Regression Project: Inflation vs.

Unemployment

Lucas Ogden
1st Period

In modern society, unemployment and inflation both are very relevant issues for
countries around the world. A large number of employees are required in order to have a healthy
economy- and typically a high inflation rate in a given country can hurt the economy. These two
topics are relevant to economists and even politicians trying to generate economic plans, as
well as the citizens experiencing inflation or unemployment. But are they related? Neither
variables are beneficial to the economy as the rate increases, so they have that in common. But
the real question is figuring out if one affects the other, as investigated in this project.
The regression equation for the given values is
y=-.0107x^4+.177x^3-1.0143x^2+2.608x+4.1945. The slope isnt meaningful in a quartic
regression, but the y- intercept would represent the unemployment rate when the inflation of a
given country equals zero. This particular number would be significant because it would show if
a neutral inflation rate would cause a higher or lower unemployment rate. This in turn could
motivate economists to investigate more into unemployment and potentially lower the rate. I
decided to use a quartic regression, because the R^2 value was the highest in that
circumstance. The R^2 value represents how strong the correlation is between the two
variables, which in this case was approximately .38. The relationship between the two is not
ridiculously strong, but .38 displays that there is a clear relationship between the two. Looking at
the graph, one can predict certain outputs for the certain value of inflation on the x-axis. Looking
at 3 on the x-axis, for example, one could hypothesize that the y-value would be approximately
a 5% unemployment rate. At 5 on the x-axis, the unemployment rate would most likely fall to
around or a little above a 4% unemployment rate. And for the last prediction, 7 on the x-axis
might fall at a 3.5-3.8% unemployment rate.

This graph of Inflation Vs. Unemployment is based on the following data:

Country

Inflation

Unemployment Rate

United States

2.1

8.1

Afghanistan

7.2

8.5

Canada

1.5

7.2

China

2.7

4.5

Germany

5.4

India

9.3

3.4

Fiji

3.4

8.4

Ghana

9.2

3.5

Haiti

6.3

France

9.9

Japan

4.3

Lebanon

8.9

Malaysia

1.7

3.1

Mexico

4.1

4.9

As a result of my findings in this project, there is a defined relationship between

unemployment and inflation. Of course, the graph isnt linear because there isnt a constant
correlation (something that wouldnt be possible with real world data). The information provided
(including the graph and data points) could be useful to economists in order to better
understand the economy. The y-intercept in this certain circumstance is 4.3, which is the rate of
unemployment when the inflation rate in the country is 0. This country is Japan, which
experienced a neutral inflation rate in the year of 2012 which consequently produced an
unemployment rate of 4.3. This study includes significant information that can be used to
understand relationships between different economic variables in the future. A better
understanding of the relationship between unemployment and inflation could allow economies to
avoid some of the downward spirals to which they have been prone in the past.

Works Cited:

1. Fuhrmann, Ryan. "Okun's Law: Economic Growth And Unemployment." Investopedia.

Web. 10 Sept. 2014.

2. "Unemployment, Total (% of Total Labor Force) (modeled ILO Estimate)."

Unemployment, Total %. The World Bank, Web. 10 Sept. 2014.
<http://data.worldbank.org/indicator/SL.UEM.TOTL.ZS>.