Analyzing relationship between inflation rate and per capita GDP growth Essay Sample

equation. we can see that pay rising prices is negatively related to unemployment _ ( Farmer. 2002 ) . _ We will come back to this issue when we start analysing informations from Azerbaijan.

This thought is the basic premise behind Philips curve. which implies negative relationship between rising prices and unemployment.Now. let’s have a expression at other jurisprudence. called Okun’s jurisprudence.

Harmonizing to this jurisprudence. divergences between possible and existent GDP are relative to difference between natural and existent unemployment ( Gartner. 2003 ) :Y*-Y= A ( U*-U ) ( 2 )So. Philips curve shows negative relationship between rising prices and unemployment and Okun’s jurisprudence describes relationship between unemployment and GDP. Therefore.

if we consider equations ( 1 ) and ( 2 ) together. we can see a correlativity between GDP growing and rising prices rate. i. e.

. both rising prices and GDP growing is negatively correlated to unemployment. So. there is a positive relationship between rising prices and GDP growing.For now. it is adequate with theoretical portion.

Now. let’s see what is traveling on in pattern.Azerbaijan: Cardinal FACTS ABOUT GROWING ECONOMYDue to immense oil grosss. country’s GDP growing rate was tremendous in last few old ages.

Azerbaijan held 1st topographic point in the universe economic system for its GDP growing rate from 2006 to 2009. In 2007 GDP growing rate was 34. 50 % . Baku-Tbilisi-Ceyhan grapevine that started operational stage in 2006 is expected to convey the state $ 160 billion during following 30 old ages.Huge grosss brought about execution of immense undertakings in Azerbaijan.

This in bend resulted in more governmental disbursement and therefore more aggregative demand. The latest factor

pushed force per unit area on rising prices rate. Therefore. rising prices was upward in Azerbaijan analogue to increasing oil grosss. Along with this.

governmental plan aimed to development of non-oil sector is being implemented successfully. New workss and mills have been built during last decennary to diminish economy’s dependance on oil. As a consequence. unemployment rate is downward slopping.

Country’s currency was re-denominated in 2006. This was really important factor for the fiscal sector. Increased assurance in New Azerbaijan manat ( AZN ) resulted in grasp of this currency against USD. National Bank of Azerbaijan is still seeking to restrict this grasp to excite exports.Theory IN PRACTICENow we have a general thought what we are speaking about. We can set together the theory and look into it on macroeconomic informations of Azerbaijan.

We will get down deducing Philips curve for this state. And so see whether Okun’s jurisprudence holds in Azerbaijan. Finally we will happen relationship between these two theories and derive relationship between rising prices and per capita GDP growing._Figure 1. Unemployment rate in Azerbaijan__Source: State Statistical Committee of Azerbaijan Republic ( World Wide Web.

azstat. _org_ ) __Figure 2. Inflation rate measured by CPI. __Source: National Bank of Azerbaijan ( World Wide Web.

nba. AZ ) _Figure 1 shows downward aslant unemployment line. As it was emphasized. this is due to creative activity of new work topographic points. particularly in non-oil sectors.

Figure 2 represents the degree of rising prices in Azerbaijan. measured by CPI. Merely in 2006 the incline is negative. but so it is positive once more.

We will come back to the ground of diminishing rising prices in 2006 subsequently.

Now. if we put these figures together we can deduce Philips curve for Azerbaijan._Figure 3. Prince philips curve_On the Y axis we have rising prices rate and on the ten axis we have the degree of unemployment. From this graph we can see that there is a negative relationship between these two indexs.

If we recall neoclassical pay equation. it implies the negative relationship every bit good ( if expected monetary value rising prices is considered changeless ) .As we emphasized supra. the lone divergence in this graph happens in 2006. What is the chief ground for this? Actually.

immense oil grosss flowed into the state in 2006 and GDP growing rate was tremendous ( 34 % ) . So. rising prices rate should even increase more. The issue is that.

to contend lifting rising prices in the form of turning oil monetary values and immense grosss authorities of Azerbaijan decided to re-denominate its currency by 5000 times. So. AZN exchange rate was truly close to taking World currencies ( 1 AZN?1. 25 USD ) . The National Bank of Azerbaijan and private Bankss set higher involvement rates for refinancing and sedimentations in AZN instead than USD. This resulted in addition of sedimentations in general.

The growing rate of sedimentations and nest eggs was 58 % in 2006. while it was 22 % in 2005 ( _National Bank of Azerbaijan. Deposits and Savings for currencies in 2006_ ) . Increase of sedimentations in AZN was 37 % in 2006.

while it was 20 % in 2005. These factors show that Government could accomplish its end to lower rising prices for 2006. That is the chief

ground why there is such a divergence when we analyze Philips curve.Let’s now try to happen relationship between GDP growing and unemployment rate.Figure 4.

Per Capita GDP in Azerbaijan. USD._Source: State Statistical Committee of Azerbaijan Republic_If we consider this graph together with unemployment graph we can see the negative relationship between per capita GDP and rising prices rate in Azerbaijan. Let’s put these two indexs together in one graph._Figure 5.

Okun’s saw_On the ten axis we have the rate of unemployment and on the Y axis we have the per capita GDP from 2003 boulder clay 2008. From this graph we can see that this jurisprudence holds in real properties of Azerbaijan. Now. we have seen that per capita GDP growing is negatively related to unemployment. and on the other manus.

rising prices is besides negatively related to unemployment. This means that. rising prices and GDP growing ( i. e. per capita GDP growing ) is correlated. they have positive relationship.

This positive relationship can be observed if we put these two indexs together._Figure 6. Positive relationship between per capita GDP and rising prices rate_To reason our analysis about how neoclassical theoretical account of rising prices. growing and unemployment plants in pattern let’s analyze following chart. If we recall neoclassical pay equation ( 1 ) we can see that left manus holds difference between pay growing and productiveness growing ( pay rising prices ) . In the chart below.

we see that mean monthly salary growing rate exceeds both non-oil labour productiveness growing rate and non-oil sector GDP growing rate. So. it means that& gt ; 0. Then the right manus of the equation should

be besides positive. in other words. monetary value rising prices must be positive.

From here we come to conclusion that neoclassical theory is appropriate while discoursing these relationships._Figure 7. _We have observed that. both Philips curve and Okun’s jurisprudence clasp in existent figures of Azerbaijan.

After analysing these relationships we came into decision that so. there is a correlativity between rising prices and per capita GDP. For this intent we have used neoclassical pay equation. Of class. each theory has its deductions.

advantages and disadvantages. Obviously. this relationship could be proved utilizing other attacks and other theoretical accounts. In any instance.

there is a positive relationship between per capita GDP growing and rising prices.Bibliographies:Roger E. A. .

Farmer ( 2002 ) . _Macroeconomics. _ 2nd edition. South-Western.Gartner M.

( 2003 ) . _Macroeconomics. _ Harlow: Financial Times Prentice Hall.Nellis G.

. Parker D. ( 2004 ) . _Principles of macroeconomics.

_ Harlow: Financial Times Prentice Hall. 2004.Montiel P. ( 2009 ) .

_International Macroeconomics_ . Fabulous Printers Pre.State Statistical Committee of Azerbaijan Republic. World Wide Web. azstat. orgNational Bank of Azerbaijan Republic.

World Wide Web. nba. AZMosley L. ( 2005 ) . Currency Redenomination in Developing Countries. World Wide Web.

unc. edu/~lmosley/APSA % 202005. pdfAnnual Reports of National Bank of Azerbaijan for 2005. 2006.

2007 and 2008. Downloadable from NBA web site.