Analyzing GDP And CPI Relationship In Australia

Gross Domestic Product

INTRODUCTION

In most cases, the economic growth is measured using the Gross Domestic Product (GDP). The advancement in all fields of a nation can be provided normally using the economic growth of a country (Olson, 2008). Generally, the Gross Domestic Product grows faster when business takes on more labor thereby giving the residents more money to spend (Vassalou, 2003). As a result, there is an increase in demand for the availability of money to spend on needs and wants. On the contrary, when there is no economic growth, business will become stagnant or even downsized. Employment will become inactive or even shrink as the demand and the living standards of the people are affected adversely.

Gross Domestic Product is the worth of money of all the final goods and services which are produced from sale in one year within a nation (Auty, 2003). Gross Domestic Product is measured using three ways. They include the income, the production, and the expenditure approach. Use of the measures is bound to lead to the same result (Stewart & Rankin, 2008). Gross Domestic Product includes exports but does not include expenditure on imports.

The Gross Domestic Product value that is unadjusted for inflation, which measures in current instead of base-period dollars, is referred to as Nominal Gross Domestic Product (Mariano & Ozmucur, 2018). The value of Gross Domestic Product that is expressed in the dollars base period while eliminating the impact of changes in price is referred to as the Real Gross Domestic Product. When the actual quantities of output remain the same, the Real Gross Domestic Product will remain unchanged. However, the nominal Gross Domestic Product may increase or decrease in correlation with the rising or falling prices of goods and services (Mielnik & Goldermberg, 2002). The progression in real Gross Domestic Product over a period is a sign of the performance of an economy (Sutton et al., 2007). An appropriate gauge of living standards is the real GDP per capita that is the real GDP divided by the population.

In Australia, price stability is measured using the index of price. The price index is a series of price measurements which show how the mean price of a set of goods changes over time (Nath & Sarkar, 2018). The most vital price indices are the Producers Price Index (PPI) and Consumer Price Index (CPI). CPI is a degree of the general price levels of goods and services which are purchased by households. Consequently, Producers Price Index (PPI) is a measure which is not confined to those items that are bought by households and includes all goods and services that are produced in Australia (Khan et al., 2018). It should be noted that the percentage change in an index and the direction of the change matters instead of the index number itself.

Consumer Price Index

HYPOTHESES

To test the relationship between the GDP percentage change and the CPI, a hypothesis was developed. A hypothesis is a statement which tests a relationship between two or more variables (Chen et al., 2008). In a study or experiment, a hypothesis briefly sums a researcher’s prediction of the findings of the study which may be or not supported by the outcome. A hypothesis entails a null hypothesis and an alternate hypothesis (Craig & Abramson, 2018). A null hypothesis is a hypothesis of no difference. Thus, a null hypothesis suggests that there is a relationship between two or more variables. On the other hand, an alternate hypothesis is a hypothesis that shows that there is a difference between two or more variables. Thus, acceptance of an alternate hypothesis shows that there is no relationship between two or more variables.

Thus;

H₀: There is an association between percentage change in GDP and CPI

H₁: There is no association between percentage change in GDP and CPI

TREND AND DESCRIPTIVE ANALYSIS

Gross Domestic Product

Figure 1: Gross Domestic Product Trend

Table 1: GDP descriptive statistics

Mean	0.86
Standard Error	0.04
Median	0.8
Mode	0.9
Standard Deviation	0.60

Figure 1 shows that the percentage change of GDP has been fluctuating frequently over the quarters.  The highest GDP percentage change that has been achieved over the quarters was in July 1969 with a percentage change of 2.5%. On the other hand, the lowest Gross Domestic Product percentage change over the quarters was in December 1982 with a low of -1.2%. The mean percentage change of Gross Domestics Product was 0.86% with a standard deviation of 0.6%.

Consumer Price Index

Figure 2: Consumer Price Index trend

Table 2: Consumer Price Index Descriptive Statistics

Mean	1.18
Standard Error	0.07
Median	0.9
Mode	0
Standard Deviation	1.11

A similar observation could also be observed for the CPI. The CPI reached its highest point in December 1977 with a high of 6.1%. On the other hand, the CPI was at its lowest point in December 1961 with a low of -1.3%. The Consumer Price Index has a mean of 1.18% with a standard deviation of 1.11%.

TESTING OF HYPOTHESES

Sources of data

Data used in this study was secondary in nature and was thereby obtained from existing sources. Thus, it was acquired from the Australian Bureau of Statistics.

Data collection

The model of estimation was done using quarterly historical data. The data ranged from December 1959 to December 2017. The period was selected to capture the trends of the measures over the 58 year period. Therefore, the study adopted a time series data.                                     

Hypotheses

REGRESSION ANALYSIS

To test the developed hypothesis, the statistical method that was appropriate was a linear regression model. The main idea behind regression analysis is examining whether a set of predictor variables do a good job in predicting a dependent (outcome) variable (Kutner et al., 2004). Conversely, it tests whether a variable, in particular, is a significant predictor of the outcome variable. It tests the magnitude of the predictor variable and the sign of beta estimates which affect impact the variable outcome. In a nutshell, a regression analysis determines the strength of the predictor, forecasts an effect and forecasts the trend.

As a result, the regression estimates are utilized in explaining the relationship between one dependent variable and one or more variables which are independent.

The simplest regression equation form is defined by the formula:

Y = c +bx

Y estimates the score of the dependent variable: c is the constant: b is the coefficient of regression while x is the score of the independent variable.

The linear regression that was used in determining the relationship between the Gross Domestic Product percentage change and Consumer Price Index was developed through Microsoft Excel. The outputs are as shown in the subsequent tables below.

Table 3: Regression Statistics

Multiple R	R Square	Adjusted R Square	Standard Error	Observations
0.22	0.05	0.04	0.59	233

From the table 3 above, it can be seen that the regression model explains 4% of the variability. Consequently, 96% of the variability is explained by variables which are not in the model. From this, it can also be deduced that the regression model fits a straight line.

Table 4: ANOVA

	Degree of freedom	Sum of Squares	Mean of Squares	F	Significance F
Regression	1	4.00	4.00	11.67	0.00
Residual	231	79.25	0.34
Total	232	83.25

The ANOVA table shows that the regression model is statistically significant. The model has a significant level of 0.00 which is less than the critical acceptance value of 0.05.

Table 5: Regression Model                                  

	Coefficients	Standard Error	t Stat	P-value
Intercept	1.00	0.06	17.78	0.00
CPI	-0.12	0.03	-3.42	0.00

From the regression model, it is evident that all factors kept constant, the Gross Domestic Product percentage change is 1 unit. The constant is statistically significant at p < 0.05. Conversely, a unit increase in the Consumer Price Index leads to a 0.12 decrease in the Gross Domestic Product percentage change. Consequently, the change is statistically significant at p < 0.05.

Interpretation

From the regression model, the mathematical model that is derived is:

GDP = 1 – 0.12CPI

Therefore, we can deduce that the relationship between the Gross Domestic Product percentage change and Consumer Price Index is negative. Thus, when the CPI increases, the percentage change in GDP tends to decrease. The opposite is also true.

The regression model, therefore, supports existing literature which claim that the Consumer Price Index contributes negatively to the Gross Domestic Product of a nation. Therefore, for a nation to ensure that its Gross Domestic Product continues to grow significantly, and then it has to reduce the Consumer Price Index. The reduction can be achieved through the reduction of costs of basic goods and commodities thereby making the living standards of the people attainable to all.

CONCLUSION

The CPI is widely used as a measure of inflation and a proxy of the efficiency of the government’s economic policy. It gives citizens, businesses and the government an idea of the changes in price in the economy and as a guide in making informed decisions regarding the economy. Thus, ensuring a low Consumer Price Index is a great starting point in ensuring that Australia is able to increase its Gross Domestic Product in the subsequent quarters or years to come.