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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS 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 Lahore Business School, University of Lahore, Pakistan Ayesha Farooq Lahore Business School, University of Lahore, Pakistan
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 40year 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 COPY RIGHT © 2013 Institute of Interdisciplinary Business Research

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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 (%) 2009 Means S.D. C.V. 7.163 5.7649 80.481 2010 7.1538 5.1066 71.384 2011 9.2883 5.7292 61.682 Population growth rates (%) 2009 1.386 0.902 65.11 2010 1.44 0.981 68.08 2011 1.386 1.064 76.75 GDP (%) (real growth rates) 2009 2.09 5.69 273 2010 5.6 2.63 46.9 2011 5.93 3.21 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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VOL 4, NO 9 Chart No. 1: Bar Chart of Variables’ means

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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 Inflation rates Population growth rates GDP growth rates 120 120 120 Min. -2.8 -0.63 -15.1 Max. 28.9 4.31 22.5 Mean 7.8683 1.4038 4.5368 S.E. 0.51 0.089 0.401 S.D. 5.587 0.976 4.392 Variance 31.212 0.953 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 Inflation rates Between Groups Within Groups Total Population growth rates GDP growth rates Between Groups Within Groups Total Between Groups Within Groups Total 120.972 3593.278 3714.249 0.08 113.348 113.427 362.163 1933.279 2295.443 df 2 117 119 2 117 119 2 117 119 181.082 16.524 10.96 0.000 0.04 0.969 0.041 0.960 Mean Square 60.486 30.712 F 1.969 Sig. 0.144

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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 2009 2010 2011 -3.5075 -3.84043 0.90895 0.90895 0.001 0.000 -5.6653 -5.9982 Upper Bound -1.3497 -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 Inflation rates Population growth rates GDP growth rates 0.360999538 0.290490452 4.831532504 df1 2 2 2 df2 117 117 117 Sig. 0.6978 0.7484 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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VOL 4, NO 9 Table no. 6: Pearson Correlations for all Variables

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Correlations Inflation rates Inflation rates Pearson Correlation Sig. (2-tailed) N Population growth rates Pearson Correlation Sig. (2-tailed) N GDP growth rates Pearson Correlation Sig. (2-tailed) N 120 0.045 0.624 120 -0.126 0.169 120 120 0.286 0.002 120 120 1 Population growth rates 0.045 0.624 120 1

GDP growth rates -0.126 0.169 120 0.286 0.002 120 1

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 Un-standardized Coefficients Model 1 (Constant) Inflation rates Population growth rates B 3.551 -.110 1.317 Std. Error .849 .069 .395 -.140 .293 Standardized Coefficients Beta t 4.182 -1.590 3.337 Sig. .000 .114 .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 COPY RIGHT © 2013 Institute of Interdisciplinary Business Research

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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. 2. 3. 4. 5. 6.

Acemoglu, D. and Johnson, S. (2007). Disease and development: the Effect of Life Expectancy on Economic Growth. Journal of Political Economy, 115 (6), 925–985. Benabou, R. (1992). Inflation and Markups: Theories and Evidence from the Retail Trade Sector. European Economic Review, 36, 566-574. Bokil, M. and Schimmelpfennig, A. (2005).Three Attempts at Inflation Forecasting in Pakistan.IMF Working Paper No. 05/105. Washington, D.C.: IMF. Denison, E.F. (1981). International Transactions in Measures of the Nation’s Production. Survey of Current Business, 61(5), 17–28. Dwyer, G. P. Jr. and Hafer, R. W. (1999). Are Money Growth and Inflation Still Related? Federal Reserve Bank of Atlanta Economic Review, 84(2), 32-43. Feldstein, M. (1997).The Costs and Benefits of Going from Low Inflation to Price Stability.In Reducing Inflation: Motivation and Strategy,edited by ChristinaD . R, and David H. R, University of Chicago Press. pp.123-156. Fischer, S. (1981). Towards an Understanding of the Costs of Inflation:II. CarnegieRochester Conference Series on Public Policy, 15, 5-42. Hall, R. E. and Jones, C. I. (2007). The Value of Life and the Rise in Health Spending. Quarterly Journal of Economics, 122 (1), 39-72. 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.

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10. Khan, A. H. and Qasim, M. A. (1996). Inflation in Pakistan Revisited. Pakistan Development Review, 35(4), Part II: 747–759. 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. (Monday, May 30).

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