The relationship between GDP& M2 in Israel

Relationship between GDP (Constant LCU) and M2:

Gross Domestic Product (GDP) and Broad Money Supply (M2) are important indicators in
economics that reflect different aspects of an economy. While they are not directly causative
of each other, there is a relationship between them, and they are often used together to analyze
economic conditions. Changes in M2 can influence economic activity, and economic activity,
in turn, can affect the demand for money. An increase in M2 can potentially lead to increased
spending, investment, and economic growth. Conversely, a decrease in M2 might signal a
reduction in economic activity.

Israel:
In Israel, the link between M2, a measure of the money supply, and GDP, the country's gross
domestic product, is complicated and impacted by a number of economic factors. In general,
increased M2 can support economic expansion by supplying cash for spending and investment.
The effect, though, is contingent upon how well the economy makes use of the expanded
money supply. The link between inflation, interest rates, and government policy is significantly
influenced by external influences.

Country: Israel
1995 2022
GDP (constant LCU) 557.6B 1586.6B
Broad money (M2) 204.5B 1829.2B
Source: World Development Indicator, World Data Bank.

Calculation:
1.For GDP growth, 2.For M2 (Broad Money), 3.Inflation,
FV= PV (1+g)n FV= PV (1+m)n 1+i = 1+m/1+g
Or, 1586.6B = 557.6B (1+g)28 Or, 1829.2B =204.5B (1+m)28 Or, i= {(1+0.0814)/(1+0.0381)}-1
Or, g = 3.805% Or, m= 8.139% Or, i= 4.17%
 Explanation of calculations:
1. GDP Growth:
- The GDP in Israel grew from 557.6 billion LCU in 1995 to 1586.6 billion LCU in 2022.
- The calculated annual growth rate (g) is approximately 3.805%.
2. Broad Money (M2) Growth:
- The M2 money supply in Israel increased from 204.5 billion LCU in 1995 to 1829.2 billion
LCU in 2022.
- The calculated annual growth rate (g) for M2 is approximately 8.139%.
3. Inflation:
- To calculate the inflation rate (i), it used the formula (1+i) = (1+M) / (1+G).
-The result is an inflation rate (i) of approximately 4.17% when comparing the growth rates of
M2 (money supply) and GDP.
So, in summary:
- GDP in Israel grew at an annual rate of 3.805% from 1995 to 2022.
- The M2 money supply grew at an annual rate of 8.139% during the same period.
- The inflation rate, calculated based on the difference in growth rates, is approximately 4.17%.

Now,
Year Ti=X GDP M2 Ti^2 LnGDP=LnYi Ti*LnGDP LnM2=LnYi Ti*LnM2
1995 1 557.6B 204.5B 1 27.04692744 27.04692744 26.04405352 26.04405352
1996 2 590.7B 255.7B 4 27.10451962 54.20903924 26.26707589 52.53415177
1997 3 613.1B 293.9B 9 27.14172342 81.42517026 26.40644135 79.21932405
1998 4 638.3B 351.6B 16 27.18205462 108.7282185 26.58586317 106.3434527
1999 5 659.5B 406.3B 25 27.21481695 136.0740848 26.73029798 133.6514899
2000 6 716.7B 438.9B 36 27.29797777 163.7878666 26.80745014 160.8447008
2001 7 719.1B 476.6B 49 27.3013129 191.1091903 26.89004614 188.230323
2002 8 718.3B 529.3B 64 27.30017004 218.4013603 26.99481031 215.9584824
2003 9 728.3B 528.9B 81 27.31401292 245.8261162 26.99414232 242.9472809
2004 10 763.2B 567.2B 100 27.36074828 273.6074828 27.06395758 270.6395758
2005 11 794.7B 624.1B 121 27.40125736 301.413831 27.1595588 298.7551468
2006 12 839.1B 667.4B 144 27.4555814 329.4669768 27.22670239 326.7204286
2007 13 889.7B 531.1B 169 27.5141636 357.6841268 26.9981739 350.9762606
2008 14 918.6B 597.6B 196 27.54615791 385.6462108 27.11612447 379.6257426
2009 15 926.8B 632.2B 225 27.55495035 413.3242552 27.17240118 407.5860177
2010 16 979.3B 652.B 256 27.61008714 441.7613942 27.20324705 435.2519529
2011 17 1033.7B 727.3B 289 27.66420726 470.2915234 27.31260631 464.3143073
2012 18 1060.5B 773.1B 324 27.68975466 498.4155839 27.3737069 492.7267242
2013 19 1107.3B 839.B 361 27.73296262 526.9262899 27.45553327 521.6551321
2014 20 1150.7B 938.3B 400 27.77140541 555.4281082 27.56730237 551.3460474
2015 21 1179.3B 977.8B 441 27.79595973 583.7151544 27.60859789 579.7805556
2016 22 1232.6B 1034.1B 484 27.84018406 612.4840494 27.66457637 608.62068
2017 23 1285.4B 1088.B 529 27.88206082 641.2873989 27.71532982 637.4525858
2018 24 1337.7B 1133.7B 576 27.92195748 670.1269795 27.75653938 666.156945
2019 25 1393.3B 1218.9B 625 27.96267839 699.0669598 27.82900795 695.7251988
2020 26 1367.4B 1487.4B 676 27.94393086 726.5422023 28.02802402 728.7286246
2021 27 1485.2B 1716.3B 729 28.02654248 756.716647 28.17121724 760.6228655
2022 28 1586.6B 1829.2B 784 28.0926381 786.5938669 28.23489713 790.5771197
Total 406 7714 771.6707436 11257.10701 762.3776848 11173.03517

Calculation:
1.For Real GDP, 2.For M2,
b= 0.03715 b= 0.06489
a= 27.021 a= 26.29

Now,
Year GDP= a+bt e^(a+bt) M2= a+bt e^(a+bt)
1995 27.05815 563.9B 26.35489 279.1B
1996 27.0953 585.2B 26.41978 297.8B
1997 27.13245 607.4B 26.48467 317.8B
1998 27.1696 630.4B 26.54956 339.1B
1999 27.20675 654.2B 26.61445 361.8B
2000 27.2439 679.B 26.67934 386.1B
2001 27.28105 704.7B 26.74423 412.B
2002 27.3182 731.4B 26.80912 439.6B
2003 27.35535 759.1B 26.87401 469.1B
2004 27.3925 787.8B 26.9389 500.5B
2005 27.42965 817.6B 27.00379 534.1B
2006 27.4668 848.6B 27.06868 569.9B
2007 27.50395 880.7B 27.13357 608.1B
2008 27.5411 914.B 27.19846 648.8B
 2009 27.57825 948.6B 27.26335 692.3B
2010 27.6154 984.5B 27.32824 738.8B
2011 27.65255 1021.8B 27.39313 788.3B
2012 27.6897 1060.4B 27.45802 841.1B
2013 27.72685 1100.6B 27.52291 897.5B
2014 27.764 1142.2B 27.5878 957.7B
2015 27.80115 1185.5B 27.65269 1021.9B
2016 27.8383 1230.3B 27.71758 1090.4B
2017 27.87545 1276.9B 27.78247 1163.5B
2018 27.9126 1325.2B 27.84736 1241.5B
2019 27.94975 1375.4B 27.91225 1324.8B
2020 27.9869 1427.4B 27.97714 1413.6B
2021 28.02405 1481.5B 28.04203 1508.3B
2022 28.0612 1537.5B 28.10692 1609.5B

The values in the dataset are calculated based on two equations involving exponential
functions. Here's an explanation of each of the values:
1. Year: These are the years from 1995 to 2022, representing the period for which the data
is provided.
2. M2 (Money Supply): M2 represents the money supply, which is the total amount of
money in an economy, including physical currency, checking accounts, savings
accounts, and other liquid assets. In dataset, the values for M2 are calculated using the
equation.
3. GDP (Gross Domestic Product): GDP represents the total economic output of a country
or region within a specified period. It measures the value of all goods and services
produced within that economy. In your dataset, the values for GDP are calculated using
the same equation as M2.
M2 = e^ (a+bt)
 e is the mathematical constant approximately equal to 2.71828.
 a and b are constants.
 t represents the year.
GDP = e^ (a+bt)
 e is the mathematical constant approximately equal to 2.71828.
 a and b are constants.
 t represents the year.
The constants "a" and "b" in both equations determine the growth rate of M2 and GDP over
time.
Figure:

Real GDP & Broad Money in the Economy

1800.B
1600.B
1400.B
1200.B
1000.B
800.B
600.B
400.B
200.B
.B
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
GDP=e^(a+bt) M2=e^(a+bt)2

We observe that from 1995 to 2022 real GDP and M2 are continuously increasing. But we se
in 2019 to 2022 M2 are cross the GDP value also.