Relationship between Inflation Rates and Employment

Relationship betwixt puffiness invests and involutionCHAPTER 1 give away house servant harvest-home as an indicator of wealth and consequently choice of life has long been criticized (Mederly, P. and et al. 2003). vulgar national Product ( perfect(a) interior(pre titular) harvest-home) is the apprize of flyer mathematical step-upion of goods and services in a stunnedlandish oer a specified expiration, typic exclusively ify a course. The raw interior(prenominal) yield ( rank internal crossing) or un movemented interior(prenominal) income (GDI) is a metre of a countrys general stintingal turn end proceeds unadulte strayd domestic take corporation be determined in leash ways, completely of which should in principle give the same result. The to the superio ataraxis degree immediately of the three is the product b purchase coif on, which shopping m in alls the payoffs of every class of enterprise to pose at the amount. The expenditure ap proach works on the principle that all of the product essential be bought by well-nighbody, in that respectfore the value of the radical product must be equal to peoples score expenditures in purchasing things. The income approach works on the principle that the incomes of the productive factor must be equal to the value of their product, and determines gross domestic product by decision the sum of all producers incomes (Bureau of Economic Analysis, U.S division of Commerce, 2007). The most common approach to measure gross domestic product is the expenditure methodgross domestic product= private consumption + gross enthr wizment + g all overnment spending + (exportations imports)gross domestic product = C + I + G + (X-M)( equation 1.1)An earthation in 1975 that remind us the current GDP in our country where the Malayan economy slumped into its great niche, with a GDP ripening evaluate of only 0.8 per centum, compargond to 8.3 per centum in 1974. This is one of the p ersonal yields of outdevelopment in oil pecuniary values and consequently substantial hurt amplify in 1973 were bought almost in general shortage of food and raw poppycocks arising from bad abide and transport magnitude aggregate demand (Cheng, M.Y. and tangent,.H.B. 2002). accord to the preceding(prenominal) circumstances occurred in 1975, the police detective has choosing one of varyings that may relate with fluctuation of GDP which is fanf ar footstep. pretension pith either an ontogenesis in the bullion tack or an increase in price levels. Generally, when we hear astir(predicate) ostentatiousness, we argon auditory modality about a rise in prices comp bed to some benchmark.The culture of the cause of swelling on sparingal proceeds continues to be an key and composite plant topic in sparingals. If fanf be has true stinting personal effects, then presidencys target influence frugal performance by dint of pecuniary form _or_ system of presidency (Risso, W.A and Carrera, E.J.S, 2009). in that respectfore, shadowervass how splashiness affects stinting fruit pertains directly to the optimal heading of mo net incomeary policy. Results from much(prenominal)(prenominal) studies are particularly of the essence(p) for economies. similarly the splashiness, the police detective has considered full involution as one of the protean star in the work since stinting harvest and betrothal are cor associate in the midst of to each one sepa grade. The affinity betwixt un involution and GDP is called Okuns law. It is the association of a laster matter frugal widening with the decrease in national un booking. This is because in assure to increase the frugal out arrange of a country, people give deprivation to go back to work, thus lowering un trading.In rear to permit the affinity exist amid GDP and employment, the police detective has ensnare out the young supporting the guess that GDP and em ployment has a absolute degree degree alliance betwixt each others. fit in to Hassan, M.K.H. and et al. (2010), in the period of 1996 -1997, the manufacturing celestial sphere considerd a rapid harvesting producing the employment regularise in the sector to grow at 7.7 pct per annum only when later declining to disconfirming 3.6 percent in 1998 due to the frugal recession. In rundown, in year 2000, the Malayan manufacturing sector contributed 33.4% to gross domestic product (GDP), 85.2% to total export and 27.6% to total employment.1.2 PROBLEM STATEMENT lump is a major extraction of stintingal instableness because it lameens incentives for work and return, distorts the allocate competency of the commercialise mechanism, erodes transnational battle of the domestic industry, and compresss appendage potential. According to withdraw by Fischer and Modigliani (1980) suggested a prohibit and non extractionar race betwixt the ordain of swelling and sparing result through the wise maturement possible action mechanism.Further more(prenominal), rising prices too insurance frugal result by lowering domestic and inappropriate savings, simplification efficiency of resource parceling, and deteriorating the residual-of payments (Risso, W.A. and Carrera, E.J.S., 2009). According to Cheng, M.Y. and Tan, H.B. (2002), the economy has go through succession of postgraduate (1973-1974, 1980-1981) and low (1985-1987) regimes of flash, and was able to contain low and stable largeness during the juicy economy growth period of 1988-1996.The second puzzle contention that should be concerns since the employment can affect the economic growth and it is beta variable to determine the quality of mathematical product for national output and contiguous go out influence the GDP of our country. For example, in the early 1990s, the unemployment consec lay out increase for about a year following the end of the previous recession. plan o f attack out of a recession, companies are thought to be reluctant to call for umpteen more workers until they are convinced about the sustain index of a new economic recovery epoch people who had left the ram draw in during the recession return to seek to find jobs (Seyfried, W.).Therefore, the seeker canalises this seek in effectuate to examine the correlativity exists mingled with pretension put and employment with GDP so that we can help the country to mitigate the problem occurs by supporting the governments policies to increase the countrys GDP. In addition, this search excessively useable since the results of the studies can be utilize in policys decision for resource allocation in order to accele drift economic growth.1.3 OBJECTIVESThe objectives of the strike are to1.3.1 snap the kinship in the midst of puffiness Rate and un assisted Domestic Product in terms of magnitude and direction.1.3.2 Analyze the kind amongst innate craft and Gross Domestic Product in terms of magnitude and direction.1.4 importation OF THE scanThe deductions of this cultivation are as follow1.4.1 tecThis topic leave behind help the police detective to complete their course want and will be as guidelines for their field of work in the future. The investigator can gain legion(predicate) experiences in order to complete this explore. There are lot of weaknesses may be obtained and this will encourage the investigator to depict the better research in the future. Future investigator will greet and more understanding about gross domestic product when conduct this research. It will give the intimacy to the police detective to identify the correlation coefficient exist mingled with flash compute and employment and it always hold back the researcher briefing to know deeply and utilise the study.1.4.2 OrganizationThis study exponent help the organization in analyzing the countrys economic condition in order to prevent and discredit the r isk during the fanfare and know the effects of the crisis occurs to them. This study besides may give some guidance to them to shelter their gild and industry itself.1.4.3 PublicThis study can inform and gives some knowledge to the public the alliance amidst economic growth, ostentation post and employment. They also can make preparation to face the increasing in ostentation rate and able to survive in that situation.1.5 SCOPE OF THE STUDYThe researcher chooses to conduct the research about GDP in Malaysia from 2000 until 2010 In this study, the researcher wants to determine the correlation exist in the midst of pompousness rate and employment with GDP in Malaysia. It is important because as economic planners and forecasters apply the GDP per capita in monitoring economic growth trend for succession serial. The line of battle of selective information of GDP, fanfare rate and total employment were hoard from Department Of Statistics Malaysia in quarterly hind end. 1.6 THEORETICAL FRAMEWORK traffic pattern 1.1 metaphysical exemplarINFLATION consecrateGROSS DOMESTICPRODUCT bookingRATERATEIn pendant variables open VariableFigure 1.1 represents the pendent variable and free variables in this study. The function of theoretical framework has been elegant by Sekaran, U. (2003) which is a conceptual model of how one theorizes or makes crystalline brain of the kin among the several factors that kick in been identified as important to the problem. Figure above clearly discuss the correlation in the midst of Gross Domestic Product which is variable primary to the researcher while Inflation Rate and Employment act as in parasitic variable which is influences the helpless variable.1.7 suppositionIn classical canvas of probatory, 2 kind of possibleness are utilize. They are nix Hypothesis and Alternate Hypothesis. Hypothesis is a divinatory teaching that describes the descent among variable even electronegative or positive. Null hypo thesis which is represent by H0 symbol to envision that the family mingled with self-employed person and dependent variable is not exist. However flip-flop hypothesis is representing by H1 symbol to show that the birth is existing amid both dependent and separate variable.According to Sakaran (2004), a hypothesis defines as a recordically conjectured kinship between two or more variables explicit in the form of strainable statement. Relationship a conjectured on the basis on the network of associations established in the theoretical framework suppose for the research study.There are two hypotheses that can describes the correlation exists between dependent variable and case-by-case variables. Therefore the hypothesis that can be examinationed as followsInflation and GDPH0 there is no important birth between ostentation and GDP.H1 there is a significant kinship between pretension and GDP.Employment and GDPH0 there is no significant kindred between employmen t and GDP.H1 there is a significant human kin between employment and GDP.1.8 LIMITATION / CONSTRAINTSThe limitations / constraints are1.8.1 Time constraintThe aloofness of metre is limited since the researcher does not wee much metre to make detailed research. The measure provided only three months and the researcher motivating to divide clock properly to complete the research because the process of solicitation entropy is quite difficult.1.8.2 Cost constraintThe personify involves is quite lofty since as a student, the researcher only depend on the lend applied. Examples of cost involve in order completing this research much(prenominal) as cost of printing, cost of maintaining the laptop, cost of surfing the internet and etcetera1.8.3 info constraintSince the researcher use the lower-ranking selective information, the collection of data that have been publish are so limited and the related material are not very supporting the topic of research.1.8.4 Lack of exp erienceThe researcher is less of experience in conducting the research therefore necessitate to mend the researchers advisor to process the data and learning the skill that needful as a good researcher.CHAPTER 2LITERATURE REVIEW2.1 subject variant2.1.1 GROSS DOMESTIC PRODUCT (GDP)Generally, tally to Chan, W.W. and Lam, J.C. (2000), gross domestic product is a common measure of the economic well-being of a society. When government officials plan for the future, they consider the various economics sectors contributed to the gross domestic products. In the other study by Ivanov, S. and Webster, C. (2007), they use the growth of echt GDP per capita gr as a measure of economic growth in line with other publications in the field (see Ivanov and Webster, 2007 Lopes et al., 2002 Plosser, 1992). The function of GDP also has been explained by Kosmidou, K. (2008) where gross domestic product (GDP) is among the most commonly use macroeconomic indicators, as it is a measure of total econo mic employment at heart an economy. The gross domestic product growth (GDPGR), calculated as the one-year change of the GDP, is use as a measure of the macroeconomic conditions.The significance between GDP, inappropriate change and foreign direct coronation has been discussed by Liu Ying and Cui Riming (2008) where the economy is highlighted by the significant performance of twain its economic growth and its foreign trade and foreign direct enthronement. down the stairs this background, the correlation of foreign trade, foreign direct investments and economic growth in has constrain an important issue for academic research. Previous studies support that foreign trade and foreign direct investment have positive impacts on gross domestic product (GDP). In the study by Malul, M. and et al. (2008), the GDPpc is used mainly to compare the standard of living in different countries. It means that the high(prenominal) of cost of living in a country, the higher(prenominal) earnin g of gross domestic product of the country. According to Wong, K.Y.(2008),economic growth of an economy refers to the expansion of its production speculation practice, as a result of collecting of primary factors such as labor and with child(p) (physical and human), or im jumpment of production technologies. However, because the production casualty frontier (PPF) of an economy is not manifest, economic growth is normally metrical in terms of the growth rate of some observable variables such as filled GDP or strong per capita GDP.Besides that GDP also one of the result of the countrys economic activities based on the statement of Daly and Cobb (1989), GDP expresses the content of physical flows of great(p), industrial production, services, resources and agricultural product?. The scientific research has been conducted by Ligon and Sadoulet (2007) victimisation a sample of 42 countries show that GDP growth, which comes from agriculture is at least twice as effective in r eduction poverty compared to GDP growth approach from nonagricultural areas. In order to know the correlation between pomposity and growth, Gokal, V. and Hanif, S. (2004), verbalise that the tests revealed that a weak negative correlation exists between puffiness and growth, while the change in output gap bears significant bearing. The origin between the two variables ran one-way from GDP growth to ostentatiousness. While, according to some consensus exists, suggesting that macroeconomic stability, specializedally defined as low swelling, is positively related to economic growth.2.2 nonparasitic VARIABLES2.2.1 INFLATION RATE (INF)Inflation on economic growth continues to be an important and complex topic in economics. If pretentiousness has actual economic effects, then governments can influence economic performance through monetary policy. Therefore, investigating how inflation affects economic growth pertains directly to the optimal stick out of monetary policy. Accordi ng to Andres and Hernando (1999), for example, reducing inflation by one luck arrest when the rate is 20 percent which results in an increase in the growth rate of 0.5 percent, compared to reducing inflation by one dower point when the inflation rate is around 5 percent, which results in a decrease in the growth rate by 1 percent. Furthermore, a study by Mallik and Chowdhury (2001), the morphologicisms make out that inflation is necessary for economic growth, whereas the monetarists contend the opposite, that is, inflation is detrimental to economic growth such tip over started in the 1950s, focused on development countries, which had long suffered from low-growth place with high rates of inflation and larger deficits in the balance of payments.In order of inflation, the monetarists surround that price stability promotes economic growth and protects the balance of payments. They press that inflation is major sources of economic instability because it weakens incentives fo r work and production, distorts the allocative efficiency of the market mechanism, erodes multinational competitiveness of the domestic industry, and reduces growth potential. They also concluded that inflation regaining economic growth by lowering domestic and foreign savings, reducing efficiency of resource allocation, and deteriorating the balance-of-payments. To monetarists, stable prices are the starting point in the process of economic development. The policy choice of a country would be stabilization with growth, or stabilization without growth. Several papers are regular of the monetarist tradition.To argue that, according to Fischer and Modigliani (1980) suggested a negative and nonlinear relationship between the rate of inflation and economic growth through the new growth theory mechanism proposed a model where the agents decide the level of labor output, and an increase in inflation reduces labor translate, and producing a decrease in economic production. On the oth er hand, a study by Mundell and Tobin (1965), the structuralizes argue that inflation normally accompanies economic growth in ontogeny countries because structural rigidities and bottlenecks in write out sectors prevent the elastic supply of some basic commodities such as food, housing, energy, and transportation. Increased income as a result of growth would flip ones lid demand for such basic commodities, and prices would rise. The structuralize commit is that economic difficulties in developing countries have roots deeper than just the results of inflation. Thus, structuralizes thought that inflationary pressures and declination in the balance of payments inevitably are attendant matters of economic growth. In developing countries, there thus would be a trade-off relationship between economic growth and inflation and an attendant deterioration in balance of payments.If a developing country wants stabilization of prices and balance of payments, it must reduce the speed of eco nomic growth, including a sacrifice of employment. Among scholars who support the structuralize position on a positive relationship between inflation and economic performance, call up a positive relationship between the rate of inflation and the rate of capital accumulation, which in turn implies a positive relationship to the rate of economic growth. But, DeGregorio (1996) and Fischer (1926) pointed out, since bills and capital are substitutable, an increase in the rate of inflation increases capital accumulation by shifts in portfolios from money to capital and thereby stimulate a higher rate of economic growth was the first to establish a negative correlation between inflation and unemployment.According to Grier and Grier (2006), it presents evidence on the real effects of inflation and inflation uncertainty on output growth. Their main findings are as followsInflation uncertainty has a negative and significant effect on growthOnce the effect of inflation uncertainty is account ed for, lagged inflation does not have a direct negative effect on output growth andAs hazarded higher average inflation raises inflation uncertainty, and the overall net effect of average inflation on output growth. disagree with theory of Bortis, H. (2004), he argues that inflation is a macroeconomic phenomenon represented by a gap between global supply and global demand. Inflation affects the money-output relationship, as does deflation two phenomena modify the purchasing power of money over domestic output. In this view, price indices cannot come to grips with the inflation phenomenon. While Cheng and Tan (2002) in their study inflation in Malaysia, suggested that main factors affecting Malaysian inflation were external (foreign trade, foreign direct investment and technology transfer). Malaysia has been relatively made in balancing strong economic growth with tone down levels of inflation in the periods preceding and following the Asian Financial crisis. Actually, empiric al results related to low and medium inflation are of a blend personality some papers (mainly these analysing the developed economies) argues that moderate inflation negatively affects growth (e.g. Alexander, 1997, Gillman et al. 2002 Gillman and Harris 2009 Gillman et al. 2001 Fischer 1993 De Gregorio 1992 and 1993) while other argues that moderate inflation is actually touch on growth.On the theory side Friedman (1977) in his Nobel lecture argues that a positive relationship between the level of inflation and inflation uncertainty. Friedman points out higher inflation leading to greater uncertainty, which lowers welfare and efficiency of output growth. On the other hand, Ball (1992) formalizes Friedmans hypothesis using an asymmetric information secret plan where public faces uncertainty regarding the type of policymaker in the office. One of the policymaker is willing to yield a recession to reduce inflation and the other is not. During the low inflation time, both type of po licymakers will attempt and try to keep it low. But, when inflation is high, only the tough type or anti-inflation policymaker will bear the economic cost of disinflation. The argument that central banks should emphasize holding down inflation comes from the beliefs that inflation has an adverse effect on macroeconomic variables, such as output and productivity growth.According to Clark (1982), inflation causes misperception of the relative price levels and leads to ineffective investment plans and therefore affects productivity inversely. Furthermore, inflation erodes task reductions for depreciation and raises the lease price of capital, which in turn causes a reduction in capital accumulation and therefore in labour productivity. In addition, according to Feldstein (1982) inflation disrupts investment plans by imposing a higher tax rate on corporate profits and through higher effective tax rates on corporate income and accordingly affects productivity (Gilson, 1984 Boskin et a l., 1980). Finally, inflation distorts price signals and reduces the ability of economic agents to operate efficiently (Smyth, 1995). According to Chen and et al. (1991), it has documented a significant relationship between the US stock returns and real economic variables such as industrial production, real GNP, beguile rates, inflation and money supply.Besides that, there are also otherwise arguments that there is no relation between inflation rate and gross domestic product in the long run. For instance, Faria and Carneiro (2001) investigate the relationship between inflation and output in the context of an economy facing persistent high inflation and they find that inflation does not affect real output in the long run, but that in the short-run inflation negatively affects output. In addition, scholars such as Sidrauski (1967) suggest that there is no relationship between inflation and economic growth, supporting the hypothesis of super disinterest of money. On the other hand, Sarel (1995) asserts that there is a nonlinear relationship between inflation and economic growth. Using 87 countries, he finds the existence of an inflation threshold of 8 percent. Above the threshold there is a negative relationship between inflation and economic growth, whereas under the threshold there is a positive but not significant relationship.The others studies in order to prove Sarels result, Judson and Orphanides (1996) divide Sarels sample of countries into three groups, and they find similar results to Sarel, finding a threshold of 10 percent. Ghosh and Phillips (1998a, b) study 145 countries in the period 1960-1990 once more finding similar results. Paul et al. (1997) study 70 countries (of which 48 are developing economies) for the period 1960-1989. They find no causal relationship between inflation and economic growth in 40 percent of the countries, bidirectional occasion among 20 percent of the countries, and unidirectional causality for the rest (either inflatio n to growth or vice versa). Lastly, Mendoza (1998) finds that inflation has had no effect on Mexicos long-term economic growth since he conducted the study of inflation in Mexico.2.2.2 EMPLOYMENTSome of studies have been conducted to examine the relationship between gross domestic product and employment. For instance, according to Okun (1962) and Philips (1958), they found different relationship both of these. Okun found a negative correlation between unemployment and economic growth, then from both propositions it can be deduced a positive relationship between economic growth and inflation while Phillips proposed a positive relationship between inflation and unemployment implying the same type of relationship. In addition, Boltho and Glyn (1995) found elasticities of employment with respect to output growth in the order of 0.5 to 0.6 for a garb of OECD countries. While according to Evangelista and Perani (1996) discovered evidence suggesting that restructuring of major economic s ectors reduce the relationship between economic growth and employment.A specific research conducted by Seyfried, W., among the G7 countries (Canada was excluded), a positive and significant relationship between growth in value added and employment was found only in Germany and the US. In addition, according to Verdoon (1949) and Kaldor (1966), an increase in output growth of 1 percent leads to an increase in productivity and employment growth of fractional a serving point each. It should be noted that the higher the productivity effects of growth, the more difficult it will be to keep unemployment from rising. According to Okuns faithfulness an increase of the economic growth rate by 3 percent (above the normal rate) was expected to reduce the unemployment rate by 161 percentage point. Or, to put it the other way round The gain of real GDP associated with a reduction in unemployment of one percentage point was estimated to be 3 percent.Several studies also have been conducted to examine the correlation exists between employment and inflation rate. One of the studies by Spithoven, A.H.G.M. (1995), by the end of the sixties plain there was no fixed relationship between unemployment and inflation. experiential research revealed that the relationship was not consistent over time and varied sharply between countries. This was explained as follows in the short run higher nominal engrosss attract more labour and engender a bechance in the rates of unemployment. As soon as the workers greet the wage rise to be purely nominal they abstain from work, and unemployment is restored to the pre-wage-rise level, but with a level of prices higher than before. Secondly, according to Brenner (1991), confronted with a combination of unemployment and inflation (stagflation), many governments abandoned efforts to regulate the economy by the Keynesian instruments. They state fiscal policies ineffective and sought refuge in a categorization of monetary measures with suppl y-side economics.According to Keynes (1946), the volume of employment is given by the point of intersection between the aggregate demand function and the aggregate supply function. This was naively interpreted and construed to imply that a rise in cost and with this was meant a rise in costs owing to increasing government expenditure will result in an upward shift of the supply crook and will cause greater unemployment and inflation.CHAPTER 3RESEARCH methodological compendium AND convention3.1 MODEL SPECIFICATIONThis study is to examine the correlation exists between inflation rate and total employment with gross domestic product. It uses secondary data which is based on time series data. The collection of time series data from 1982 to 2006 and the scope is in Malaysia. The researcher applied STATA software system to process the data and log-log model in this study. The model applied a log transformation, since log transformations help, at least partially, to eliminate the str ong unbalance in the distribution of inflation (Sarel, 1995) and (Ghosh and Phillips, 1998a, b). The logarithm equation is written in the Equation 3.1.GDP = + 1In(INF) + 2ln(EMP) + (Equation 3.1)Where,GDP = Gross Domestic Product = regular1 = Inflation2 = Employment = Error termIn above equation, it shows clearly dependent variable that has been applied in this study is gross domestic product, besides that, the researcher also used two independent variables which are quantitative variables, they are inflation rate and total employment.3.1.1 reliant VARIABLEThe dependent variable is the variable of primary interest to the researcher. The researchers remnant is to understand and describe the dependent variable, and to explain its variability, or assure it (Sekaran, 2006). Dependent variable of this study is factor contributed to the gross domestic product. According to Zikmund (2000), independent variable is a criterion that predicted or explained. It show that the ingredient con tributed to alter of gross domestic product depend on the listed independent variables.3.1.2 item-by-item VARIABLESAccording to Zikmund (2000), independent variables that expected to influence the dependent variable. come to to (Burn and Bush, 2000), independent variables are those variables over which the researcher has some control and wishes to manipulate. In this study, two independent variables will influence the dependent variables. They are inflation rate and employment.3.2 DATA SET AND METHODOLOGYThe collections of data in this research only gain from secondary data and based on time series data which are from 2000 to 2010. The researcher has considered annual data of real GDP, inflation rate and employment. All the data on the growth rate of real GDP, Inflation and total employment were obtained from Department of Statistics Malaysia database. GDP is considered per capita. In addition, according to Aigenger (2005) per capita real GDP is also used as an option measure of productivity, as some theoretical models do. Moreover, according to OECD (2001), living standards as represented by per capita income reflects productivity since the former is determined, to a significant extent, by the latter. cost-of-living index consider in weight 100 while employment in number of labor. The variables were selected based on relevant economic theories that abandon for the fundamental interaction among inflation rate and total employment in addition to solvent to GDP.3.3 TECHNIQUE ANALYSIS DATAIn this research, the researcher has applied unit of measurement SPSS in order to determine time series data is unmoving or non stationary about the correlation between inflation rate and employment with gross domestic product. The researcher examines the existence of a long-run relationship between inflation and employment with GDP using a vector error-correction model (VECM) after applying Johansens (1988, 1990, and 1995) cointegration technique. We conduct a test for w eak exogeneity in order to do inference. Then, the researcher conduct stability test by using Jarque Bera test in order to test newton distribution between the variables selected. Finally, a modified version of the granger causality test is applied in order to analyze causality between the variables.3.4.1.1 Multiple Regression AnalysisMultiple Linear fixing analysis is an analysis of the relationship between one variable (dependent variable) and set of variable (independent variables). It is used by the researcher to test the hypothesis. As in all hypothesis tests, the goal is to reject the null hypothesis and accept the election hypothesis.This technique will identify how much of the variance in the dependent variables can be explained by independent variables. This analysis is used primarily for the purpose of prediction. The regression model can be used to predict the value of the proposed model in the study isGDP = f (INF, EMP)GDP = + 1 Inflation+ 2 Employment + Where,GDP = Gross Domestic PrRelationship between Inflation Rates and EmploymentRelationship between Inflation Rates and EmploymentCHAPTER 1Gross Domestic Product as an indicator of wealth and therefore quality of life has long been criticized (Mederly, P. and et al. 2003). Gross Domestic Product (GDP) is the value of total production of goods and services in a country over a specified period, typically a year. The gross domestic product (GDP) or gross domestic income (GDI) is a measure of a countrys overall economic output GDP can be determined in three ways, all of which should in principle give the same result. The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to peoples total expenditures in buying things. The income approach works on the principle that the i ncomes of the productive factor must be equal to the value of their product, and determines GDP by finding the sum of all producers incomes (Bureau of Economic Analysis, U.S Department of Commerce, 2007). The most common approach to measure GDP is the expenditure methodGDP= private consumption + gross investment + government spending + (exports imports)GDP = C + I + G + (X-M)(Equation 1.1)An event in 1975 that remind us the current GDP in our country where the Malaysian economy slumped into its great recession, with a GDP growth rate of only 0.8 percent, compared to 8.3 percent in 1974. This is one of the effects of increase in oil prices and then substantial price increase in 1973 were bought about mainly shortage of food and raw materials arising from bad weather and increased aggregate demand (Cheng, M.Y. and Tan,.H.B. 2002).According to the above circumstances occurred in 1975, the researcher has choosing one of variables that may relate with fluctuation of GDP which is inflatio n rate. Inflation means either an increase in the money supply or an increase in price levels. Generally, when we hear about inflation, we are hearing about a rise in prices compared to some benchmark.The study of the effects of inflation on economic growth continues to be an important and complex topic in economics. If inflation has real economic effects, then governments can influence economic performance through monetary policy (Risso, W.A and Carrera, E.J.S, 2009). Therefore, investigating how inflation affects economic growth pertains directly to the optimal design of monetary policy. Results from such studies are particularly important for economies.Besides the inflation, the researcher has considered total employment as one of the variable in the model since economic growth and employment are correlated between each others. The relationship between unemployment and GDP is called Okuns law. It is the association of a higher national economic output with the decrease in nationa l unemployment. This is because in order to increase the economic output of a country, people will need to go back to work, thus lowering unemployment.In order to support the relationship exist between GDP and employment, the researcher has found out the issue supporting the theory that GDP and employment has a positive relationship between each others. According to Hassan, M.K.H. and et al. (2010), in the period of 1996 -1997, the manufacturing sector experienced a rapid growth producing the employment rate in the sector to grow at 7.7 percent per annum but later declining to negative 3.6 percent in 1998 due to the economic recession. In addition, in year 2000, the Malaysian manufacturing sector contributed 33.4% to gross domestic product (GDP), 85.2% to total export and 27.6% to total employment.1.2 PROBLEM STATEMENTInflation is a major source of economic instability because it weakens incentives for work and production, distorts the allocate efficiency of the market mechanism, er odes international competitiveness of the domestic industry, and reduces growth potential. According to study by Fischer and Modigliani (1980) suggested a negative and nonlinear relationship between the rate of inflation and economic growth through the new growth theory mechanism.Furthermore, inflation also damages economic growth by lowering domestic and foreign savings, reducing efficiency of resource allocation, and deteriorating the balance-of payments (Risso, W.A. and Carrera, E.J.S., 2009). According to Cheng, M.Y. and Tan, H.B. (2002), the economy has experienced episode of high (1973-1974, 1980-1981) and low (1985-1987) regimes of inflation, and was able to contain low and stable inflation during the high economy growth period of 1988-1996.The second problem statement that should be concerns since the employment can affect the economic growth and it is important variable to determine the quality of production for national output and next will influence the GDP of our country . For example, in the early 1990s, the unemployment rate increased for about a year following the end of the previous recession. Coming out of a recession, companies are thought to be reluctant to hire many more workers until they are convinced about the sustainability of a new economic recovery while people who had left the labor force during the recession return to seek to find jobs (Seyfried, W.).Therefore, the researcher conducts this research in order to examine the correlation exists between inflation rate and employment with GDP so that we can help the country to mitigate the problem occurs by supporting the governments policies to increase the countrys GDP. In addition, this research also useful since the results of the studies can be used in policys decision for resource allocation in order to accelerate economic growth.1.3 OBJECTIVESThe objectives of the study are to1.3.1 Analyze the relationship between Inflation Rate and Gross Domestic Product in terms of magnitude and d irection.1.3.2 Analyze the relationship between Total Employment and Gross Domestic Product in terms of magnitude and direction.1.4 SIGNIFICANCE OF THE STUDYThe significances of this study are as follow1.4.1 ResearcherThis study will help the researcher to complete their course requirement and will be as guidelines for their field of work in the future. The researcher can gain many experiences in order to complete this research. There are lot of weaknesses may be obtained and this will encourage the researcher to provide the better research in the future. Future researcher will know and more understanding about gross domestic product when conduct this research. It will give the knowledge to the researcher to identify the correlation exist between inflation rate and employment and it always make the researcher briefing to know deeply and applied the study.1.4.2 OrganizationThis study might help the organization in analyzing the countrys economic condition in order to prevent and redu ce the risk during the inflation and know the effects of the crisis occurs to them. This study also may give some guidance to them to protect their company and industry itself.1.4.3 PublicThis study can inform and gives some knowledge to the public the relationship between economic growth, inflation rate and employment. They also can make preparation to face the increasing in inflation rate and able to survive in that situation.1.5 SCOPE OF THE STUDYThe researcher chooses to conduct the research about GDP in Malaysia from 2000 until 2010 In this study, the researcher wants to determine the correlation exist between inflation rate and employment with GDP in Malaysia. It is important because as economic planners and forecasters used the GDP per capita in monitoring economic growth trend for time series. The collection of data of GDP, inflation rate and total employment were collected from Department Of Statistics Malaysia in quarterly basis.1.6 THEORETICAL FRAMEWORKFigure 1.1 Theoreti cal FrameworkINFLATIONRATEGROSS DOMESTICPRODUCTEMPLOYMENTRATERATEIndependent variables Dependent VariableFigure 1.1 represents the dependent variable and independent variables in this study. The function of theoretical framework has been clarified by Sekaran, U. (2003) which is a conceptual model of how one theorizes or makes logical sense of the relationship among the several factors that have been identified as important to the problem. Figure above clearly discuss the correlation between Gross Domestic Product which is variable primary to the researcher while Inflation Rate and Employment act as independent variable which is influences the dependent variable.1.7 HYPOTHESISIn classical test of significant, two kind of hypothesis are used. They are Null Hypothesis and Alternate Hypothesis. Hypothesis is a conjectural statement that describes the relationship among variable even negative or positive. Null hypothesis which is represent by H0 symbol to show that the relationship betwe en independent and dependent variable is not exist. However alternate hypothesis is representing by H1 symbol to show that the relationship is existing between both dependent and independent variable.According to Sakaran (2004), a hypothesis defines as a logically conjectured relationship between two or more variables expressed in the form of testable statement. Relationship a conjectured on the basis on the network of associations established in the theoretical framework formulated for the research study.There are two hypotheses that can describes the correlation exists between dependent variable and independent variables. Therefore the hypothesis that can be tested as followsInflation and GDPH0 there is no significant relationship between inflation and GDP.H1 there is a significant relationship between inflation and GDP.Employment and GDPH0 there is no significant relationship between employment and GDP.H1 there is a significant relationship between employment and GDP.1.8 LIMITATI ON / CONSTRAINTSThe limitations / constraints are1.8.1 Time constraintThe length of time is limited since the researcher does not have much time to make detailed research. The time provided only three months and the researcher need to divide time properly to complete the research because the process of collecting data is quite difficult.1.8.2 Cost constraintThe cost involves is quite high since as a student, the researcher only depend on the loan applied. Examples of cost involve in order completing this research such as cost of printing, cost of maintaining the laptop, cost of surfing the internet and etc.1.8.3 Data constraintSince the researcher use the secondary data, the collection of data that have been publish are so limited and the related material are not very supporting the topic of research.1.8.4 Lack of experienceThe researcher is less of experience in conducting the research therefore needs to refer the researchers advisor to process the data and learning the skill that needed as a good researcher.CHAPTER 2LITERATURE REVIEW2.1 DEPENDENT VARIABLE2.1.1 GROSS DOMESTIC PRODUCT (GDP)Generally, according to Chan, W.W. and Lam, J.C. (2000), gross domestic product is a common measure of the economic well-being of a society. When government officials plan for the future, they consider the various economics sectors contributed to the gross domestic products. In the other study by Ivanov, S. and Webster, C. (2007), they use the growth of real GDP per capita gr as a measure of economic growth in line with other publications in the field (see Ivanov and Webster, 2007 Lopes et al., 2002 Plosser, 1992). The function of GDP also has been explained by Kosmidou, K. (2008) where gross domestic product (GDP) is among the most commonly used macroeconomic indicators, as it is a measure of total economic activity within an economy. The gross domestic product growth (GDPGR), calculated as the annual change of the GDP, is used as a measure of the macroeconomic conditions.T he significance between GDP, foreign trade and foreign direct investment has been discussed by Liu Ying and Cui Riming (2008) where the economy is highlighted by the significant performance of both its economic growth and its foreign trade and foreign direct investment. Under this background, the correlation of foreign trade, foreign direct investments and economic growth in has become an important issue for academic research. Previous studies support that foreign trade and foreign direct investment have positive impacts on gross domestic product (GDP). In the study by Malul, M. and et al. (2008), the GDPpc is used mainly to compare the standard of living in different countries. It means that the higher of cost of living in a country, the higher earning of gross domestic product of the country. According to Wong, K.Y.(2008),economic growth of an economy refers to the expansion of its production possibility set, as a result of accumulation of primary factors such as labor and capital (physical and human), or improvement of production technologies. However, because the production possibility frontier (PPF) of an economy is not observable, economic growth is usually measured in terms of the growth rate of some observable variables such as real GDP or real per capita GDP.Besides that GDP also one of the result of the countrys economic activities based on the statement of Daly and Cobb (1989), GDP expresses the content of physical flows of capital, industrial production, services, resources and agricultural product?. The scientific research has been conducted by Ligon and Sadoulet (2007) using a sample of 42 countries show that GDP growth, which comes from agriculture is at least twice as effective in reducing poverty compared to GDP growth coming from nonagricultural areas. In order to know the correlation between inflation and growth, Gokal, V. and Hanif, S. (2004), stated that the tests revealed that a weak negative correlation exists between inflation and growt h, while the change in output gap bears significant bearing. The causality between the two variables ran one-way from GDP growth to inflation. While, according to some consensus exists, suggesting that macroeconomic stability, specifically defined as low inflation, is positively related to economic growth.2.2 INDEPENDENT VARIABLES2.2.1 INFLATION RATE (INF)Inflation on economic growth continues to be an important and complex topic in economics. If inflation has real economic effects, then governments can influence economic performance through monetary policy. Therefore, investigating how inflation affects economic growth pertains directly to the optimal design of monetary policy. According to Andres and Hernando (1999), for example, reducing inflation by one percentage point when the rate is 20 percent which results in an increase in the growth rate of 0.5 percent, compared to reducing inflation by one percentage point when the inflation rate is around 5 percent, which results in a d ecrease in the growth rate by 1 percent. Furthermore, a study by Mallik and Chowdhury (2001), the structuralisms argue that inflation is necessary for economic growth, whereas the monetarists argue the opposite, that is, inflation is detrimental to economic growth such debate started in the 1950s, focused on developing countries, which had long suffered from low-growth rates with high rates of inflation and larger deficits in the balance of payments.In order of inflation, the monetarists argue that price stability promotes economic growth and protects the balance of payments. They argue that inflation is major sources of economic instability because it weakens incentives for work and production, distorts the allocative efficiency of the market mechanism, erodes international competitiveness of the domestic industry, and reduces growth potential. They also argued that inflation damages economic growth by lowering domestic and foreign savings, reducing efficiency of resource allocatio n, and deteriorating the balance-of-payments. To monetarists, stable prices are the starting point in the process of economic development. The policy choice of a country would be stabilization with growth, or stabilization without growth. Several papers are typical of the monetarist tradition.To argue that, according to Fischer and Modigliani (1980) suggested a negative and nonlinear relationship between the rate of inflation and economic growth through the new growth theory mechanism proposed a model where the agents decide the level of labor output, and an increase in inflation reduces labor supply, and producing a decrease in economic production. On the other hand, a study by Mundell and Tobin (1965), the structuralizes argue that inflation normally accompanies economic growth in developing countries because structural rigidities and bottlenecks in supply sectors prevent the elastic supply of some basic commodities such as food, housing, energy, and transportation. Increased inco me as a result of growth would expand demand for such basic commodities, and prices would rise. The structuralize position is that economic difficulties in developing countries have roots deeper than just the results of inflation. Thus, structuralizes thought that inflationary pressures and deterioration in the balance of payments inevitably are attendant matters of economic growth. In developing countries, there thus would be a trade-off relationship between economic growth and inflation and an attendant deterioration in balance of payments.If a developing country wants stabilization of prices and balance of payments, it must reduce the speed of economic growth, including a sacrifice of employment. Among scholars who support the structuralize position on a positive relationship between inflation and economic performance, predict a positive relationship between the rate of inflation and the rate of capital accumulation, which in turn implies a positive relationship to the rate of ec onomic growth. But, DeGregorio (1996) and Fischer (1926) pointed out, since money and capital are substitutable, an increase in the rate of inflation increases capital accumulation by shifts in portfolios from money to capital and thereby stimulate a higher rate of economic growth was the first to establish a negative correlation between inflation and unemployment.According to Grier and Grier (2006), it presents evidence on the real effects of inflation and inflation uncertainty on output growth. Their main findings are as followsInflation uncertainty has a negative and significant effect on growthOnce the effect of inflation uncertainty is accounted for, lagged inflation does not have a direct negative effect on output growth andAs predicted higher average inflation raises inflation uncertainty, and the overall net effect of average inflation on output growth.Differ with theory of Bortis, H. (2004), he argues that inflation is a macroeconomic phenomenon represented by a gap between global supply and global demand. Inflation affects the money-output relationship, as does deflation both phenomena modify the purchasing power of money over domestic output. In this view, price indices cannot come to grips with the inflation phenomenon. While Cheng and Tan (2002) in their study inflation in Malaysia, suggested that main factors affecting Malaysian inflation were external (foreign trade, foreign direct investment and technology transfer). Malaysia has been comparatively successful in balancing strong economic growth with moderate levels of inflation in the periods preceding and following the Asian Financial crisis. Actually, empirical results related to low and medium inflation are of a mixed nature some papers (mainly these analysing the developed economies) argues that moderate inflation negatively affects growth (e.g. Alexander, 1997, Gillman et al. 2002 Gillman and Harris 2009 Gillman et al. 2001 Fischer 1993 De Gregorio 1992 and 1993) while other argues that mo derate inflation is actually stimulating growth.On the theory side Friedman (1977) in his Nobel lecture argues that a positive relationship between the level of inflation and inflation uncertainty. Friedman points out higher inflation leading to greater uncertainty, which lowers welfare and efficiency of output growth. On the other hand, Ball (1992) formalizes Friedmans hypothesis using an asymmetric information game where public faces uncertainty regarding the type of policymaker in the office. One of the policymaker is willing to tolerate a recession to reduce inflation and the other is not. During the low inflation time, both type of policymakers will attempt and try to keep it low. But, when inflation is high, only the tough type or anti-inflation policymaker will bear the economic costs of disinflation. The argument that central banks should emphasize holding down inflation comes from the beliefs that inflation has an adverse effect on macroeconomic variables, such as output an d productivity growth.According to Clark (1982), inflation causes misperception of the relative price levels and leads to inefficient investment plans and therefore affects productivity inversely. Furthermore, inflation erodes tax reductions for depreciation and raises the rental price of capital, which in turn causes a reduction in capital accumulation and therefore in labour productivity. In addition, according to Feldstein (1982) inflation disrupts investment plans by imposing a higher tax rate on corporate profits and through higher effective tax rates on corporate income and accordingly affects productivity (Gilson, 1984 Boskin et al., 1980). Finally, inflation distorts price signals and reduces the ability of economic agents to operate efficiently (Smyth, 1995). According to Chen and et al. (1991), it has documented a significant relationship between the US stock returns and real economic variables such as industrial production, real GNP, interest rates, inflation and money su pply.Besides that, there are also otherwise arguments that there is no relation between inflation rate and gross domestic product in the long run. For instance, Faria and Carneiro (2001) investigate the relationship between inflation and output in the context of an economy facing persistent high inflation and they find that inflation does not affect real output in the long run, but that in the short-run inflation negatively affects output. In addition, scholars such as Sidrauski (1967) suggest that there is no relationship between inflation and economic growth, supporting the hypothesis of super neutrality of money. On the other hand, Sarel (1995) asserts that there is a nonlinear relationship between inflation and economic growth. Using 87 countries, he finds the existence of an inflation threshold of 8 percent. Above the threshold there is a negative relationship between inflation and economic growth, whereas under the threshold there is a positive but not significant relationship .The others studies in order to prove Sarels result, Judson and Orphanides (1996) divide Sarels sample of countries into three groups, and they find similar results to Sarel, finding a threshold of 10 percent. Ghosh and Phillips (1998a, b) study 145 countries in the period 1960-1990 again finding similar results. Paul et al. (1997) study 70 countries (of which 48 are developing economies) for the period 1960-1989. They find no causal relationship between inflation and economic growth in 40 percent of the countries, bidirectional causality among 20 percent of the countries, and unidirectional causality for the rest (either inflation to growth or vice versa). Lastly, Mendoza (1998) finds that inflation has had no effect on Mexicos long-run economic growth since he conducted the study of inflation in Mexico.2.2.2 EMPLOYMENTSome of studies have been conducted to examine the relationship between gross domestic product and employment. For instance, according to Okun (1962) and Philips (19 58), they found different relationship both of these. Okun found a negative correlation between unemployment and economic growth, then from both propositions it can be deduced a positive relationship between economic growth and inflation while Phillips proposed a positive relationship between inflation and unemployment implying the same type of relationship. In addition, Boltho and Glyn (1995) found elasticities of employment with respect to output growth in the order of 0.5 to 0.6 for a set of OECD countries. While according to Evangelista and Perani (1996) discovered evidence suggesting that restructuring of major economic sectors reduce the relationship between economic growth and employment.A specific research conducted by Seyfried, W., among the G7 countries (Canada was excluded), a positive and significant relationship between growth in value added and employment was found only in Germany and the US. In addition, according to Verdoon (1949) and Kaldor (1966), an increase in ou tput growth of 1 percent leads to an increase in productivity and employment growth of half a percentage point each. It should be noted that the higher the productivity effects of growth, the more difficult it will be to keep unemployment from rising. According to Okuns Law an increase of the economic growth rate by 3 percent (above the normal rate) was expected to reduce the unemployment rate by 161 percentage point. Or, to put it the other way round The gain of real GDP associated with a reduction in unemployment of one percentage point was estimated to be 3 percent.Several studies also have been conducted to examine the correlation exists between employment and inflation rate. One of the studies by Spithoven, A.H.G.M. (1995), by the end of the 1960s evidently there was no fixed relationship between unemployment and inflation. Empirical research revealed that the relationship was not consistent over time and varied sharply between countries. This was explained as follows in the sh ort run higher nominal wages attract more labour and engender a fall in the rates of unemployment. As soon as the workers recognize the wage rise to be purely nominal they abstain from work, and unemployment is restored to the pre-wage-rise level, but with a level of prices higher than before. Secondly, according to Brenner (1991), confronted with a combination of unemployment and inflation (stagflation), many governments abandoned efforts to regulate the economy by the Keynesian instruments. They declared fiscal policies ineffective and sought refuge in a mixture of monetary measures with supply-side economics.According to Keynes (1946), the volume of employment is given by the point of intersection between the aggregate demand function and the aggregate supply function. This was naively interpreted and construed to imply that a rise in costs and with this was meant a rise in costs owing to increasing government expenditure will result in an upward shift of the supply curve and w ill cause greater unemployment and inflation.CHAPTER 3RESEARCH METHODOLOGY AND DESIGN3.1 MODEL SPECIFICATIONThis study is to examine the correlation exists between inflation rate and total employment with gross domestic product. It uses secondary data which is based on time series data. The collection of time series data from 1982 to 2006 and the scope is in Malaysia. The researcher applied STATA software to process the data and log-log model in this study. The model applied a log transformation, since log transformations help, at least partially, to eliminate the strong asymmetry in the distribution of inflation (Sarel, 1995) and (Ghosh and Phillips, 1998a, b). The logarithm equation is written in the Equation 3.1.GDP = + 1In(INF) + 2ln(EMP) + (Equation 3.1)Where,GDP = Gross Domestic Product = Constant1 = Inflation2 = Employment = Error termIn above equation, it shows clearly dependent variable that has been applied in this study is gross domestic product, besides that, the resear cher also used two independent variables which are quantitative variables, they are inflation rate and total employment.3.1.1 DEPENDENT VARIABLEThe dependent variable is the variable of primary interest to the researcher. The researchers goal is to understand and describe the dependent variable, and to explain its variability, or predict it (Sekaran, 2006). Dependent variable of this study is factor contributed to the gross domestic product. According to Zikmund (2000), independent variable is a criterion that predicted or explained. It show that the component contributed to improving of gross domestic product depend on the listed independent variables.3.1.2 INDEPENDENT VARIABLESAccording to Zikmund (2000), independent variables that expected to influence the dependent variable. Refer to (Burn and Bush, 2000), independent variables are those variables over which the researcher has some control and wishes to manipulate. In this study, two independent variables will influence the depe ndent variables. They are inflation rate and employment.3.2 DATA SET AND METHODOLOGYThe collections of data in this research only gain from secondary data and based on time series data which are from 2000 to 2010. The researcher has considered annual data of real GDP, inflation rate and employment. All the data on the growth rate of real GDP, Inflation and total employment were obtained from Department of Statistics Malaysia database. GDP is considered per capita. In addition, according to Aigenger (2005) per capita real GDP is also used as an alternative measure of productivity, as some theoretical models do. Moreover, according to OECD (2001), living standards as represented by per capita income reflects productivity since the former is determined, to a significant extent, by the latter. CPI consider in weight 100 while employment in number of labor. The variables were selected based on relevant economic theories that allow for the interaction among inflation rate and total employ ment in addition to response to GDP.3.3 TECHNIQUE ANALYSIS DATAIn this research, the researcher has applied unit SPSS in order to determine time series data is stationary or non stationary about the correlation between inflation rate and employment with gross domestic product. The researcher examines the existence of a long-run relationship between inflation and employment with GDP using a vector error-correction model (VECM) after applying Johansens (1988, 1990, and 1995) cointegration technique. We conduct a test for weak exogeneity in order to do inference. Then, the researcher conduct stability test by using Jarque Bera test in order to test normality distribution between the variables selected. Finally, a modified version of the Granger causality test is applied in order to analyze causality between the variables.3.4.1.1 Multiple Regression AnalysisMultiple Linear regression analysis is an analysis of the relationship between one variable (dependent variable) and set of variabl e (independent variables). It is used by the researcher to test the hypothesis. As in all hypothesis tests, the goal is to reject the null hypothesis and accept the alternative hypothesis.This technique will identify how much of the variance in the dependent variables can be explained by independent variables. This analysis is used primarily for the purpose of prediction. The regression model can be used to predict the value of the proposed model in the study isGDP = f (INF, EMP)GDP = + 1 Inflation+ 2 Employment + Where,GDP = Gross Domestic Pr