1

Impact of Inflation on GDP

The Impact of inflation on GDP
FIRST AUTHOR

MUHAMMAD IBRAHIM KHAN
MBA Student
IQRA University
Email: Ibrahimkhan8767@gmail.com

SECOND AUTHOR

ORANGZAIB ANWAR
MBA Student
IQRA University
Email: orangzaib.anwar@iunc.edu.pk

THIRD AUTHOR

SYED FAUZAN ALI
MBA Student
IQRA University
Email: saiyedfauzan@live.com

FOURTH AUTHOR

ABDULLAH BIN JAWAID
MBA Student
IQRA University

FIFTH AUTHOR

AURANGZAIB ADIL
MBA Student
IQRA University

SIXTH AUTHOR

SAJJAD ALI
MBA Student
IQRA University

SEVENTH AUTHOR

SYED ZAFAR AHMAD
MBA Student
IQRA University

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Impact of Inflation on GDP





Abstract
This study has explained the impact of inflation on GDP in Pakistan. It is a longitudinal study
from the period 1983-2010. The data has been collected from various economic surveys. The
study supports the fact that inflation is significantly influential on GDP with a strong positive
correlation. The value of Pearson Correlation is found to be 0.97 which shows that there is strong
positive relation and sig value 0.00 shows that there is a relation between independent variable
(inflation) and dependent variable (GDP) at confidence level of 95%. It is, therefore concluded
that inflation possess a role which is influential on GDP in Pakistan.
Keywords: Inflation and GDP













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Impact of Inflation on GDP



INTRODUCTION:
We have studied the impact of inflation on GDP in Pakistan. GDP is the sum of the value of all
the products produced in a country during fiscal year. It is found one of the indicators of the
production and growth rate of the economy and play a strategic role in development,
employment and the balance of payment (Volker, 2005). According to Catao and Terrones
(2003) inflation is the continuous rise in the price with the passage of time and declination in
the value of money. Historically, Inflation rate in Pakistan is reported by the Pakistan Bureau of
Statistics , the average inflation rate is 8.04 percent, reaching the ultimate height of 37.81 percent
in December of 1973 and a record low of -10.32 percent in February of 1959.












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Impact of Inflation on GDP



Objectives of the Study



-To examine the role of inflation in the economy of Pakistan
- To examine the role of GDP in the economy of Pakistan
- To examine the influencing role of inflation in relationship to GDP


Research question:

Is there any impact of inflation on GDP?

Problem statement:

Whenever GDP has been low, inflation has been high, and vice versa
Research model:




In this research paper we have two variables; inflation (independent) variable where as GDP
(dependent) variable. We want to study the impact of inflation of GDP.
Sampling technique:
We adopted simple convenience random sampling.
Sample size:
Our sample is 28 years of time series annual data.

Inflation

GDP

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Impact of Inflation on GDP

Findings:
Trend analysis:

Pakistans GDP is overall increasing, but there is also a slight fluctuation present due to the
economic uncertainties in the country.

Time
G
D
P
27 24 21 18 15 12 9 6 3
16000
12000
8000
4000
0
AccuracyMeasures
MAPE 76
MAD 1316
MSD 2812746
Variable
Actual
Fits
Trend Analysis Plot for GDP
LinearTrendModel
GDP= -2109.20 + 416.529*t

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Impact of Inflation on GDP

Pakistan inflation is an increasing trend at start but there is a slight fluctuation present during the
period of 15 to 27 years but overall there is an increasing trend in inflation time to time.

Correlation table
Correlations: inflation and GDP

Inflation P-value


GDP 0.97 0.00

Cell Contents: Pearson correlation



Hence the value of Pearson correlation is found to be 0.97 which indicates that there is a strong
relation between inflation and GDP and P-value is less than 0.05 hence it indicates that inflation
has a significant impact on GDP.

Time
i
n
f
l
a
t
i
o
n
27 24 21 18 15 12 9 6 3
250
200
150
100
50
0
AccuracyMeasures
MAPE 17.496
MAD 13.473
MSD 305.564
Variable
Actual
Fits
Trend Analysis Plot for inflation
LinearTrendModel
Inflation= -5.28516 + 7.51634*t

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Impact of Inflation on GDP

Regression
Regression Analysis: GDP versus inflation

The regression equation is

GDP = - 2107 + 58.2 inflation


Predictor Coef SE Coef T P
Constant -2106.5 293.2 -7.18 0.000
Inflation 58.215 2.415 24.11 0.000


S = 807.229 R-Sq = 95.7% R-Sq(adj) = 95.6%

S = 935.974 R-Sq = 96.0% R-Sq(adj) = 95.8%

The regression equation indicates that one unit of change in inflation results into a 58.2 unit of
change in GDP. Whereas R square indicates that there is a 95.7% of variance in GDP which may
be a result of inflation.


Forecasting GDP by Moving Average method for 2011


time
G
D
P
30 27 24 21 18 15 12 9 6 3
20000
15000
10000
5000
0
Moving Average
Length 3
Accuracy Measures
MAPE 12
MAD 629
MSD 1015880
Variable
Forecasts
95.0% PI
Actual
Fits
Moving Average Plot for GDP

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Impact of Inflation on GDP
We have forecasted GDP for 2011 which is found to be Rs 18062.9 billion. The data available was from
1983 to 2010.
Forecasting inflation by Moving Average method for 2011





We have forecasted inflation for 2011 which is found to be 294.54%. The data available was
from 1983 to 2010.



Time
i
n
f
l
a
t
i
o
n
30 27 24 21 18 15 12 9 6 3
350
300
250
200
150
100
50
0
MovingAverage
Length 1
AccuracyMeasures
MAPE 7.769
MAD 9.449
MSD 170.127
Variable
Forecasts
95.0% PI
Actual
Fits
Moving Average Plot for inflation
Moving Average
Length 3

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Impact of Inflation on GDP
Conclusion
The conclusive outcome of this paper is that inflation is found a significant
influential for GDP with strong positive correlation. The value of Pearson Correlation is found to
be 0.97 which shows that there is a strong positive relation and sig value of 0.00 shows that there
is a relation between independent variable (inflation) and dependent variable (GDP). It is,
therefore concluded that inflation possess a role which is influential for GDP. The result of the
previous studies has also proved that inflation has a significant impact on GDP.
Recommendations
Pakistan inflation rates are highly deviating year wise due to uncertain economic setups. Pakistan
is in a weak economic condition and highly volatile that needs to be realized for the
establishment of valid economic policy for the control of inflation.

Uncertainties exist in every economy, but Pakistans economy faces these contingencies and
economic problems more often than others. Pakistan is facing hyperinflation in this kind of
situation financial precautionary initiatives are required to be taken into consideration to manage
the inflation for negative outcomes.

Monetary and fiscal policy is guiding the financial behavior in terms of flow of money from one
unit to another unit. The flow of money in different sectors of economies needs to be properly
managed and examined for valid economic decision and measures.


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Impact of Inflation on GDP
Too much printing of money is causing an increase in inflation and our currency is being de-
valued thus the government should put an end to this non-stop printing.
Limitations
Our study comprised of only inflation and GDP, we did not consider the impact of
interest rate which is also an important factor. Secondly this research is based only on 28 years of
annual data of inflation and unemployment rate out of 66 years.