Gross Domestic Product Essay Example | Topics and Well Written Essays - 2000 words

Gross Domestic Product - Essay Example The dependent variable used for this study is the Gross domestic product (GDP) of the United Kingdom (UK). GDP is an important measure for any country because it represents the healthiness of its economy. It is calculated by summing the market value of all goods and services produced within this economy. The percent change in GDP is used to measure the growth in the economy during the specified period. GDP is measured in real prices in order to remove the effect of inflation. The data for the GDP for the UK is extracted from the Economic Trend Annual Supplement (ETAS) database. ETAS is released annually from British office of national statistics (ONS). It contains a summary of the United Kingdom (UK) economic accounts. Field number 2.1A is selected from the database which contains the time series of GDP chained volume measures which is referenced by the variable ABMI. These values are seasonally adjusted to represent the period from 1948 to 2005. Annually linked and weighted chain volume measures better highlight changes in GDP than constant price values. This is because take account of year-to-year changes (Aspden & Person 2000). Figure 1 shows little change from year to year in UK GDP. Therefore the percent change from year-to-year is computed and replaces by the real values of annual GDP. The percent change in the British GDP (appendix B) is shown in the following figure: Figure 2: Percent Change in UK GDP from 1948 to 2005 Figure 2 amplifies the changes and highlights that occurred during the period of the study. It shows periods when GDP positively increased or negatively decreased which were not visible in figure 1. From the above graph the following years experienced major increase in the British GDP: 1973 (7.1%), 1964 (5.5%), 1960 (5.3%), 1988 (5%). The following years also experienced the most decrease in GDP values: 1980 (-2.1%), 1981 (-1.5%), 1991 (-1.4%), 1974 (-1.4). 3. Econometric Model: Regression is considered as a special case of econometric modeling (Wang & Jain 2003). Theory suggests that GDP growth is positively related to inflation and negatively related to unemployment and real interest rates (RIT). The following relevances of these three variables are explored in the following sections. 3.1 The relevance of Inflation in predicting GDP: The relationship between inflation and GDP is a very delicate relationship and still causes much controversy in both theory and empirical findings (Hossain & Chowdhury 1996). Mallik & Chowdhury (2001) examined the long-run and short-run dynamics of the relationship between GDP and inflation. They found that inflation and economic growth are positively related on the long run. They also found that inflation is more sensitive to changes in growth rates than that of growth rates to changes in inflation. Thus moderate inflation is good for growth but fast economic growth feeds back into inflation. Thus too much GDP growth would accelerate inflation rates, which would decrease the value of money more than the value gained by GDP and even more taking the economy downhill as verified by Bruno and Easterly (1998). 3.2