There are several ways to mensurate national income. It can be measured as Gross domestic merchandise, gross national income, net national income or in the signifier of per capita incomes. Every step has its ain benefits and drawbacks. For this survey Per capita GDP has been chosen as the step of growing rate for two grounds. First, it involves the complete history of all the reported economic activity taking topographic point in an economic system. Second, it besides captures the impact of population alterations on GDP growing rate. The information for per capita GDP has been taken from World Development Index ( WDI ) and has been adjusted to the base twelvemonth 2000 to capture the existent growing rate in per capita income.
3.1.2 Inflation Rate
Like national merchandise there are several ways to mensurate rising prices rate. We can utilize whole monetary value index, GDP deflator, consumer monetary value index, nucleus rising prices etc. Though each of these indexs step rising prices, but in a different manner and with a different context. For our analysis we will utilize consumer monetary value index as it is a wholistic step of rising prices and takes into history a complete set of goods and services and assign different weights to each. Though it has its ain cringle holes but still it gives a reasonably realistic image of the rising prices rate prevailing in an economic system.
From the extended literature reappraisal it has now been clear that most of the old work done in hunt of any relationship between rising prices and economic growing involves panel informations survey. Such theoretical accounts can non be applied on clip series informations with maximal preciseness. The surveies which have used clip series informations have besides chiefly based their theoretical accounts on correlativity and farmer causality ( Gokal and Hanif ( 2004 ) ). These and other related techniques including OLS are non rather utile for clip series informations as they can take to specious consequences until their long-term equilibrium relationship has been confirmed ( Daldo Gonzalo and Marmol ( 1999 ) ) .
We have made our analysis rather simple. From old literature study we have assumed that rising prices and growing rate do hold a long tally every bit good as a shortrun relationship between them. However this relation is non merely additive instead a non linear relationship has been observed in which the mutual opposition of relationship alterations as the rate of rising prices rises. So simple additive theoretical account can non be used. For this purpose the undermentioned theoretical account is proposed.
Y =f ( ? , ? 2 )
- ‘ is the one-year rate of growing in existent per capita GDP.
‘ ? ‘
- is the one-year rate of rising prices determined by ciphering the growing rate in one-year consumer monetary value index.
( ? 2 )is square of one-year rate of rising prices and is merely calculated by squaring?
It is obvious from above theoretical account that it involves per capita GDP growing as dependent variable while rising prices rate and the square of rising prices rate as explanatory variables. Using such a theoretical account we can easy look for the non additive nature of relationship between the focussed variables.
Cointegration technique is used to happen the grounds of any possible long tally relationship between the two or more clip series. Previously Ordinary Least Square has been used to happen the relationship between clip series. However this normally heads to quite deceptive consequences when it was observed after series of empirical surveies that though OLS showed important relationship yet no such relationship existed in existent, ensuing in specious arrested development ( Wooldridge 2006 ).
This fact was foremost reported by Granger ( 1981 ) and proposed a new technique in which series stationary at same incorporate degree could hold long-term equilibrium relationship.
Cointegration technique can be applied utilizing Johanson cointegration trial. It calculates two statistics ; Trace statistic and maximal Eigen statistic. It has the void hypothesis that there exists no long tally relationship between the variables. For the series to hold long-term equilibrium relationship both of these statistics calculated for each vector relation should be greater than the tabulated value. The figure of values is equal to figure of variables in the theoretical account. Model is said to be extremely important if all values of statistics are important. It may be noted through empirical observation that at least one cointegration vector has the deduction that all variables are cointegrated and follow a common long-term equilibrium way ( Dolado, 1999 ) . Now this technique will be used for appraisal intents.