Analysis of Economic Growth & Inflation

Table of Contents

Abstract

Table of Contents

List of Figures

List of Tables

1. Introduction

2. Purpose of the Research
2.1 Background Information
2.2 Problem Statement and Research Sub-questions
2.3 Significance of the Problem
2.4 Aim and Objectives

3. Research design
3.1 Literature Review
3.2 Conceptual Framework
3.3 Hypotheses
3.4 Variables
3.4.1 Inflation Rate
3.4.2 Economic Growth Rate
3.5 Methods of Analysis
3.5.1 Statistical Tools
3.5.2 Correlation Coefficient Test
3.5.3 Granger Causality Test
3.5.4 VAR Model Analysis
3.6 Deviations

4. Data
4.1 Source and Data Collection Method
4.2 Sample Design
4.3 Problem Encountered with Data Collection

5. Analysis and Results
5.1 Correlation Coefficient Test
5.2 Granger Causality Test
5.3 VAR Model Analysis

6. Conclusion

7. Recommendation

References

Appendices

Appendix 1 – Data of GDP Growth Rate and CPI

Appendix 2 – Result of Correlation Coefficient

Appendix 3 – Result of Granger Causality Test

Appendix 4 – Result of VAR Model

Appendix 5 – Budget & Timetable

List of Figures

Figure 3.21 Flow Chart of Hypothesis Testing

Figure 5.11 Scatter Graph of the Correlation Coefficient Trend

Figure 5.31 VAR Model Co-integration Equations

Figure 5.32 Impulse Response Function

List of Tables

Table 5.12 Correlation Matrix

Table 5.13 Correlation Coefficient Test result

Table 5.21 Granger Causality Test Result

1. Introduction

This research focuses on the relationship between China’s inflation and economic growth rate. The purpose of the research is presented in the first section of the report. Then there will be a detailed research plan and a statement regarding data collection. In the following section, the analysis and result are stated with lots of tables and charts generated by Eviews and Excels. At the end of the report, we make some recommendations based on findings of the research.

2. Purpose of the Research

2.1 Background Information

Before 1949, China’s economy was extremely backward. The reform and opening-up in 1979 has accelerated China’s economic development, making China one of the major economic powers in the world. (Permanent Mission of PRC, 2008) From 1983 to 1985, double-digit real GDP was achieved for the first time. In the early 1990s, China’s economy continued to grow at an unprecedented rate, accompanied by a rapidly increasing inflation. In 1993, measures were taken to rein in the overheating economy, so the growth rate gradually subsided during the following years and the inflation rate also slowed down, reaching negative growth in 1998. After 2000, China’s economy kept increasing and reached the highest level in 2007. However, the 2008 global financial crisis began to reduce the economic growth. In the face of financial crisis, the government pumped 4 trillion RMB in the form of an economic stimulus package, which succeeded in preventing a dramatic fall of GDP in 2009 and providing a sustained recovery in 2010. (Chinability, 2011) Meanwhile, the overall trend of inflation is increasing except for a short fall in 2009.

2.2 Problem Statement and Research Sub-questions

From the above information, we know that China’s economy has been growing rapidly during the past two decades, so has the inflation rate. Consequently, there comes the problem whether there is any kind of correlation between them. This research focuses on the relationship between China’s inflation rate and economic growth. We have divided the main problem into three sub-questions:

- Whether there is a significant correlation between China’s inflation rate and economic growth.
- Whether there is a cause-and-effect relationship between China’s inflation rate and economic growth.
- How time factor influences the relationship between China’s inflation and economic growth

2.3 Significance of the Problem

Inflation is a general and progressive increase in the prices of goods and services in an economy, which in turn erodes the purchasing power of money. This phenomenon usually lowers the quality of people’s daily life and discourages investment and savings, for the money on hand is not as valuable as before while the prices of living necessities keep increasing (Mcbride, 2012). If inflation cannot be controlled to a limited range, unemployment and unsteadiness will occur. Although high inflation rate does harm to a country’s economy, low and moderate inflation sometimes comes along with economic growth, which to some extent has positive effects to the economy.

Economic growth is another important issue for a country’s development. It is the increase in the amount of goods and services produced by an economy over a certain period of time. Economic growth can reflect the speed of economic development and the economic strength of a country, which can be determined by the investment quantity, work output and the rate of production. However, it is always influenced by the policy of a county and the current market circumstances. If the economy grows in a stable and smooth way, the quality of life, social welfare and employment situation will be improved.

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