The Effects of Unemployment Rate and Inflation on Economic Growth

The Effects of Unemployment Rate and Inflation on Economic Growth

Introduction

The economic growth of a country is desirable since it leads to improved standards of livings. The Gross Domestic Product (GDP) indicates a countries economic growth. A higher GDP indicates higher economic growth. Several factors affect the GDP of a country. Some of the factors that influence the growth of the economy include inflation and the unemployment rate (Alisa 90). Inflation is the increase in the prices of goods and services of a country. Inflation is as a result of the decrease in the value of the currency hence an increase in inflation leads to a decrease in the economic growth. An increase in the unemployment rate leads to a decrease in the economic growth of a country. The unemployment rate decreases the purchasing power of individuals hence shrink the economy. This paper investigates the correlation between economic growth and inflation and the unemployment rate of the United States. A linear regression analysis will be used to analyze the data with GDP as the response variable and unemployment rate and inflation as the explanatory variables.

Method of Data Collection

The data used in the analysis involves the GDP, the unemployment rate, and the inflation of the population of interest which is the United States from the year 1985 to 2018 (Amadeo para 3). The data was obtained from the website The Balance. The website provides reliable data concerning the economic status of the United States. It provides the economic statistics and analyzes the performance with respect to the previous status.

Data Analysis

Scatter plot diagrams were used to show the graphical representation of the relationship between the response variable and the explanatory variables. The scatter plot diagram of GDP against unemployment shows a negative relationship between the variables. The scatterplot indicates a decrease in economic growth with the increase in the unemployment rate. The StatKey analysis also indicates the coefficient of correlation between the two variables. The coefficient of correlation indicates the direction and strength of the relationship. The coefficient of correlation of the relation between GDP and inflation is -0.576. The negative sign indicates a negative direction of the relationship. The figure also indicates a relationship of moderate strength. The coefficient of determination can be obtained by finding the square of the coefficient of correlation. The coefficient of determination is 0.332. This means that the regression model represents 33.2% of the sample. The regression model is obtained in the summary statistics of the StatKey analysis. The following is the regression model of the graph of GDP against unemployment:

y = -0.588x + 6.139

Where,

y = predicted value of GDP

-0.588 = slope of the linear relationship

X = the value of unemployment rate

6.139 = y-intercept

The second scatterplot diagram gives the graphical representation of the relationship between GDP and inflation. The diagram shows a slightly inclined slope which indicates an increase in inflation leads to an increase in GDP. The coefficient of correlation of the relationship is 0.186. This shows that there is a weak or no relationship between the variables. The coefficient of determination is 0.035. This indicates that the regression model represents only 3.5% of the sample. The following is the regression model of the relationship:

y = 0.225x + 2.08

The null hypothesis of the relationship between GDP and unemployment is that changes in the rate of unemployment have no significant effect on the GDP of the United States. The randomized test in StatKey is used to test the null hypothesis. The p-value of the test is indicated as 0. This shows that there is enough evidence to reject the null hypothesis. We can, therefore, conclude that changes in the unemployment rate have a significant effect on the GDP of the United States. This means that an increase in the rate of unemployment leads to a significant decrease in the growth of the economy.

Conclusion

The purpose of the study was to determine how the response variable GDP relates to the explanatory variables inflation and unemployment rate. The population of interest was the United States. Data of the three variables was collected from 1985 to 2018. The first step of data analysis involved the creation of scatterplot diagrams followed by regression analysis. It was determined that there exists a negative and moderate relationship between GDP and unemployment rate. This means that an increase in the unemployment rate leads to a significant reduction in the GDP. It was also determined that there exists a weak relationship between inflation and GDP. This means that an increase in inflation does not bring about a significant change in GDP. The final analysis involved a randomized test for correlation to measure the null hypothesis of the relationship between unemployment and GDP. The null hypothesis was rejected since the p-value of the test was 0. This means that the changes in the rate of unemployment bring about a significant effect on the GDP. In conclusion, the unemployment rate should be as low as possible for the United States to realize Economic growth.

Works Cited

Alisa, Maximova. "The Relationship between Inflation and Unemployment: A Theoretical Discussion about the Phillips Curve." Journal of International Business and Economics, 3.2, 2015, 89-97.

Amadeo, Kimberly. “US real GDP growth rate by year compared to inflation and unemployment.” The Balance, 2019, www.thebalance.com/u-s-gdp-growth-3306008