NATIONAL UNIVERSITY OF MODERN LANGUAGES NUML, LAHORE.

24 9
2014
GDP GROWTH RATE
ANALYSIS WITH OTHER
VARIABLES
Submitted to: Ms Maheen
Admin
S U B M I T T E D B Y : MA R I A M H A S A N
Macroeconomic Analysis

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NOMINAL GDP AND REAL GDP AND THEIR RELATIONSHIP:
Unlike real GDP, nominal GDP is the measurement that leaves price changes in
the estimate. Therefore, nominal GDP is usually higher. Real GDP is always given
in terms of a base year. Real GDP is what nominal GDP would have been if there
was no price changes from the base year. Both real and nominal GDP are given
as an annual rate.
Nominal GDP is GDP evaluated at current market prices. Therefore, nominal
GDP will include all of the changes in market prices that have occurred during
the current year due to inflation or deflation. Inflation is defined as a rise in the
overall price level, and deflation is defined as a fall in the overall price level. In
order to abstract from changes in the overall price level, another measure of
GDP called real GDP is often used. Real GDP is GDP evaluated at the market
prices of some base year.
When the nominal GDP increases it implies that prices have increased. Nominal
GDP is current prices and real GDP takes prices changes into account.
In Real GDP the inflation is adjusted, therefore in order to calculate Nominal
GDP with add in Inflation to Real GDP.
Further is explained in the chart given below which shows a contrast of both
Real and Nominal GDP along with Annual Inflation Rate.
From the Graph it explains that;
Real GDP and Nominal GDP show positive comovement with one and other but
Nominal GDP is higher than Real GDP. This positive Comomvement also shows
Positive correlation of Real and Nominal GDP. On the graph Real GDP (BLUE) is
lower than Nominal GDP (GREEN).
This positive correlation shows a positive trend in Real GDP and Nominal GDP but
Nominal GDP shows very high variations with respect to Real GDP. It shows that
Nominal GDP increases and decreases with the same trend as Real GDP but a
higher frequency.


Macroeconomic Analysis

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0
5
10
15
20
25
30
2004 2006 2008 2010 2012 2014 2016
Real GDP
Inflation Rate %
Nominal GDP
Years Real GDP Inflation Rate % Nominal GDP
2005 7.67 9.27 16.94
2006 6.81 7.92 14.73
2007 5.68 7.77 13.45
2008 2.7 11.99 14.69
2009 3.6 20.78 24.38
2010 4.8 11.73 16.53
2011 2.96 11.9 14.86
2012 4.19 9.3 13.49
2013 3.6 7.7 11.3
2014 4.1 9.7 13.8
Macroeconomic Analysis

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Macroeconomic Analysis

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Analysis of GDP with other
Variables
1. Inflation
2. Unemployment
3. Nominal Wage Rate
Macroeconomic Analysis

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GDP Growth Rate % (Annual) with Inflation Rate % from 2005-
2014:











0
5
10
15
20
25
2004 2006 2008 2010 2012 2014 2016
GDP Growth rate % (Annual)
Inflation Rate %
Years GDP Growth rate % (Annual) Inflation Rate %
2005 7.67 9.27
2006 6.81 7.92
2007 5.68 7.77
2008 2.7 11.99
2009 3.6 20.78
2010 4.8 11.73
2011 2.96 11.9
2012 4.19 9.3
2013 3.6 7.7
2014 4.1 9.7
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Analysis:
The consumer price index (CPI) reflects the increased cost of living, or inflation. The CPI
is calculated by measuring the costs of essential goods and services, including vehicles,
medical care, professional services, shelter, clothing, transportation, and electronics.
Inflation is then determined by the average increased cost of the total basket of goods
over a period of time.
A high rate of inflation may erode the value of the dollar more quickly than the
average consumers income can compensate. This, thereby, decreases consumer
purchasing power, and the average standard of living declines. Moreover, inflation
can affect other factors, such as job growth, and can lead to decreases in the
employment rate and GDP.

Gross domestic product in Pakistan represents the total aggregate output of the
economy. It is important to keep in mind that the GDP figures as reported to investors
are already adjusted for inflation. In other words, if the gross GDP was calculated to be
6% higher than the previous year, but inflation measured 2% over the same period, GDP
growth would be reported as 4%, or the net growth over the period.

Over time, the growth in GDP causes inflation, and inflation begets hyperinflation. Once
this process is in place, it can quickly become a self-reinforcing feedback loop. This is
because in a world where inflation is increasing, people will spend more money
because they know that it will be less valuable in the future. This causes further increases
in GDP in the short term

Because leading indicators have the potential to forecast where an economy is
headed, fiscal policymakers and governments make use of them to implement or alter
programs in order to ward off a recession or other negative economic events. Here
inflation is a lagging variable that is determined by GDP of a country. It is predicted by
GDP rate and hence it also tells the direction of growth of variable. The Inflation rate of
Pakistan and GDP growth rate show a negative comovemnet.
The graph shows that GDP and Inflation have a countercyclical effect with each and
hence are negatively correlated. As GDP falls the Inflation rate of a country rises.



Macroeconomic Analysis

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GDP Growth Rate % (Annual) with Unemployment Rate %
from 2005-2014:



Years GDP Growth rate %
(Annual)
Unemployment Rate
%
2005 7.67 8.3
2006 6.81 6.6
2007 5.68 6.5
2008 2.7 7.4
2009 3.6 14
2010 4.8 15
2011 2.96 5.6
2012 4.19 6
2013 3.6 5.17
2014 4.1 6.6



0
2
4
6
8
10
12
14
16
18
2004 2006 2008 2010 2012 2014 2016
GDP Growth rate % (Annual)
Unemployment Rate %
Macroeconomic Analysis

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Analysis:
The unemployment rate is very important and measures the number of people looking
for work as a percentage of the total labor force. In a healthy economy, the
unemployment rate will be anywhere from 3% to 5%. In case of Pakistan is hasnt been
fortunate in terms of a healthy unemployment percentage. The database showed that
since the last decade the unemployment rate has been residing above the healthy
level as lay down by World Labor Force Organization. Unemployment has been at its
peak from 2009-2010. Due to high political crisis and economically misbalanced. Yes
unemployment rate fell around 2013 to 5.1%. Which again rose to 6% as per the report
in August in 2014 due to high political and energy crisis .
Annual GDP growth over 2.5% has caused a 0.5% drop in unemployment for every
percentage point over 2.5%. It sounds like the perfect way to kill two birds with one
stone - increase overall growth while lowering the unemployment rate,
Unfortunately, however, this positive relationship starts to break down when
employment gets very low, or near full employment. Extremely low unemployment rates
have proved to be more costly than valuable, because an economy operating at near
full employment will cause two important things to happen:
1. Aggregate demand for goods and services will increase faster than
supply, causing prices to rise.
2. Companies will have to raise wages as a result of the tight labor market.
This increase usually is passed on to consumers in the form of higher prices
as the company looks to maximize profits.
Unemployment is also a lagging variable as it is determined by GDP itself but in contrast
to Inflation, Unemployment shows a positive correlation with GDP and both show a
Procyclical relationship because unemployment seems to follow the same direction as
GDP above and below the trend.



Macroeconomic Analysis

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GDP Growth Rate % (Annual) with Nominal Wage Rate from
2005-2014:











0
2000
4000
6000
8000
10000
12000
14000
2005 2006 2007 2008 2009 2010 2011 2012 2013
GDP Growth (Billion)
Nominal Wage
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References:
http://www.gdpinflation.com/2013/01/inflation-rate-in-pakistan-from-2000-
to.html
http://www.tradingeconomics.com/pakistan/gdp-growth
http://www.pbs.gov.pk/content/labour-force-survey-2012-13-annual-report