year is the most that our economy can securely

sustain exclusive of causing negative consequences.

1.3 Effects of Population

Population increase put forth supplementary strain on natural resource utilization. People have to fed, housed,

and dressed; as population raises, the requirement for food and materials swells. The escalating utilization of

land and resources, at some position go beyond the carrying facility and causes the natural resources ineffective

or exhausted. This could effect in economic hardship. Specifically every addition in population has directed to

more troubles than settlement. Some of the negative effects of population increase include high population

growth rates need immense investment in Social infrastructure. Due to the scarcity of investment finances, social

infrastructure like schooling, wellbeing, transportation and accommodation is likely to diminish. This results in

congestion and declining value of services. Every year the world population enlarges by about 80 million.

Towards the finish of 2011, the total attains seven billion, having more than twice since 1965. It has estimated to

rise to 9.3 billion in 2050. The carrying ability of the earth for humans has determined by global inhabitants,

economic means to devour resources, the technology available and the selection of lifestyle. Correct population

data is an essential element of social and economic strategy. Governments cannot distribute well-organized

services and infrastructure without facts of the national demographic sketch – the mass of the population, where

people exist, how aged they are, and the net effect of birth rates, death rates and exodus.

2. Objectives

The purpose and objectives of this research is to:

Analyze consistency of inflation, population growth and GDP growth rates from year 2009-2011.

Check the association and relationship among inflation, population growth and GDP growth rates.

Test out the impact of inflation and population growth on GDP real growth rate.

3. Literature review

An appealing conclusion can be drawn from the research by Dwyer and Hafer (1999).These authors evaluate the

association between average money growth and average inflation rate in two eras,1987-1992 and 1993-1997.In

the second era, the average inflation rate (across every country in the sample) is lesser. The decrease in the

average inflation rate directs to the formation of two flat clusters of observations near to the basis. Therefore, the

deteriorating association between money growth and inflation, as we grow towards zero money growth, may be

related with the average money growth of a country.

Inflation and its inconsistency necessitate great real costs to the market. Numerous studies demonstrate that a

10% inflation rate can create losses of approximately 3% of the real GNP in the course of saving and investment

misallocation or the loss of value of real balances (Fischer, 1981, Feldstein, 1997 and Lucas, 2000).

Expenditure on wellbeing to enlarge life allows individuals to buy extra periods of utility. The marginal utility of

life addition does not decrease. As a consequence, the best composition of total expenditure moves toward

health, and the health share rise along with income (Hall and Jones, 2007). Acemoglu and Johnson (2007)

approximate the contributory impact of modification in life expectancy on income. The instrumented transform

in life expectancy have a great effect on population growth; a 1% boost in life expectancy escorts to a boost in

population of about 1.5%. Life expectancy has a much lesser effect on total GDP both primarily and over a 40-

year horizon, on the other hand. As a result, there is no confirmation that the large exogenous boost in life

expectancy led to an important boost in per capita economic development.

Benabou (1992) amend inflation and markups in the U.S. retail trade sector, a sector in which, he declares, low

search costs play a vital role in the empirically probable association between inflation and markups. Benabou

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discovers expected and unexpected inflation to have a diminutive but considerably negative impact on retail

markups. Benabou construe his result as support for the forecast that pricing theory in the attendance of inflation

would guide to superior price dispersal.

Denison (1981), following the view that net exports should be deflated by means of an import price index, sets

up the term “Command GDP” to portray real GDI in the United States. This is the identical measure illustrated

in the SNA 1993. Denison’s terminology and methodology are afterward used by the National Income and

Product Accounts in the United States when constructing their Command GDP measure.

Khan and Qasim (1996) hit upon food inflation to be determined by money supply, value-added in

manufacturing and wheat support price in Pakistan. Non-food inflation is determined by money supply, real

GDP, import prices and electricity prices. It is scarcely astonishing that changes in the wheat support price have

an effect on the food price index, given that wheat products account for 14 percent of the index. Nevertheless,

this does not routinely entail that headline inflation is exaggerated by changes in the value of one particular item.

Certainly, Khan and Qasim discover that generally inflation is only determined by money supply, import prices,

and real GDP.

Sherani (2005) discovers that in Pakistan augments in the wheat carry price elevate the CPI index (but not

essentially inflation). Sherani highlights that the lofty levels of inflation in 2005 mainly resulted from a financial

hang over that was urbanized by loose monetary conditions. Concerning the position of the exchange rate, the

size of a discover confirmation of replace rate cross in a small VAR, while Hyder and Shah (2004) uncover some

substantiation of exchange rate go through in a larger VAR. Bokil and Schimmelpfennig (2005) stumble on

broad money and private sector credit growth to be good leading pointers for inflation.

4. Methodology

The data have collected from Index Mundi and central intelligence agency website. Data contains inflation rates,

population growth rate and GDP real growth rates from year 2009 to 2011 of 40 developing countries situated in

Asia, Africa and Latin America, which had randomly selected. Two types of statistical software, Microsoft Excel

and SPSS have used to interpret results by applying different statistical tests on data variables. There is also a

limitation of this study as there were only three variables, so due to any exogenous factors some statistical

models were unable to interpret results that are more accurate.

5. Empirical results

At the outset, there is some descriptive analysis of this research. Following is the consistency analysis of

inflation, population growth and GDP growth rates of 40 countries of the developing world.

Table No. 1: Consistency analysis of variables

Inflation rates (%)

Population growth

rates (%)

GDP (%)

(real growth rates)

2009 2010 2011 2009 2010 2011 2009 2010 2011

Means 7.163 7.1538 9.2883 1.386 1.44 1.386 2.09 5.6 5.93

S.D. 5.7649 5.1066 5.7292 0.902 0.981 1.064 5.69 2.63 3.21

C.V. 80.481 71.384 61.682 65.11 68.08 76.75 273 46.9 54.1

In above Table No. 1, inflation rates, population growth rates and GDP real growth rates of

forty developing countries from year 2009 to 2011 have shown accordingly. The results show

that inflation rates were consistent or uniform in year 2011, similarly population growth rate in

2009 and GDP growth rate in 2010. For more convenience, consistent values have shown

highlighted in the table.

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Chart No. 1: Bar Chart of Variables’ means

This bar chart show that inflation rates were stable in 2009 and 2010 but in 2011, it grew by

29.83% in developing countries. Population growth rates were stable throughout these three

years with an inconsequential and ignorable change. However, the real growth rates of GDP

had continuous emergent rates over the years.

Table no. 2: Overall Descriptive statistics for year 2009-2011 of all variables

N Min. Max. Mean S.E. S.D. Variance

Inflation rates 120 -2.8 28.9 7.8683 0.51 5.587 31.212

Population growth rates 120 -0.63 4.31 1.4038 0.089 0.976 0.953

GDP growth rates 120 -15.1 22.5 4.5368 0.401 4.392 19.289

Table no. 3 has the statistical description of the data. The table shows that there are total 120

observations. Minimum inflation, population growth and GDP growth rates are -2.8, -0.63 and

-15.1 respectively and maximum are 28.9, 4.31 and 22.5. Furthermore, means of the data

notify that from 2009 to 2011, there is an average increase of inflation rates with 7.9%,

population growth rate with 1.4% and GDP real growth rate with 4.5%. In addition, the

standard error of mean, Standard deviations and variances of variables has shown accordingly.

Table No. 3: ANOVA for all Variables

Sum of

Squares df

Mean

Square F Sig.

Inflation

rates

Between Groups 120.972 2 60.486 1.969 0.144

Within Groups 3593.278 117 30.712

Total 3714.249 119

Population

growth

rates

Between Groups 0.08 2 0.04 0.041 0.960

Within Groups 113.348 117 0.969

Total 113.427 119

GDP

growth

rates

Between Groups 362.163 2 181.082 10.96 0.000

Within Groups 1933.279 117 16.524

Total 2295.443 119

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Now there is analysis of variances or ANOVA test for all variables. The hypothesis for this test

will be:

Ho: µ2009= µ2010= µ2011

H1: at least one variable is different

In table no. 3, it is shows that the p-values of inflation rates and population growth rates are

greater than 0.05 that means we accept null hypothesis and reject alternative hypothesis. It

means that there is no significant mean difference. Nevertheless, when it comes to GDP

growth rate its value is 0.000, which is highly significant and less than specified level of

significance i.e., α= 0.05, so it can be demonstrate that there is some significant difference in at

least one variable.

Table No. 4: Tukey HSD test for GDP growth rates

Multiple Comparisons

Dependent Variable: GDP growth rates

Tukey HSD

(I) Years

(J)

Years

Mean Difference

(I-J)

Std.

Error Sig.

95% Confidence

Interval

Lower

Bound

Upper

Bound

2009 2010 -3.5075 0.90895 0.001 -5.6653 -1.3497

2011 -3.84043 0.90895 0.000 -5.9982 -1.6827

Tukey HSD post hoc test has applied to ensure mean significance difference among variables.

Hence, table no. 3 show that means of year 2009 is different from 2010 and 2011. It is true

because the p-values are highly significant. Furthermore, there mean differences, Standard

deviations and lower and upper boundaries are shown in the table accordingly.

Table no. 5: Levene test for homogeneity of variances

Test of Homogeneity of Variances

Levene Statistic df1 df2 Sig.

Inflation rates 0.360999538 2 117 0.6978

Population growth rates 0.290490452 2 117 0.7484

GDP growth rates 4.831532504 2 117 0.0096

Now, there is Levene test to verify the homogeneity or heterogeneity of variances. The

hypothesis for this test will be:

Ho: Variances are homogenous

H1: Variances are heterogeneous

The results in table no. 5 show that the p-values of inflation rates and population growth rates

are greater than 0.05, so it can be illustrates that, variances are homogenous but in case of GDP

growth rate, it is less than 0.05 so it is not homogenous.

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Table no. 6: Pearson Correlations for all Variables

Correlations

Inflation rates Population growth rates GDP growth rates

Inflation

rates

Pearson Correlation 1 0.045 -0.126

Sig. (2-tailed) 0.624 0.169

N 120 120 120

Population

growth rates

Pearson Correlation 0.045 1 0.286

Sig. (2-tailed) 0.624 0.002

N 120 120 120

GDP growth

rates

Pearson Correlation -0.126 0.286 1

Sig. (2-tailed) 0.169 0.002

N 120 120 120

Correlation is significant at the 0.01 level (2-tailed)

Table no. 6 shows the Pearson correlation for all variables, which shows whether there, is any

positive or negative relation among these variables. The results show that inflation rates and

population growth have no relation with each other, as their p-values are greater than level of

significance. However, Population growth rates and GDP growth rates have the positive

relationship with each other and dependency exists between them, as their values are less than

level of significance.

Table No. 7: Coefficients for regression analysis

Model

Un-standardized

Coefficients

Standardized

Coefficients

t Sig. B Std. Error Beta

1 (Constant) 3.551 .849 4.182 .000

Inflation rates -.110 .069 -.140 -1.590 .114

Population growth rates 1.317 .395 .293 3.337 .001

Dependent Variable: GDP growth rates

The OLS model for regression analysis will be:

GDP= βo+ β1 (Inflation) + β2 (Population)

By putting values from table no. 7 in the model, it can be like following:

GDP= 3.551- 0.110(Inflation) + 1.317 (Population)

This model shows that increase in 1% of inflation rate can decrease GDP growth rate by 0.110

and increase in 1% of Population growth can lead to increase in GDP by 1.317. Additionally,

inflation rates have the negative and population growth rates have the positive relationship

with GDP growth rate.

6. Conclusion

Generally, the effects of inflation are negative and can upset individuals and companies

equally as it causes an increase in tax bracket, lowers national savings, currency debasement

and rising prices of imports. In addition, the inflation has the negative association with national

income and at the same time have the negative collision on national savings because of the

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lower purchasing power. Moreover, population enlargement put forth additional strain on

natural resource utilization. High population growth rates require massive investment in Social

infrastructure. Therefore, resources and investment should be massive in a country if there is

an incessant increasing population growth.

The results of this study show that inflation rates were consistent or homogeneous in year

2011, population growth rates in 2009 and GDP growth rates in 2010. Additionally, from year

2009 to 2011, there was an average increase of inflation rates with 7.9%, population growth

rate with 1.4% and GDP real growth rate with 4.5% in developing countries. As well, there

was no significant difference in the means of population growth and inflation rates from year

2009-2011 but GDP rates had different means. Since year, 2009 had different means with 2010

and 2011. The outcome of this study also tells that inflation has negative and Population

growth have the positive relation between them. The positive relation of GDP with population

growth could have comes true if marginal productivity increases so supplementary human

capital can improve economy.

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REFERENCES

1. Acemoglu, D. and Johnson, S. (2007). Disease and development: the Effect of Life

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Sector. European Economic Review, 36, 566-574.

3. Bokil, M. and Schimmelpfennig, A. (2005).Three Attempts at Inflation Forecasting in

Pakistan.IMF Working Paper No. 05/105. Washington, D.C.: IMF.

4. Denison, E.F. (1981). International Transactions in Measures of the Nation’s Production.

Survey of Current Business, 61(5), 17–28.

5. Dwyer, G. P. Jr. and Hafer, R. W. (1999). Are Money Growth and Inflation Still Related?

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David H. R, University of Chicago Press. pp.123-156.

7. Fischer, S. (1981). Towards an Understanding of the Costs of Inflation:II. Carnegie-

Rochester Conference Series on Public Policy, 15, 5-42.

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Quarterly Journal of Economics, 122 (1), 39-72.

9. Hyder, Z. and Shah, S. (2004). Exchange Rate Pass-Through to Domestic Prices in

Pakistan. SBP Working Paper No. 5. Karachi: State Bank of Pakistan.

10. Khan, A. H. and Qasim, M. A. (1996). Inflation in Pakistan Revisited. Pakistan

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11. Lucas, R. E. (2000). Inflation and Welfare. Econometrica, 68, 247-374.

12. Sherani, S. (2005).The Dark Side of the Force.ABN-AMRO Economic Focus – Pakistan.

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Documents

The Association and Impact of Inflation and Population Growth on GDP: A Study of Developing World