Basic Econometrics Assignment.docx - BFI204 Basic Econometrics Semester May 2019 Assignment Title Effect of Inflation Rate on GDP in Malaysia from 1979

Basic Econometrics Assignment.docx - BFI204 Basic...

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BFI204 Basic Econometrics Semester May 2019 Assignment Title: Effect of Inflation Rate on GDP in Malaysia from 1979 to 2017 Lecturer: Associate Professor Dr Eugene Pek Chuen Khee NAME STUDENT ID Cheong Jin Hao 1001747568 Low Chea Hui 1001746637 Yap Suet Hooi 1001746639 Lim Jing Rou 1001852163 Yong Yu Wen 1001849709
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Introduction Background of the Topic Malaysia had its formation in 1963 and has been one of the Asia’s best in the past. Malaysia also was one of the non-western states that success to attain a comparative smooth transformation in order to have more advanced economy system. Primary sector products became larger supplier since the late nineteenth century. Raw materials comprise rubber, pail oil and tin had been exported to foreign countries. Malaysia ranked 36 th by GDP (nominal) and 67 th by GDP per capita (PPP) in year 2018 [ CITATION Cou18 \l 1033 ]. Average of 6.5% Real gross domestic product (GDP) had grown from year 1957 to 2015. As shown in the GDP latest statistics, GDP in Malaysia increased by 4.485% in Mar 2019. Malaysia’s nominal GDP reached 88.490 million US Dollar in the same year. Statistic shows that nominal GDP per capita had the highest value in year 2018 and lowest value in year 1961, which have 11,079.266 USD and 226.979 US Dollar. Data of GDP per capita updated annually, data obtainable from Dec 1957 to Dec 2018. Nominal GDP per capita (PPP) of Malaysia in year 2018 had reached 11,079.266 USD as compared to year 2017 which have only 9,965.354 USD. Average number of nominal GDP per capita of Malaysia worth 2,122.511 USD [ CITATION CEI18 \l 1033 ]. 1
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Problem Statement For many years the relationship between inflation and GDP has been one of the most widely researched topics in macroeconomics. Some regression analysis can check either 1 direction only, meaning that we can only regress Y on X. But for the model of inflation and GDP, it involved causality, means that the regression model can check both directions, either by regressing inflation on GDP, or by regressing GDP on inflation. Surely, we know that we can regress inflation on GDP, where they will have a positive and direct relationship. This is because GDP has a significant effect on the inflation of a country. Over time, the growth in GDP causes inflation, and inflation will subsequently cause hyperinflation if the GDP growth is too rapid. This is shown in the cost-push and demand-pull inflation, where the prices will increase as a result in the increase in aggregate demand and cost of the goods and services [CITATION RYA17 \l 1033 ] However, when we regress GDP on inflation, can we get the same results as the former model whereby they are positively related? In a world where inflation is increasing, people will spend more money because they know that it will be less valuable in the future[CITATION RYA17 \l 1033 ]. This causes further increases in GDP in the short term. The Phillips curve also shows that high inflation is consistent with low rates of unemployment, implying that there is a positive impact on economic growth. If the rate of inflation increases suddenly, it temporarily reduces the rate of increase in wages. Consequently, the cost
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