Chapter-One

Introduction

1.1 Introduction
1.2 Significance of the study
1.3 Objectives of the study
1.4 Methodology of the study
1.5 Model specification
1.6 Limitations of the study

1 Inflation and Its Impact on Economic Growth of Bangladesh

1.1 Introduction

To attain sustainable economic growth coupled with price stability continues to be the
central objective of macroeconomic policies for most countries in the world today. In this
era of globalization, the effect of economic inflation crosses borders and percolates to both
developing and developed nations. Too much money in circulation, increases production
costs, declines in exchange rates, decreases in the availability of limited resources such as
food or oil etc. are the basic causes of inflation. Inflation is a sign that an economy is
growing, but excessive economic growth can be detrimental as it can lead to hyperinflation
as experienced, at the other extreme, an economy with no inflation has essentially
stagnated. The right level of economic growth, and thus the right level of inflation, is
somewhere in the middle. The question on whether or not inflation is harmful to economic
growth has recently been a subject of intense debate to policy makers and macro
economists. Several studies have estimated a negative relationship between inflation and
economic growth. Specifically, the bone of contention is that whether inflation is necessary
for economic growth or it is detrimental to growth. High and continued economic growth
with low down inflation is the essential purpose of the macroeconomic strategy makers.

There are two main types of inflation, which is demand pull inflation and cost push
inflation. Demand pull inflation is inflation where the basic cause comes from the demand
side. When demand is increased and cannot be met by an equivalent increase in supply, the
general price level will increase and inflation will happen. Cost push inflation, which is
also called supply push inflation, occurs because of rising cost of production, for example
an increase of price of raw materials, an increase of wage rate, and so on.

Inflation and unemployment both vary from economy to economy. Some economies have
found high inflations related to higher unemployment. Some economies have found high
inflation moderately related to unemployment and others high inflation with low
unemployment. Similarly, some countries are in the situation where the economy is in
moderate to low inflation and moderate to lower unemployment and others are moderate
to low inflation but moderate to high unemployment. Therefore, inflation exists in different
economies differently. Despite these plethora of studies both for developing and developed

2 Inflation and Its Impact on Economic Growth of Bangladesh

countries, the literature on inflation and economic growth in Bangladesh is scanty. The
purpose of this paper is to empirically examine the relationship between inflation and its
impact of economic growth in Bangladesh using time series analysis (2007 to 2016). For
conducting the study, the researchers use the regression model and test the hypothesis. The
research study would be contributive to lay down the main reasons for the stated
phenomena and critically draw some imperative statements for the improvement of the
current status.

1.2 Significance of the study

The significance of the study is that inflation is major problem in Bangladesh and affect people’s
daily life income, purchasing power, literacy rate, money supply, etc. and they all effect economic
growth of Bangladesh in some way and that further effect in country development. Investment,
inflation is related to develop economic growth in Bangladesh. The study presents the economic
growth of the Bangladesh.

1.3 Objectives of the study

Main objective:
To know the impact of inflation on economic growth in Bangladesh;

Other objectives:
To show the relationship Inflation and GDP, FDI, PCI.

1.4 Methodology of the study

Methodology is the systematic, theoretical analysis of the methods applied to a field of

study. The process used to collect information and data for the purpose of making business
decision.

3 Inflation and Its Impact on Economic Growth of Bangladesh

1.4.1 Data sources

There are two major approaches to gathering information about a situation, person,
problem or phenomenon. Based upon these broad approaches to information gathering,
data from secondary source. In order to generate this report only secondary data has been
used.

1.4.2 Sample selection

The study sample are GDP, Inflation, FDI, Per Capita and Unemployment rate. There have
available data about these report in the form of Bangladesh Bureau of Statistics, Ministry
of Finance of Bangladesh, Tradingeconomics.com that means here 2007-2016 data are
considered.

1.4.3 Selection of period

The study was conducted in 2007-2016 to prepare the report. Therefore 10 years of the
GDP, Inflation, FDI, Per Capita Income data were collected.

1.4.4 Hypotheses
H0:1- There is no relationship between Inflation and GDP, FDI, PCI.

1.5 Model Specification

RGDPGRT = f (Inflation Rate, FDI, PCI)

Or
RGDPGRTt = β1 + β2InfRt + β3FDIt + β4PCIt +Ut
Where,
RGDPGRT = Real Growth Rate of Gross Domestic Product (Annual %);
β1, β2, β3, β4 = Parameters of the Estimate;
InfR = Inflation Rate (Annual %);
FDI = Foreign Direct Investment (Annual %);
PCI = per capita Income (Annual %);

4 Inflation and Its Impact on Economic Growth of Bangladesh

U = Stochastic Error Term or Residuals (Annual %);
T = Time period (2007 – 16)
β2 = Slope Coefficient of Inflation Rate.
β3 = Slope Coefficient of FDI
β4 = Slope Coefficient of PCI

1.4.6 Limitations of the study

To prepare a report on the topic like this is not easy task in a short duration. In preparing this report
some problems and limitations have encountered which are as follows:

 We have used only 10 year’s data.

 Only 4 independent variables are used

5 Inflation and Its Impact on Economic Growth of Bangladesh

 Chapter-Two
Review of the Literature

6 Inflation and Its Impact on Economic Growth of Bangladesh

2.1 Literature Review
A literature review is a text of a scholarly paper, which includes the current knowledge including
substantive findings, as well as theoretical and methodological contributions to a particular topic.
Literature reviews are secondary sources, and do not report new or original experimental work.
Through reviewing the literature, researchers find out research gap and get guideline to complete
the research work. A brief related literature is presented below:

Ahmed and Mortaza (2005) empirically identified the nexus between inflation and economic
growth using annual data on real GDP and CPI for the period of 1980-2005. They showed a
statistically significant long-run negative relationship between inflation and economic growth as
well as a threshold level of 6 percent inflation for Bangladesh. This study indicates a non-linear
relationship between inflation and economic growth that is under a certain level of inflation, the
relationship is positive and beyond that level of inflation, the relationship is negative.

Arif & Ali (2012) concluded that the GDP, broad money, government expenditure and import have
a positive effect on the inflation in long run. On the other hand, government revenue and export
have a negative effect. The government expenditure coefficient is 0.466 and the money supply
coefficient is 0.337, implying a one percent increase in government expenditure and one percent
increase in money supply elicit 0.466% and 0.337% increase in inflation respectively. In the short-
run money supply has been found to be major factor influencing inflation in the country.

Chandra and Khairul (2012) conducted the study is to find out the long run of relationship
between inflation and economic growth in Bangladesh over the period 1978 to 2010. A stationary
test was carried out using the Augmented Dickey-Fuller (ADF) and Phillip-Perron (PP) tests and
stationary found at first difference at 1% and 5% level of significance. The result of the Co-
integration test showed that for the periods, 1978-2010, there was no co-integrating relationship
between inflation and economic growth for Bangladeshi data. Further effort was made to check the
causality relationship that exists between the two variables by employing the VAR-Granger

7 Inflation and Its Impact on Economic Growth of Bangladesh

causality at two different lag periods and they conducted another two test. The first test was
conducted using lag two (2) and in the result unidirectional causality was seen running from
Inflation to economic growth. Further test at lag four (4) was carried out and it supported the first
by also indicating a unidirectional causality running from inflation to economic growth. Thus, the
study through the empirical findings maintain the fact that the causality that run from inflation to
economic growth is an indication of relationship showing that inflation indeed has an impact on
growth.

Faisal (2012) suggests that the long-time lag between monetary policy announcement and policy
action, it is difficult for policymakers to coordinate properly their strategies. Under such situation,
forecasting future inflation can assist policymakers in formulating their strategies. Along with the
time lag, in reality inflation is often multi causal and prime cause of inflation can vary from year to
year.

Fischer (1993) examined the possibility of non-linearity in the relationship between inflation and
economic growth in a panel of ninety-three countries. Using both cross-section and panel data for
a sample of both developing and industrialized countries, his findings suggest a non-linear
relationship between inflation and growth. Interestingly, by using break points of 15 percent and
40 percent in spine regression, Fischer showed not only the presence of nonlinearities in the
relationship between inflation and growth, but also that the strength of this relationship weakens
for inflation rates higher than 40 percent.

Khanam and Mohammad (1995) use data from 1972-73-1991-92 and show that money wage rate
and import price positively influence over price level in Bangladesh. They use econometric tools.
This study was 20 years back. So there is a scope to conduct the study using the latest data.

Majumder (2016) indicates that only inflation rate has stationary and other three variables have
unit root problem or non- stationary at level. But when these three variables are tested at first
difference then the problem of unit root has disappeared and hence they have become stationary at
first difference. Researcher mentions that there exists a statistically significant long run positive
relationship between inflation rate and economic growth of gross domestic product. Bangladesh
has indicated a statistically significant long run positive relationship between the rate of inflation
and economic growth of GDP.

8 Inflation and Its Impact on Economic Growth of Bangladesh

Mallik and Chowdhury (2001) conducted a study to examine the short run and long run
relationship between CPI inflation and GDP growth of four South Asian countries (Bangladesh,
India, Pakistan and Srilanka). They employed Error Correction Model (ECM) to examine the link
between CPI inflation and GDP growth. They found a significant positive link between CPI
inflation and economic growth.

Mortaza and Rahman (2008) dissected the relationship between import and domestic prices in
Bangladesh during 2000-2008. Using monthly data, they investigated the relationship between
domestic supplies, pass through elasticity, and alleged that commodities with higher share of
domestic supply face a lower pass-through elasticity of import prices on domestic prices. The
results suggest that it is important for policies in Bangladesh to correctly align the exchange rate
and trade related policies in the short run to domestic realities coupled with the long run policy of
increasing domestic production as the most effective strategy to ensure domestic price stability.

Majumdar (2006) also points out some specific supply side factors of inflation such as wage/labor
cost, import cost, exchange rate, oil price, market syndication and supply shortage of agricultural
commodities.

Raihan and Fatema (2007) reviewed a number of hypotheses put forward by the economists,
policy makers and donor agencies, like IMF, World Bank and ADB, with regard to the causes of
inflation in Bangladesh. They found that both demand-side and supply-side factors such as price
hike of food and non-food items have significant influence on the rising trend of inflation in
Bangladesh.

Umare and Zubairu (2012) conducted a study on the effect of inflation on economic growth and
development in Nigeria between 1970- 2010. They used Augmented Dickey-Fuller technique in
testing the unit root property of the series and Granger causality test of causation between GDP and
inflation. The results of unit root suggest that all the variables in the model are stationary and the
results of Causality suggest that GDP causes inflation and inflation causing GDP. A major policy
implication of this result is that concerted effort should be made by policy makers to increase the
level of output in Nigeria by improving productivity/supply in order to reduce the prices of goods
and services (inflation) so as to boost the growth of the economy. Inflation can only be reduced to
the barest minimum by increasing output level (GDP).

9 Inflation and Its Impact on Economic Growth of Bangladesh

Wahid, Shahbaz and Azim (2011) conducted a study on the correlation between inflation and
financial development in case of Bangladesh for the period of 1985-2005 in long run as well as in
short run. Economic theory reveals that developed financial sector mobilizes savings efficiently
and reallocates the resources to productive projects and hence stimulates economic activities in the
country. They found that high trends of inflation impede the performance of financial markets.
GDP per capita promotes development of financial sector through its causal channels.

Younus (2012) estimates the growth inflation trade off threshold in Bangladesh, covering data
from 1976 to 2012, which demonstrates that the relationship between inflation and growth is
nonlinear with the existence of a threshold level of inflation within the range of 7-8 percent. A
simple implication of this kind of relationship between inflation and economic growth is that a
modest increase in the rate of inflation would not be harmful for the long-run real economic growth
for the economies with initially low rates of inflation. But for economies that have initially high
rates of inflation, a further increase in the inflation rate would have adverse effects on real economic
growth. However, recent data and the present situation imply that around 6 percent of inflation rate
is a tolerable level and the government should set a target of inflation around this level.

10 Inflation and Its Impact on Economic Growth of Bangladesh

 Chapter-Three
Conceptual Framework

3.1 Inflation

3.2 Causes of Inflation

3.3 Factors that affecting inflation

3.4 Consequences of Inflation

3.5 Some possible winners and losers from a period of high inflation

3.6 Economic Growth

3.7 Measurement of Economic Growth

3.8 Gross Domestic Product

3.9 Relationship between inflation and GDP growth

3.10 Gross National Product

3.11 Relationship between inflation and unemployment

3.12 Key term of inflation

11 Inflation and Its Impact on Economic Growth of Bangladesh

 3.1 Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. When the price level rises, each unit of currency buys fewer
goods and services; consequently, inflation is also erosion in the purchasing power of
money – a loss of real value in the internal medium of exchange and unit of account in the
economy.

A chief measure of price inflation is the inflation rate; the annualized percentage change in
a general price index over time.

Inflation can have positive and negative effects on an economy. Negative effects of
inflation include loss in stability in the real value of money and other monetary items over
time; uncertainty about future inflation may discourage investment and saving, and high
inflation may lead to shortages of goods if consumers begin hoarding out of concern that
prices will increase in the future. Positive effects include a mitigation of economic
recessions, and debt relief by reducing the real level of debt.

Inflation rate=

For example, in Trishal the current price of rice is 50 to per kg but last year it was 40 tk.
Here the inflation rate = .25 or 25%.

3.2 Causes of Inflation

So what exactly causes inflation in an economy? There is not a single, agreed-upon answer,
but there are a variety of theories, all of which play some role in inflation:

i. The Money Supply

Inflation is primarily caused by an increase in the money supply that outpaces economic
growth. Ever since industrialized nations moved away from the gold standard during the

12 Inflation and Its Impact on Economic Growth of Bangladesh

 past century, the value of money is determined by the amount of currency that is in
circulation and the public’s perception of the value of that money. When the Federal
Reserve decides to put more money into circulation at a rate higher than the economy’s
growth rate, the value of money can fall because of the changing public perception of the
value of the underlying currency. As a result, this devaluation will force prices to rise due
to the fact that each unit of currency is now worth less.

One way of looking at the money supply effect on inflation is the same way collector’s
value items. The rarer a specific item is, the more valuable it must be. The same logic works
for currency; the less currency there is in the money supply, the more valuable that currency
will be. When a government decides to print new currency, they essentially water down
the value of the money already in circulation. A more macroeconomic way of looking at
the negative effects of an increased money supply is that there will be more money chasing
the same amount of goods in an economy, which will inevitably lead to increased demand
and therefore higher prices.

ii. The National Debt

We all know that high national debt in a country is a bad thing, but did you know that it
can actually drive inflation to higher levels over time? The reason for this is that as a
country’s debt increases, the government has two options: they can either raise taxes or
print more money to pay off the debt.
A rise in taxes will cause businesses to react by raising their prices to offset the increased
corporate tax rate. Alternatively, should the government choose the latter option, printing
more money will lead directly to an increase in the money supply, which will in turn lead
to the devaluation of the currency and increased prices.

iii. Demand-Pull Effect:

The demand-pull effect states that as wages increase within an economic system (often the
case in a growing economy with low unemployment), people will have more money to
spend on consumer goods. This increase in liquidity and demand for consumer goods
results in an increase in demand for products. As a result of the increased demand,

13 Inflation and Its Impact on Economic Growth of Bangladesh

companies will raise prices to the level the consumer will bear in order to balance supply
and demand.

An example would be a huge increase in consumer demand for a product or service that
the public determines to be cheap. For instance, when hourly wages increase, many people
may determine to undertake home improvement projects. This increased demand for home
improvement goods and services will result in price increases by house-painters,
electricians, and other general contractors in order to offset the increased demand. This will
in turn drive up prices across the board.

Source: www.intelligenteconomist.com

14 Inflation and Its Impact on Economic Growth of Bangladesh

iv. Cost-Push Effect:

Another factor in driving up prices of consumer goods and services is explained by an

economic theory known as the cost-push effect. Essentially, this theory states that when
companies are faced with increased input costs like raw goods and materials or wages, they
will preserve their profitability by passing this increased cost of production onto the
consumer in the form of higher prices.

A simple example would be an increase in milk prices, which would undoubtedly drive up
the price of a cappuccino at your local Starbucks since each cup of coffee is now more
expensive for Starbucks to make.

Source: www.intelligenteconomist.com

15 Inflation and Its Impact on Economic Growth of Bangladesh

v.Exchange Rates

Inflation can be made worse by our increasing exposure to foreign marketplaces. In

Bangladesh, we function on a basis of the value of the taka. On a day-to-day basis, we as
consumers may not care what the exchange rates between our foreign trade partners are,
but in an increasingly global economy, exchange rates are one of the most important factors
in determining our rate of inflation.

When the exchange rate suffers such that the currency has become less valuable relative to
foreign currency, this makes foreign commodities and goods more expensive to
Bangladeshi consumers while simultaneously making goods, services, and exports cheaper
to consumers overseas.

16 Inflation and Its Impact on Economic Growth of Bangladesh

3.3 Factors that affecting inflation

Source: www.scholart.com

3.4 Consequences of Inflation

Many governments have set their central banks a target for a low but positive rate of
inflation. They believe that persistently high inflation can have damaging economic and
social consequences.

i. Income redistribution: One risk of higher inflation is that it has a regressive effect
on lower income families and older people in society. This happen when prices for
food and domestic utilities such as water and heating rises at a rapid rate
ii. Falling real incomes: With millions of people facing a cut in their wages or at best
a pay freeze, rising inflation leads to a fall in real incomes.

17 Inflation and Its Impact on Economic Growth of Bangladesh

iii. Negative real interest rates: If interest rates on savings accounts are lower than
the rate of inflation, then people who rely on interest from their savings will be
poorer. Real interest rates for millions of savers in the UK and many other countries
have been negative for at least four years
iv. Cost of borrowing: High inflation may also lead to higher borrowing costs for
businesses and people needing loans and mortgages as financial markets protect
themselves against rising prices and increase the cost of borrowing on short and
longer-term debt. There is also pressure on the government to increase the value of
the state pension and unemployment benefits and other welfare payments as the
cost of living climbs higher.
v. Risks of wage inflation: High inflation can lead to an increase in pay claims as
people look to protect their real incomes. This can lead to a rise in unit labor costs
and lower profits for businesses
vi. Business competitiveness: If one country has a much higher rate of inflation than
others for a considerable period of time, this will make its exports less price
competitive in world markets. Eventually this may show through in reduced export
orders, lower profits and fewer jobs, and also in a worsening of a country’s trade
balance. A fall in exports can trigger negative multiplier and accelerator effects on
national income and employment.
vii. Business uncertainty: High and volatile inflation is not good for business
confidence partly because they cannot be sure of what their costs and prices are
likely to be. This uncertainty might lead to a lower level of capital investment
spending.

18 Inflation and Its Impact on Economic Growth of Bangladesh

3.5 Some possible winners and losers from a period of high inflation

Source:Bankrate.com

19 Inflation and Its Impact on Economic Growth of Bangladesh

3.6 Economic Growth

Economic growth is an increase in the capacity of an economy to produce goods and

services, compared from one period of time to another. It can be measured in nominal or
real terms, the latter of which is adjusted for inflation. Traditionally, aggregate economic
growth is measured in terms of gross national product (GNP) or gross domestic product
(GDP), although alternative metrics are sometimes used.

3.7 Measurement of Economic Growth

Economic growth is measured by changes in the gross domestic product (GDP). It

measures a country's entire economic output for the past year. That takes into account all
goods and services that are produced in this country for sale, whether they are sold
domestically or sold overseas. It only measures final production, so that the parts
manufactured to make a product are not counted. Exports are counted because they are
produced in this country. Imports are subtracted from economic growth. Economic growth
is measured quarterly measured using real GDP to compensate for the effects of inflation.
Here's more on the GDP growth rate and how you can calculate it.

Measurements of economic growth do not include unpaid services. They include the care
of one's children, unpaid volunteer work, or illegal black-market activities.

They also don't include the environmental costs. For example, the price of plastic is cheap
because it doesn't include the cost of disposal. As a result, GDP doesn't measure how these
costs impact the well-being of society. The true standard of living will be raised when these
components are measured.

3.8 Gross Domestic Product

Gross domestic product (GDP) is the monetary value of all the finished goods and services
produced within a country's borders in a specific time period. Though GDP is usually
calculated on an annual basis, it can be calculated on a quarterly basis as well. GDP
includes all private and public consumption, government outlays, investments and exports

20 Inflation and Its Impact on Economic Growth of Bangladesh

minus imports that occur within a defined territory. Put simply, GDP is a broad
measurement of a nation’s overall economic activity.

Gross domestic product can be calculated using the following formula:

GDP = C + G + I + NX

Where,

C is equal to all private consumption, or consumer spending, in a nation's economy, G is

the sum of government spending, I is the sum of all the country's investment, including
businesses capital expenditures and NX is the nation's total net exports, calculated as total
exports minus total imports (NX = Exports - Imports).

3.9 Relationship between inflation and GDP growth

The notion that inflation fosters growth has died a long, difficult death in economics. For
thirty years, evidence has piled up against the idea. Certainly, in these decades, dozens of
countries tried to fertilize their economies with inflation and harvested only weeds and
misery.

Unfortunately, the inflation-buys-growth idea still lives on in public policy. It is true that a
surreptitious bout of inflation can temporarily fool an economy into growing faster than it
otherwise would. But afterwards, you pay a penalty–long-term losses that may swamp the
temporary gains.

This is not to say that a country moving from high inflation to low inflation will not suffer
some short term adjustment costs. But if so, the moral is that once you get your country
into a whole (high inflation), climbing out is likely to be painful. The answer, though, is
not to get “a little bit” back into the hole.

21 Inflation and Its Impact on Economic Growth of Bangladesh

3.10 Gross National Product

Gross national product (GNP) is an estimate of total value of all the final products and
services produced in a given period by the means of production owned by a country's
residents. GNP is commonly calculated by taking the sum of personal consumption
expenditures, private domestic investment, government expenditure, net exports, and any
income earned by residents from overseas investments, minus income earned within the
domestic economy by foreign residents. Net exports represent the difference between what
a country exports minus any imports of goods and services.

GNP is related to another important economic measure called gross domestic product
(GDP), which takes into account all output produced within a country's borders regardless
of who owns the means of production. GNP starts with GDP, adds residents' investment
income from overseas investments, and subtracts foreign residents' investment income
earned within a country.

GNP quantifies the size of a country's economy factoring in both what is produced within
its borders and what is generated by its citizens abroad. GNP is typically calculated as:
GNP = GDP + Net income inflow from abroad – Net income outflow to foreign countries.

3.11 Relationship between inflation and unemployment

Economics covers various facets and aspects related to the people and the country and their
markets. In order to understand the relationship between inflation and unemployment we
need to know what exactly they are. Inflation is studied under economics and is a condition
where the price of goods rises, or we can say that it is a general rise in the price of goods.
This can take place due to various factors like shortage or supply or excess in demand but
nevertheless we see that the price of everyday commodity rises. It is usually defined as a
situation when “too much money chasing too few goods”. Unemployment is another term
that we all hear in our day to day life these days. Unemployment is a condition where a
person who is capable of working or rather is of workable age, but still does not have any
work, or is jobless. Despite of having the capacity to work, the person does not have work,
and this too can be because of various reasons, and is or various types like, voluntary and

22 Inflation and Its Impact on Economic Growth of Bangladesh

involuntary and others. What we need to discuss is how exactly inflation is related to
unemployment. In economics it is described in various ways and Philips curve is one of
the ways used to describe the relationship between inflation and unemployment.
Historically and ever since economics have been taken up as a study we see that Philips
curve has described inflation and unemployment to be something which have been
inversely related, that is, higher rate of inflation would mean lower rate of unemployment
which means that there would be more employment.

3.12 Key term of inflation

i. Consumer Price Index (CPI): A measure of the price level in the economy based
on the prices of a collection of products designed to reflect the consumption basket
of the average consumer.
ii. Deflation: A decline in the general price level in an economy, signified by an
annual inflation rate below 0%.
iii. Hyper-inflation: A period of very high rates of inflation, usually leading to a loss
of confidence in an economy’s currency.
iv. Inflation rate: The annual rate of change of the average price of goods and
services.

23 Inflation and Its Impact on Economic Growth of Bangladesh

 Chapter-Four
Analysis and Data Presentation

4.1 Empirical Results and Discussions

4.2 Trend analysis

24 Inflation and Its Impact on Economic Growth of Bangladesh

 4.1 Empirical Results and Discussions

H0: There is no impact between Inflation and GDP, FDI, PCI

Period Inflation rate (%) GDP (%) FDI (%) PCI(%)

FY 2007 9.39 7.06 7.93 6.6888

FY2008 12.3 6.01 7.48 7.0117
FY2009 7.6 5.05 9.61 7.2842
FY2010 6.82 5.57 9.13 7.6033
FY2011 10.91 6.46 7.79 8.0004
FY2012 8.69 6.52 11.95 8.4205
FY2013 6.78 6.01 17.31 8.8189
FY2014 7.35 6.06 14.80 9.2406
FY2015 6.45 6.55 18.34 9.7288
FY2016 6.05 7.05 20.0353 14.66
Source: Bangladesh Bureau of Statistics, (4.1)

Here I use multiple regression technique; GDP, FDI, PCI rates are considered as
independent variables, Inflation is considered as dependent variable. In this model, all
values are provided by SPSS software. Inflation and GDP, FDI, PCI of 2007 to 2016.
Therefore, all of this statistical analysis, we are going to explain of these outputs.

Variables Entered/Removedb

Variables Variables
Model Entered Removed Method

1 GDP, FDI, PCIa . Enter

a. All requested variables entered.

b. Dependent Variable: INF

25 Inflation and Its Impact on Economic Growth of Bangladesh

 Model Summary

Adjusted R Std. Error of the

Model R R Square Square Estimate

1 .816a .665 .498 1.46524

a. Predictors: (Constant), GDP, FDI, PCI

Value of R:
The value of R is .816 that indicates that the variable GDP, FDI, PCI are positively
related to the Inflation.

Value of R Square:
The value of R square is .665 that indicates that 6.65% changes in Inflation are happening
for the changes of the GDP, FDI, PCI. In addition, the least part (1- .665) = .335is
changed by others factors which are not considered.

Adjusted R Square:
From the accepted data, the value of adjusted R square is .498. it shows that how much
dependent variable is changed for the changing of independent variable.

Std. Error of the Estimate:

Here the value is 1.46524 that shows the amount of variability of predicted result and
actual result acquired from the real observation.

ANOVAb

Model Sum of Squares df Mean Square F Sig.

1 Regression 25.605 3 8.535 3.976 .071a

Residual 12.882 6 2.147

Total 38.487 9

a. Predictors: (Constant), GDP, FDI, PCI

b. Dependent Variable: INF

Regression Sum of Square:

SSR value comes 25.605 showing the extent to which we are able to minimize the error
through using the multiple regression tools.

26 Inflation and Its Impact on Economic Growth of Bangladesh

Error Sum Square:
Here residual SSE value comes 12.882 showing the extent to which error is remaining
after the regression and can be minimized with the increment of the Inflation.

Total Sum Square:

In this observation, the value is 38.487 that comes after adding the SSR and SSE value.

Degrees of Freedom:
Here, SST has(n-1) df, SSR has p (number of independent variable) df and SSE has (n-p-
1) df. Hence, the mean square due to regression (MSR) is SSR/p and the mean sum of
square due to error (MSE) is SSE/n-p-1. Here 3 is df for the numerator and is df for the
denominator.

F- test:
If H0 is accepted, MSR provides an unbiased estimate of variance and the value of MSR
or MSR becomes lager. To determine how large values of MSR/MSE must be to reject
H0, we make to use of the fact that if H0 is true and assumptions about the regression
model are valid, the sampling distribution MSR /MSE is F-distribution with p df in the
numerator and (n-p-1) in the denominator.

The summary of F-test given below:

F = MSR/MSE = .397
With a level of significant α= 0.05, the tabulated value shows 3 df an in the numerator and
4 df in the denominator, F= 6.59 with 3.976<6.59, we accept the null hypothesis and
alternative hypothesis is rejected. So there is no significant relationship exists between
inflation and GDP, FDI, PCI.

Coefficientsa

Standardized
Unstandardized Coefficients Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) 6.373 4.887 1.304 .240

FDI -.360 .180 -.835 -1.993 .093

PCI -.023 .404 -.026 -.058 .956

GDP 1.049 .883 .319 1.188 .280

a. Dependent Variable: INF

27 Inflation and Its Impact on Economic Growth of Bangladesh

Regression Analysis
Regression analysis measures the nature of the relationship between dependent
variable and independent variable. It describes that the relationship is positive or
negative between variables.

Regression Equation: Ŷ = β0 + β1X1 + β2X2+ β3X3 + €

Ŷ= 6.373 + -.360 (FDI) + -.023(FDI) + .1.049(GDP) + .889(€)

The regression equation describes negative relationship between Inflation &FDI, the
negative relationship between Inflation & FDI, the positive relationship between
Inflation & GDP.
Dependent variable: Ŷ = Inflation
Independent variable: X = GDP, FDI, PCI

If independent variable is zero, then Ŷ= 6.73. Here Ŷ=6.73, which is intercept. It

shows that profit will be 6.73 if the independent variable will have no change.

Now the value of slope β1= -.360, it means if the volume of GDP increases by 1% then
the INF growth will increase by -3.60% assuming all other variables are constant.

Now the value of slope β2= -0.023, it means if the volume of INF increases by 1%
then the INF growth will increase by 0.23% assuming all other variables are constant.

Now the value of b or slope of β3= 1.049, it means if the volume of PCI increases by
1% then the INF growth will increase by 10.49% assuming all other variables are
constant.

T-test:
The calculated value of t is -1.993 and tabular value is 2.048 at 36 df of area 0.05
which is higher than calculated value of t. hence, the null hypothesis is accepted and
alternative hypothesis is rejected and concludes that there is no relationship between
FDI and Inflation.

28 Inflation and Its Impact on Economic Growth of Bangladesh

4.2 Trend analysis (According to table 4.1)

Inflation rate

Inflation rate
y = -0.4521x + 917.68
14 R² = 0.4382

12

10

0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

In 2007, inflation rate for Bangladesh was 9.39 %. Though Bangladesh inflation rate
fluctuated more in 2008. In recent years, it tended to decrease through 2007 - 2016 period
ending at 6.05 % in 2016.this is positive sign for the country.

29 Inflation and Its Impact on Economic Growth of Bangladesh

Real GDP Growth Rate

Real Growth Rate

8
y = 0.0613x - 117.14
7 R² = 0.0873

0
2006 2008 2010 2012 2014 2016 2018

In Bangladesh, services are the biggest sector of the economy and account for 50 percent
of total GDP. Annual percentages of constant price GDP are year-on-year changes. Real
growth rate is consistently changes.

30 Inflation and Its Impact on Economic Growth of Bangladesh

Nominal growth rate

Nominal growth rate

18
y = -0.0316x + 77.323
16 R² = 0.0093
14
12
10
8
6
4
2
0
2006 2008 2010 2012 2014 2016 2018

Nominal growth rate includes real interest rate plus inflation. In this graph Nominal
growth rate is changing consistent.

Unemployment rate

Unemployment Rate
5.2
y = -0.0405x + 86.033
5.1 R² = 0.1742
5
4.9
4.8
4.7
4.6
4.5
4.4
4.3
4.2
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

In this graph, Unemployment rate is fluctuated by year to year more.

31 Inflation and Its Impact on Economic Growth of Bangladesh

FDI of Bangladesh

2500
FDI USD(MILLION)
y = 145.22x - 290872
R² = 0.8383
2000

1500

1000

500

0
2006 2008 2010 2012 2014 2016 2018

The foreign direct investment (FDI) is considered as one of the major sources of
employment generation, technology transfer, and managerial capacity building, and
increasing market efficiency in any country. The foreign direct investment is increasing
more and more.

Per capita income

2000
Per Capita Income (USD)
y = 63.4x - 126654
1500 R² = 0.6976

1000

500

0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

The GDP per capita is obtained by dividing the country’s gross domestic product,
adjusted by inflation, by the total population. Last two-year per capita income is
increasing noticeable.

32 Inflation and Its Impact on Economic Growth of Bangladesh

 15

10

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Real GDP growth rate (%) Inflation rate (%)

Unemployment Rate (%) Linear (Real GDP growth rate (%))
Linear (Inflation rate (%)) Linear (Unemployment Rate (%))

Figure: Comparative analysis of inflation rate, real GDP growth rate and unemployment rate

2500

2000
FDI (USD Million)
1500
Per Capita (USD)
1000 Linear (FDI (USD Million))
500 Linear (Per Capita (USD))

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Figure: comparative analysis of FDI and Per Capital income

From the above two graphs we see that there is negative trend line in inflation. Its good
sign for us. There is positive trend line in real growth rate that means our real economic
growth is increasing. There is little bit negative trend line in nominal growth rate that means
our nominal economic growth is little bit decreasing. There is negative trend line in

33 Inflation and Its Impact on Economic Growth of Bangladesh

unemployment rate that means our unemployment rate is decreasing. There is positive
trend line in FDI that means our FDI is increasing. There is positive trend line in per capita
income. That means our PCI is increasing.

Chapter-Five
Findings, Recommendations & Conclusion

5.1 Findings
5.2 Recommendations
5.3 Conclusion

34 Inflation and Its Impact on Economic Growth of Bangladesh

5.1 Findings

Findings are the principal outcomes of a research project. This is usually referring to the totality of
outcomes, rather than the conclusions or recommendations drawn from them. The major findings
of this bank are given below:
i. From the trend analysis of GDP, it indicates that GDP is increasing presently from the
previous years and this is a positive sign of economic growth of Bangladesh.
ii. From the trend analysis of Inflation and Unemployment, it indicates the downward trend
and lower inflation and unemployment helps to boost the economic growth.
iii. The Bangladesh empirical data indicates that the real wage effect on poverty outweighs
the employment effect of inflation.
iv. Because of inflation, a lower interest rate of bank causes the depositors unwillingness to
deposit their savings in bank.
v. The increasing prices of daily commodity due to inflation increase the cost of living of
general people.
vi. High inflation put central bank under pressure to take contradictory monetary policy that
might reduce growth.
vii. Due to inflation the fluctuation in exchange rate decreases the economic growth.
viii. The higher rate of money supply causes higher rate of inflation and that decreases the
GDP.

35 Inflation and Its Impact on Economic Growth of Bangladesh

5.2 Recommendations:

i. Our result shows that there is a no impact between inflation and GDP, FDI, PCI.
Although our result shows that there is a positive relationship between inflation and
GDP. If GDP, increase, its effect goes on inflation but in reality FDI, GDP, PCI
also help in economic development.
ii. In case of per FDI and PCI, our result shows that there is a negative relationship
with inflation, in real world there are many countries who has much per capita
income and inflation rate is satisfactory level.

iii. Economic stakeholders should increase GDP and keep logical format to FDI, PCI.

5.3 Conclusion:

At the ending of the study, we can say that the main objective of this study is to examine
the impact of inflation on economic growth in Bangladesh. Annual time series data for the
period of 2007-2016 are used in the study. In the present study, hypotheses and regression
models are used to find the relationship between the inflation and economic growth for
Bangladesh. The study shows that there is a positive relationship between GDP and
inflation rate, positive relationship between inflation and FDI, positive relationship
between inflation and per capita income. The study represents, inflation plays a positive
role for economic growth of Bangladesh.

36 Inflation and Its Impact on Economic Growth of Bangladesh

5.4 Reference:

Faisal,F (2012), “Forecasting Bangladesh's Inflation Using Time Series ARIMA Models”,
;World Review of Business Research Vol. 2. No. 3. May. Pp. 100 – 117.

Mallik,G and Chowdhury,A (2001), “Inflation and Economic Growth: Evidence from
South Asian Countries,” Asian Pacific Development Journal, Vol. 8, No.1), pp. 123-135

Mortaza,G and Rahman,H (2008), “Transmission of International Commodity Prices to

Domestic Prices in Bangladesh”, Working Paper Series: WP 0807 ; Policy Analysis Unit
(PAU), Bangladesh Bank.

Ahmed, S., and Mortaza, G. (2005). Inflation and Economic Growth in Bangladesh: 1981-
2005. Policy Analysis Unit (PAU) Working Paper 0604.

Majumder, M. Alamgir, ( 2006), “ Inflation in Bangladesh: Supply Side Perspective”

Policy Research Unit, Research cell, Bangladesh Bank.

H. M. Akhter (1989) “A monetary model for Inflation for Bangladesh , 1974-1985” T

Taslim,A (1980) Inflation in Bangladesh : A Reexamination of the Structuralist Monetarist

controversy. The Bangladesh development studies vol X No 1

Majumdar,M (2006) “Inflation in Bangladesh: Supply Side Perspectives”. Bangladesh

Bank Policy, Note Series: PN 0705

Kazi,M, Arif1,M &Munshi,A (2012), “ Determinants of Inflation in Bangladesh: An

Empirical Investigation”, Journal of Economics and Sustainable Development Vol.3,
No.12, 2012. www.iiste.org ISSN 2222-1700 (Paper) ISSN 22222855 (Online).

Website:

i. www.bb.org.com
ii. www.mof.gov.bd
iii. www.tradingeconomics.com
iv. www.bbs.gov.bd

37 Inflation and Its Impact on Economic Growth of Bangladesh

 5.5 Appendix:

Period Inflation rate (%) GDP (%) FDI (%) PCI(%)

FY 2007 9.39 7.06 7.93 6.6888

FY2008 12.3 6.01 7.48 7.0117
FY2009 7.6 5.05 9.61 7.2842
FY2010 6.82 5.57 9.13 7.6033
FY2011 10.91 6.46 7.79 8.0004
FY2012 8.69 6.52 11.95 8.4205
FY2013 6.78 6.01 17.31 8.8189
FY2014 7.35 6.06 14.80 9.2406
FY2015 6.45 6.55 18.34 9.7288
FY2016 6.05 7.05 20.0353 14.66

38 Inflation and Its Impact on Economic Growth of Bangladesh