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Symbiosis Institute of Business Management, Bangalore

Macro Economics

Assignment 1

-Nandana.N

MBA EE Sem II

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INDEX

Introduction to GDP,GDP growth rate,

Unemployment Rate,Inflation and Exchange

Rate-Page 3

2. Literature Reviews-Pupose of

study,Methodologies used,Results(GDP and

unemployment rate)-Page 7

3. Literature Reviews-Pupose of study,Methodologies used,Results (Inflation rate and exchange rate)-Page 114. Data analysis, Interpretation and conclusion-Page 165.References-Page 20

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Introduction to GDP,GDP growth rate, Unemployment Rate,Inflation and Exchange Rate

I.GDP- Gross Domestic Product:

In order to analyze the health of an economy or examineeconomic growth, it's necessary to have a way to measure the size of an economy. The gross domestic product (GDP) is one of the primary indicators used to gauge the health of a country's economy. It presents a sum of a country's production which consists of all purchases of goods and services produced by a country and services used by individuals, firms, foreigners andthe governing bodies.

Importance of GDP

GDP consists of consumer spending, Investment expenditure, government spending and net exports hence it portrays an all inclusive picture of an economy because of which it provides an insight to investors which highlights the trend of the economyby comparing GDP levels as an index

GDP is used as an indicator for most governments and economic decision-makers for planning and policy formulation

In case of GDP, each component is given the weight of its relative price. In market economics it clicks as prices reflect both marginal cost of the producer and marginal utility for the consumer,

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i.e. people sell at a price that others are willingto pay

GDP helps the investors to manage their portfolios by providing them with guidance about the state of the economy

Calculation of GDP provides with the general health of the economy. A negative GDP growth portrays bad signalsfor the economy. Economists analyse GDP to find out whether the economy is in recession, depression or boom.

Gross Domestic Product is good measure for an economy and with improvement in research and quality of data, statisticians and governments are trying to find out measures to strengthen GDP and make it a comprehensive indicator of national income of a country.

GDP Growth rate:

A measure of economic growth from one period to anotherexpressed as a percentage and adjusted for inflation (i.e. expressed in real as opposed to nominal terms). The real economic growth rate is a measure of the rate of change that a nation's gross domestic product (GDP) experiences from one year to another. 

II.Unemployment rate:

Unemployment is an important social and economic problem. Getting a precise and internationally

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comparable assessment of its magnitude is therefore of interest in its own right. The appropriate measure of unemployment is, however, likely to depend on the purpose at hand. Unemployment may be used as an indicator of inflationary pressures in the labour market, as a gauge of social hardship or as a measure of under-utilization of labour.

Who is an “unemployed”?

Those persons ready, desirous and capable of working ina particular capacity to a desired extent, but who are unable to obtain paid employment in such capacity to the desired extent, are unemployed.

Unemployment is a social scourge. It is wasteful and impoverishing and generates discontent, frustration andresentment. Ultimately, if not checked and reversed, itcan lead to the disintegration or destruction of the society itself.

Unemployment Rate:

Unemployment Rate gives us a quick gauge of the health of the labour market. A deeper analysis of the unemployment rate by demographic and socio-economic characteristics, highlight vulnerable groups who might find it harder to secure employment. The number of unemployed persons provides a gauge of the magnitude ofthe problem. Characteristics most often studied includeage and educational attainment. 

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III.Inflation:

Inflation is a term used in economics to measure the increase and decrease in prices. In simpler terms inflation is a decline in the purchasing power of moneyfor goods and services.

Inflation is a consistent increase in the price of goods and services over time.  During inflationary times, money loses its "buying" or "purchasing" power, and it takes more units of currency to purchase the same units of goods or services.  Over time, inflation lowers the value of each unit of currency..

What inflation means for most people is a higher cost of living.

Economists generally favor a low and steady rate of inflation.  The job of keeping inflation under control is assigned to the monetary authorities at the Reserve Bank of India.  Increases and decreases to the money supply can be used to regulate the growth of the economy.  The levers used to control the money supply include interest rates, buying and selling of government securities and bank reserve requirements.

Inflation Rate:

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The rate of change of price of goods and services, overa period of time (usually annually) is defined as the inflation rate.

A measure of how fast a currency loses its value. That is, the inflation rate measures how fast prices for goods and services rise over time, or how much less oneunit of currency buys now compared to one unit of currency at a given time in the past. The inflation rate may increase due to massive printing of money, which increases supply in the economy and thus reduces demand. Equally, it may occur because certain important commodities become rarer and thus more expensive.

IV.Exchange rate:

The price of one country's currency expressed in another country's currency.

It is the value of two currencies relative to each other. The exchange rate is used when simply convertingone currency to another (such as for the purposes of travel to another country), or for engaging in speculation or trading in the foreign exchange market. There are a wide variety of factors which influence the exchange rate, such as interest rates,inflation, and the state of politics and the economy in each country. It is also called rate of exchange or foreign exchange rate or currency exchange

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rate. Although some exchange rates are fixed by agreement, most fluctuate or float from day to day.

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Literature Reviews-Pupose of study,Methodologies used,Results(GDP and unemployment rate)

1.http://www.bjournal.co.uk/paper/BJASS_14_2/

BJASS_14_02_02.pdf

Relationship among GDP, Per Capita GDP, Literacy

Rate and Unemployment Rate – by M. Shafiqur Rahman

Objective of study:

This paper investigates the relationship among

GDP, literacy rate and unemployment rate.It

analyses the GDP, per capita GDP data, literacy

rate and unemployment rate of Arab league

countries, and OECD countries to test whether

there exist any relationship between these

variables. This paper also finds out the strategy

that a country should take for it’s development.

Methodology used for the research:

In order to study the relationship among GDP,

PGDP, literacy rate and unemployment rate, the

Pearson’s Product moment correlation coefficient

is first calculated for all the variables.The

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correlation coefficient r is calculated.The

Spearman’s rank correlation is also used to

calculate the relationship between the variables.

Finding:

Using scatter diagrams, the final conclusion was

drawn in this paper that there exists a

significant negative relationship between GDP and

Unemployment Rate. Increasing Literacy Rate will

reduce Unemployment Rate and increase

PGDP ,resulting in the development of the

country.

2.http://www.ersj.eu/repec/ers/papers/08_4_p10.pdf

Particularities of the Correlation Between the Unemployment

Rate

and the GDP in the Dynamics of the Romanian Economy- By

Dorel Savulea

Objective of study:

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This paper tries to outline some aspects of the

interdependency between

the unemployment rate and the GDP rhythm under

the specific circumstances of the Romanian

economy in the pre-accession period to the EU.It

shows that the reversed connection between the

two macroeconomic variables cannot be applied for

Romania in the analyzed period. These situations

are also proved and the end of the paper presents

the way of using the results obtained for the

preparation of

predictions.

Methodology used for the research:

In order to study the relationship among GDP and

unemployment rate , this paper uses two methods.

The version of the level of the gross domestic

product (LGDP) and the version of the growth rate

(GR).

The basic idea underlined by LGDP is that when

the output is under the

level of the total employment, the unemployment

rate will exceed the natural rate.

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The version of the growth rate (GR) underlines

the fact that when the

output grown in a more slowly way than the full

employment output, the unemployment will grow

because the use of the production factors

decreases.

Finding:

Using regression and correlation analysis,in the

Romanian economy from the period 2000-2006,the

research pointed out, that the Okun’s law is

only valid to a small extent. This situation is

argued through the fact that the growth rate of

the GDP only partly explains the evolution of the

unemployment rate; the correlation coefficient

has a quite small value.

3.http://www.idosi.org/wasj/wasj12(BES)11/10.pdf

Analysis of correlation between inflation rate and employment

rate with Gross Domestic Product- World Applied science

journals

Objective of study:

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This paper tries to study the correlation between

GDP and unemployment rate.The variables were

selected based on relevant economic theories that

allow such interactions between the variables.The

study was done using multivariate time series

analysis available in STATA software.The

researcher can discern the movement of variables

clearly using time series data.

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Methodology used for the research:

In order to study the relationship among GDP and

unemployment rate , this paper uses time series

data ranging from 1982 to 2006 and the scope is

in Malaysia. STATA software was used to process

the data using the log log model in this study.

Unit Root test, Co Integration test and Trace

test ,Maximal Eigenvalue test, VECM test, granger

causality test were performed in order to reach

conclusive results.

Finding:

Using the above test, the paper concludes that

the inflation rate and employment rate influence

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the GDP rate in the short run.But GDP is unable

to affect either of the other two independent

variables.It concludes that there is a negative

relationship between GDP and employment rate in

the log run.

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Literature Reviews-Pupose of study,Methodologies used,Results (Inflation rate and exchange rate):

1.http://www.m-hikari.com/ams/ams-2012/ams-29-32-

2012/sekAMS29-32-2012.pdf

Investigating the Relationship between Exchange Rate and

Inflation- Siok Kun Sek:

Objective of study:

This paper conducts empirical investigation on

the relationship between exchange rate and

inflation targeting regime in the three developed

and three emerging Asian economies that have

adopted inflation targeting (IT) regime. Using a

multivariate GARCH model under BEKK

specification, we investigate if exchange rate

affect the performance of IT and the performance

of IT is compared between Asian and European

economies. The comparison is made in terms of

changes in economic structure and the

disinflation cost.

Methodology used for the research:

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For the purpose of analysis, a multivariate GARCH

(1,1) model with BEKK specification is applied.

The BEKK model is used to investigate: (1) the

correlations between the three variables i.e.

exchange rate, industrial production index and

inflation rate; (2) the impact of shock for past

value; and (3) the persistency of the three

variables to economy

Finding:

The results show significant correlation between

exchange rate movements and inflation and output

movements in both sub-periods. IT also has

significant impacts on the movements of

inflation, output and exchange rate. IT is

associated with higher volatility in exchange

rate movement in majority economies. Comparing

the performance of IT across economies, we

observe that the volatility in exchange rate has

increased dramatically and it is very volatile in

emerging Asia compare to the developed economies.

The decline in inflation impulse is larger in

emerging Asia than in developed economies. The

implementation of IT does not lead to the trade-

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off of inflation-output in Asia but the trade-off

relationship is detected in developed economies.

We can say that IT has

effectively in lowered the inflation rate and

boost up the emerging economies in Asia compared

to the developed economies.

2.http://www.bapress.ca/Journal-2/Exchange%20Rates

%20and%20Inflation%20Rates-Exploring%20Nonlinear

%20Relationships.pdf

Exchange Rates and Inflation Rates: Exploring Nonlinear

Relationships- by Bahram Adrangi and Mary E. Allender

Objective of study:

This paper investigates the Purchasing Power

Parity Theory (PPP) in the context of possible

nonlinear relationships between prices and

exchange rates of three key currencies. The main

contribution of this paper is testing for

nonlinearities and nonlinear relationships in a

framework of information arrival.

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Methodology used for the research:

This paper starts out by analyzing exchange rates

and inflation rates for stationarity, non-

linearities, and ARCH effects based on commonly

know statistics. To rule in or out the existence

of chaotic behavior, the researchers have applied

the Brock, Dechert, and Scheinkman test (BDS) and

Correlation Dimension tests of chaos to each

series. There is also application of

autoregressive models for the exchange rates and

inflation rates, along with bivariate GARCH

models of variances for the three exchange rate

and inflation rate series that show evidence that

volatility spillovers occur across prices and

exchange rates.

Finding:

The results show strong evidence that the

exchange series exhibit nonlinear dependencies.

However, there is evidence that the series

behavior may be inconsistent with chaotic

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structure. The GARCH process best explains the

nonlinearities in the monthly exchange rates and

inflation rates. Therefore, the paper concludes

with the proposal of use of the bivariate GARCH

models of the variances to ascertain the flow of

information between exchange rates and prices.

Estimation results of the bivariate GARCH models

offer evidence that the shock transmission

between domestic prices and exchange rates occur

in both directions.

3.http://www.ijcb.org/journal/ijcb06q4a6.pdf

The Impact of Monetary Policy on

the Exchange Rate- by Jonathan Kearns and Phil Manners

Objective of study:

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The paper investigates the impact of monetary

policy on the exchange rate using an event study

with intraday data for four countries. It also

shows that the impact depends on how the surprise

affects expectations of future monetary policy.

If expectations of future policy are revised by

the full amount of the surprise, then the impact

on the exchange rate is larger (0.4 percent) than

if the surprise only brings forward an

anticipated change in policy.

Methodology used for the research:

This paper uses use an event-study approach,

estimating the change in the exchange rate around

the announcement of monetary policy decisions.

Decisions include both announced changes to

monetary policy and announcements of decisions to

not change policy, so long as the market knew for

certain that a policy announcement would take

place. For each of the events, we measure the

movement in the exchange

rate around the event using intraday data. A

short seventy minute

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event window is used. This reduces the amount of

information

received by the market in the event window,

reducing the number

of events that would have to be discarded due to

the exchange

rate and interest rate jointly responding to

other news, such as a

macroeconomic data release. Because the interest

rate surprise will

be a more-dominant piece of information in a

short event window,

it should also result in more-accurate estimates

Finding:

This paper uses an event study to isolate the

impact of changes

in monetary policy on the exchange rate. The

impact of monetary policy changes on the exchange

rate is found to occur virtually instantaneously.

If we use an event window that ends well after

the monetary policy decision, the estimates do

not change, indicating that the news is rapidly

incorporated into exchange rates, although the

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standard errors widen. Despite using a narrow

event window in which no other identifiable

events occurred, the monetary shock explains only

10–20 percent of the variation in the exchange

rate in that short window. In general, the

results

suggest that monetary policy can account for only

a small part of the observed volatility in the

exchange rate. The small proportion explained by

such high-profile news indicates that there is

still much to learn in explaining exchange rate

movements.

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Data analysis, Interpretation and conclusion Data:

Year GDP at factor cost - Annual

GDP Growth Rate

2002 -03

25709.35 3.88

2003 -04

27757.49 7.97

2004 -05

29714.64 7.05

2005 -06

32530.73 9.48

2006 -07

35643.64 9.57

2007 -08

38966.36 9.32

2008 -09

41586.76 6.72

2009 -10

45160.71 8.59

2010 -11

49185.33 8.91

2011 -12

52475.3 6.69

2012 -13

54821.11 4.47

Unemployme

nt rate in

IndiaYear Unemployme

nt Rate2002 8.8

25

2003 9.5

2004 9.2

2005 8.9

2006 7.8

2007 7.2

2008 6.8

2009 10.7

2010 10.8

2011 9.8

2012 8.5

2013 7.5

Correlation Analysis:Yrs X x=X-X¯ x^2 Y y=Y-Y¯ y^2 x*y

2002 3.88-

3.4125 11.64515625 8.80.0083

33 6.95 -0.0284375

2003 7.97 0.6775 0.45900625 9.50.7083

33 0.5017361 0.479895833

2004 7.05-

0.2425 0.05880625 9.20.4083

33 0.1667361 -0.099020833

2005 9.48 2.1875 4.78515625 8.90.1083

33 0.0117361 0.236979167

2006 9.57 2.2775 5.18700625 7.8

-0.9916

7 0.9834028 -2.258520833

2007 9.32 2.0275 4.11075625 7.2

-1.5916

7 2.5334028 -3.227104167

2008 6.72-

0.5725 0.32775625 6.8

-1.9916

7 3.9667361 1.140229167

2009 8.59 1.2975 1.68350625 10.71.9083

33 3.6417361 2.4760625

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2010 8.91 1.6175 2.61630625 10.82.0083

33 4.0334028 3.248479167

2011 6.69-

0.6025 0.36300625 9.81.0083

33 1.0167361 -0.607520833

2012 4.47-

2.8225 7.96650625 8.5

-0.2916

7 0.0850694 0.823229167

2013 4.86-

2.4325 5.91705625 7.5

-1.2916

7 1.6684028 3.141979167

N=12 ∑X=87.51 x^2=45.120025∑ X=105.5∑y^2=25.55∑

909x*y=5.3262∑

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X¯= X/∑N y¯= Y/N∑

x^2*y^2=45.120025*25.55909

7.29258.7916666

67 1152.81

r= xy/∑√( x^2 y^2)∑ ∑

0.15687

Findings:

The coefficient of correlation lies between -1 and +1.

This indicates that the two variables GDP growth rate

and Unemployment rate are feebly related. There is a

weak linear relationship between the GDP growth rate

and Unemployment rate in India.

Data:

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Inflation Rate In India

Year Inflation

Rate2002

4.312003 3.812004 3.772005 4.252006 5.792007 6.392008 8.322009 10.832010 12.112011 8.872012 9.302013 10.92

Exchange Rate in India

Year Exchange

Rate

Value

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2002 47.50502003 43.44502004 43.75502005 44.60502006 43.59502007 39.98502008 50.94502009 45.13502010 44.64502011 51.16002012 54.38932013 47.5050

Correlation Analysis:Yrs X x=X-X¯ x^2 Y y=Y-Y¯ y^2 x*y

2002 4.31

-3.0791

7 9.481267361 47.5054.4496

67 6.95 -13.70126528

2003 3.81

-3.5791

7 12.81043403 43.4450.3896

67 0.1518401 -1.394681944

2004 3.77

-3.6191

7 13.09836736 43.7550.6996

67 0.4895334 -2.532210278

2005 4.25

-3.1391

7 9.854367361 44.6051.5496

67 2.4014668 -4.864661944

2006 5.79

-1.5991

7 2.557334028 43.5950.5396

67 0.2912401 -0.8630169442007 6.39 - 0.998334028 39.985 - 9.4269468 3.067774722

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0.99917

3.07033

2008 8.320.9308

33 0.866450694 50.9457.8896

67 62.24684 7.343964722

2009 10.833.4408

33 11.83933403 45.1352.0796

67 4.3250134 7.155786389

2010 12.114.7208

33 22.28626736 44.6451.5896

67 2.5270401 7.504551389

2011 8.871.4808

33 2.192867361 51.168.1046

67 65.685622 12.00166056

2012 9.31.9108

33 3.651284028 54.389311.333

97 128.4588 21.65732131

2013 10.923.5308

33 12.46678403 7.5

-35.555

3 1264.1817 -125.5399561

N=12 ∑X=88.67 x^2=102.103∑X=516.6∑

64y^2=1547∑

.13x*y=-∑

90.164

X¯= X/∑N y¯= Y/N∑ x^2*y^2=1547.13*-90.1647.3891

6743.055333

33 -139495.4

r= xy/∑√( x^2 y^2)∑ ∑

-0.2268

Findings:

The coefficient r lies below -1.

Using the correlation of coefficient “r” we can say

that there is a negative non linear relationship

between the variables Inflation rate and Exchange Rate.

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References : Investopedia

Wikipedia

RBI

CSO

Indexmundi.com

www.inflation.eu/inflation-rates/india/historic-inflation/cpi-inflation-india.aspx