Polytechnic University of the Philippines

Sta. Mesa, Manila

THE EFFECT OF INFLATION ON THE ECONOMIC GROWTH OF THE
PHILIPPINES FOR YEAR 1984 UP TO 2013
A Research Paper Presented to
Professor Maniego, Norie L.
In Partial Fulfillment
of the Requirements for the Course
ECON 3043-Economics of Money and Banking
1st Semester SY. 2014-2015
By
GROUP 1
Ahorro, Alyssa Dale
Consuelo, Claudine
Gonzales, Divina
Marpa, Mario
Picardal, Eloise Grace
Villarante, Mary Jhoy
September 2014

Abstract
General prices of commodities in the Philippines continued to rise more
rapidly in the past years. It is therefore important to know whether inflation
rate has an effect on countrys GDP growth rate. This study aimed to find out
the significant relationship of inflation rate and GDP growth rate in the
country from 1984 to 2013. Descriptive research method was used in
analyzing the data obtained. The researches gathered relevant and reliable
data from National Statistics Commission Board Office and the Bangko
Sentral ng Pilipinas and even the non-government organizations like Trade
Economics.Com and Worldbank.org. These data are then processed and
evaluated through the use of efficient software called Econometric Views
(EViews). It provided the researchers the precise results needed to validate
their hypotheses. From the results generated, as can be observed, if the
inflation reached 3.1, GDP growth rate is 9.97 on the 1 st quarter of 2012 and
8.67 on the growth rate if the inflation is 2.43 on the 3 rd quarter of 2013.
Moreover, as of the Philippines in the year 1984, when inflation rate soared
53%, the GDP growth rate was -19.20% and when inflation rate was 1.9% in
2012, GDP growth rate turned 5.4%. This entails that an increase in the
inflation rate have a spontaneous effect on the Gross Domestic Product
growth rate in the long run. It turned out that inflation rate slightly affects
the GDP growth rate positively in the short run but its effect is more visible in
the long-run as inflation rate gives a negative effect on the growth rate.

CHAPTER 1
THE PROBLEM AND ITS BACKGROUD

This chapter presents the Introduction, Background of the Study,

Theoretical Framework, Conceptual Framework, Statement of the Problem,
Hypotheses, Scope and Limitation, Significance of the study and the
Definition of Terms.

Introduction
The Philippines, once belonged to the poorest countries in Asia, has
been making headway these years. It has been remarked as one of the
fastest growing economy in its region, with the purpose of attaining high and
sustained growth.
Asian Development Bank has cited that private consumption and
investment drove economic growth higher in 2013. It is expected to continue
in the forecast period, though moderating from last year.
However, economic growths do not ensure a stable inflation rate. It
was reported by the National Statistics Office that despite the devastation
brought by natural disasters and higher electricity prices, the countrys
inflation rate in 2013 was the lowest in six years. Notwithstanding with the
latter scenario, todays increase in the general price level of goods and
services tend to pick up briskly:
Mays headline inflation registered at 4.1 percent from 3.9 percent in
March 2014 and 2.6 percent in the same period a year ago. Inflation in the
first four months of 2014 also stood at 4.1 percent, according to the
Philippine Statistics Authority (PSA).

Todays condition, whereas the buoyancy of the price of commodities

is likely to remain the status quo, it is engrossing to know the relationship
between economic growth and inflation in the country.
This paper is organized to provide a rational explanation regarding
the effect of inflation in economic growth.
Background of the Study
The Philippines is a newly industrialized nation located in the South
East Asia. The country experienced low economic development earning it the
title the sick man of Asia due to its failure to attain the same level of
development as what its neighbors has achieved.
However, in contrast to the fate of most of its neighbors,

the

Philippines registered an average of 4.9 percent on its Real GDP growth rate
on the year 2008 and 0.9 percent in 2009, a very upsetting situation due to
some Asian countries such as India recording an 8 percent growth on 2008
and 6.5 percent on 2009, and Vietnam with 6.5 percent on 2008 and 4.4
percent on 2009 respectively.
In some instances the efforts of the people and the administration has
evaded vanity; the country did achieve a success from which the economic
growth of the Philippines averaged 4.8 % in 2000-2012, grew by 7.8 % in the
first quarter of 2013, faster than some countries. The quarterly growth rate
was the highest since President Benigno Aquino III took office in 2010. Also, it
ranked 16th out of 42 countries in the Asia-pacific region in the 2014 Index of
Economic Freedom, reflecting notable improvements in investment freedom,
business freedom, monetary freedom, and the control of government
spending.. The country has also ascended 5 notches to 38 th out of 60
countries worldwide on back of strong macroeconomic fundamentals and
upbeat investor confidence.

In the face of impressive growth figures, the Philippines is dealing with

many challenges. Among these is the tangible rapid change of the price level
of goods and services. Thus, the government introduced policies to help
mitigate inflation rate.
The BSPs approach to Monetary Policy has been introduced. The
policys objective is to promote price stability, which is genuinely conducive
in accomplishing balanced and sustainable growth of the economy. It is
mainly focused to achieving a low and stable inflation, supportive of the
economys development objective. The Philippine Development Plan 20112016 was also introduce to set an ambitious goal of stable economic growth
in the country in six years.
The condition of the progress of both the economic performance and
inflation is too compelling for the researchers to resist evaluating. They want
to know the effect of having an escalated economy to the cost of
commodities, in which the citizens are directly affected as consumers.
Theoretical Framework
The study regarding the effect of inflation to the economic growth of
the Philippines from the year 1983 up to year 2013 is anchored to
Endogenous Economic theory on Keynesian Mode discussing the relationship
of inflation rate and economic growth specifically the Keynesian AD-AS
Model.
Keynesian model framework comprising of Aggregate Demand (AD)
and Aggregate Supply (AS) curves, the AS curve is upward-sloping rather
than vertical in the short-run; the implication is that changes in the demand
side of the economy resulting

from expectations , labor force and policy

actions such as discretionary monetary or fiscal policies, affect both prices

and output in the short run as predicted by the Phillips Curve (Blanchard and
Kitoyaki, 1987 ; Dornbusch et al.,1996 ; Romer ,2001); therefore the
Keynesian model advocates that there exists a positive relationship between

inflation and output. However, in this Keynesian framework, it is not the case
that inflation is itself a growth-enhancing force ; the point is rather that if
rising aggregate demand is leading to increased growth , then some inflation
pressures are likely to emerge as relatively benign byproduct. The positive
relationship between inflation and growth exhibited in the short-run
dynamics is unsustainable in longer term and turns negative with higher
inflation rate.
Moreover, inflation causes real appreciation of the domestic currency
and

reduces

international

competitiveness

by

making

exports

more

expensive; in a country with fixed exchange rate, inflation would lead to the
deterioration of the trade balance and capital outflows and impact negatively
on the long-term economic growth (Dollar, 1992; Easterly, 1999).
Concepts and principles of this model will lead the researcher to a
deeper analysis of the study. This entail that inflation has a weak correlation
to different variables that can affect the economic growth of a country and
every institution involved plays a vital role to the economic sustainability of a
nation.
Conceptual Framework
The flow of the study is discussed through conceptual framework. The
study used the system approach. The system of three frames is composed of
input which went through the process or operations and emerged as the
output.
* Philippine Economic
Indicators
Gross Domestic
Product growth
INPUT
rate 2004-2013
OUTPUT
Gross Domestic
Product growth
ratd 19842013
Inflation Rate

*Analysis of Data
*Statistical Analysis
Econometric
Views (EViews)

* Economic Growth

PROCESS

FIGURE 1: CONCEPTUAL FRAMEWORK

Statement of the Problem

This research paper titled The Effect of Inflation on The Economic
Growth of The Philippines for the year 1983 up to 2013 aimed to answer the
following question: What is the effect of inflation on the economic growth of
the Philippines from the year 1983 up to 2013?
Specifically the study endeavored to answer the following:
1. What is the economic growth and inflation trend of the Philippines for
the year 1984-2013?
2. Does inflation rate affect economic growth of the Philippines for the
year 1984-2013?
a. Does inflation rate affect the economic growth on short run basis?
b. Does inflation rate affect the economic growth on long run basis?
Statement of the Hypotheses
The null hypotheses tested are:

1. Inflation has no significant effect on the economic growth of the

Philippines on the 1st quarter of 2012 up to 4th quarter of 2013.
2. Inflation has no significant effect on the economic growth of the
Philippines on the year 1984 up to 2013.

Scope and Limitations of the Study

This study was conducted to determine how inflation affects economic
growth. Since inflation is a condition, when cost of services coupled with
goods rise and the entire economy seems to go out of control. Whenever
there is expected inflation, governments take appropriate steps to minimize
the ill effects of inflation to a certain extent. Inflation often increases when
economies experience booms in the economy.
The study involved only the year 1984 up to year 2013 here in the
Philippines. This given period provides an excellent backdrop given the
presence of fluctuations in the trends of the inflation rate and economic
growth for 30 years. For the short run basis, data from 2004 up to 2013 was
collected. Data are gathered within this time frame which is subjected to
specific process to yield pertinent results. The Real Gross Domestic Product
growth rate is used by the researchers because among the indicators, this
measures the growth of an economy either per quarter or annually. Also,
inflation rate as measured by GDP deflator is used to show the fluctuations
happening to inflation rate for the past 30 years.
To make this possible, the study was anchored on the official
government data released by the government agencies other independent
organizations which are significant to the subject of this study.
Significance of the Study
This study will be beneficial and effective especially to the following
people:

To the society: As price takers, sellers, and consumers, they will really
be the ones who are affected when inflation occurs. This study will help
them know the changes in prices especially of prime commodities and

so that they will be well equipped in case of spikes in inflation.

To the Philippine Government: Government agencies especially the
executive body is tasked in crafting economic policies to rein in
inflation and encourage economic growth to lead the country to
progress. This research paper shall help them make decisions that will
prevent or the

minimize effect of inflation on the economy and

formulate effective solutions to the problem.

To the students (especially Economics students): This study will help
them understand the important issues and its implication to the
economy. Through their awareness with the inflations effect to the
economic growth, they will be able to make educated consumption
decision to somehow lessen its impact to their personal budget and
eventually contribute to small yet gradual improvement to our
economy. This will also ensure that they are equipped with the right

knowledge that they can use for the future.

To the researchers: This study served in great part for the completion
of the researchers course requirement. And also led them to discover
new knowledge and widen their understanding on the relevant

economic issues.
To other researchers: This paper shall be effective and helpful
reference for the researchers who would intend to make any further
relevant study about the effect of inflation on the economic growth.

DEFINITION OF TERMS
Commodity is a marketable item produced to satisfy wants or needs.
Economic commodities comprise goods and services.

Demand is a buyer's willingness and ability to pay a price for a specific

quantity of a good or service. Demand refers to how much (quantity) of a
product or service is desired by buyers at various prices.
Economic growth is the increase in the market value of the goods and
services produced by an economy over time. It is conventionally measured
as the percent rate of increase in real gross or real GDP.
Economy or economic

system consists

of

the production, distribution or

trade, and consumption of limited goods and services by different agents in a

given geographical location.
Government is a group of people that has the power to rule in a territory,
according to the law. This territory may be country, a state or province within
a

Gross

country,

domestic

product (GDP)

or

is

the market

region.

value of

all

officially

recognized final goods and services produced within a country in a year, or

over a given period of time.
Inflation is a sustained increase in the general price level of goods and
services in an economy over a period of time.
Market is one of the many varieties of systems, institutions, procedures,
social and infrastructures whereby parties engage in exchange.
Price taker is a person or company that has no control to dictate prices for
a good or service. In the trading world, a price taker is a trader who does not
affect the price of the stock if he or she buys or sells shares.
Price is

the quantity of payment or compensation given

by

one party to

another in return for goods or services. In modern economies, prices are

generally expressed in units of some form of currency. (For commodities,
they are expressed as currency per unit weight of the commodity, e.g. euros
per kilogram.)

Society is

a group of

people

involved

in

persistent interpersonal

relationships, or a large social grouping sharing the same geographical or

social territory, typically subject to the same political authority and dominant
cultural expectations.
Supply is the amount of a product that producers and firms are willing to sell
at a given price all other factors being held constant.

CHAPTER 2
REVIEW OF RELATED LITERATURE AND STUDIES
This chapter presents the significant areas of the major components of
the study. Each section is organized under related literature, foreign and local
and related studies. Insistent to identify the effect of inflation on the
economic growth, there is seemed a need to conduct a research on the
subject for a wider view of some relevant circumstances. In view of above
considerations, studies are presented as they lead justification to the study.

REVIEW OF THE RELATED LITERATURE

This portion presents a review of several literatures that would be
beneficial to the study summarized from previous writings, showing detailed
facts asserted by few people on the effect of inflation in economic growth.
On this element of study some reviews of the proponents and authors
passage in order to help the proponents to find ways in contact with
the problem that have been encountered.
LOCAL LITERATURE
Josef T. Yap has cited the stand of economic growth of the Philippines at
various inflation rate, at different periods of times on his discussion paper,
Inflation and Economic Growth in the Philippines (September 1996).

At the macroeconomic level, studies have been more quantitative in

nature. There has been recent cross-country evidence supporting the view
that long-run growth is adversely affected by inflation. An oft-cited reference
is that of Fischer (1993). The framework that is used is derived from
endogenous growth theory which tries to determine the causes of difference
in growth rates in different countries. The negative effect of inflation on
output stems from the resulting macroeconomic instability which makes it
more difficult for economic agents to plan efficiently thus reducing
investment.
In the Philippine the direct costs of inflation have been measured by
estimating its impact on output and its components. The welfare costs and
distributional effects of the inflation tax have been largely ignored. In the
PIDS Annual Macroeconometric Model (Reyes and Yap, 1993a), for example,
a rise in sectoral prices and the general price level results in a decline in
demand for the relevant sectoral output. This explains why the impact of a
peso depreciation on total output is contractionary, particularly in the
industry and service sectors.

Inflation as a proxy for macroeconomic stability also has a negative

impact on real fixed investment in the PIDS model. Thus, controlling inflation
will result in higher capital formation and expand the future productive
capacity of the economy.

FOREIGN LITERATURE

REVIEW OF RELATED STUDIES

This portion presents a review of few studies that would be beneficial to the
study, showing thesis abstracts asserted by few people on the effect of inflation in
economic growth.

LOCAL STUDIES

Cesar B. Quicoy, Amelia M. L. Bello and Tirso B. Paris, Jr. on their paper,
Price Stabilization Measures and its effects on the Philippine
Export Sector (1999), have supposed the result of inflation to growth:

Using a general equilibrium model, it is showed that there was a structural

relationship between inflation and growth - higher inflation reduced growth. They
suggested, however, that future empirical studies should take more care to control
for the factors that influence both inflation and growth since these are jointly
affected by a number of other factors. The short-run relationship runs from output
to inflation, with higher levels of economic activity tending to push inflation up when

aggregate spending in the economy runs ahead of the level of output that the
economy can supply on a sustainable basis.

FOREIGN STUDIES
Min Li of the University of Alberta, Canada, has proven that theres a
negative relationship between inflation and economic growth in the long-run
in his paper, Inflation and Economic Growth: Threshold Effects and
Transmission Mechanism.

Findings

provide

some strong

policy implications.

For

developing

counties, first, the marginal negative effect of moderate inflation in the range
of 14 to 38 percent is pronounced. An increase in inflation by 10 percentage
points per year will reduce economic growth by about 0.2-0.4 percentage
points. This adverse influence of moderate inflation on growth will lead to a
substantial negative effect on economies in the long term. Second,
policymakers should not exert efforts to keep the inflation rate at zero
percent since single-digit inflation (below the first threshold of 14%) does not
impede and can even stimulate economic performance. Third, hyperinflation
does not have hyper-negative effects on economic growth because the
marginal impact of hyperinflation is much lower than that of moderate
inflation. Empirically, we can observe that reductions in the hyperinflation
rate have never had significant effects on economic growth. Therefore,
controlling moderate inflation should be the main goal for policymakers in
developing countries.

Robert J. Barro on his paper, Inflation and Economic Growth (2013) that
was supported by the National Science Foundation, England assessed the
effects of inflation on economic performance.

A major finding from the empirical analysis is that the estimated effects
of inflation on growth and investment are significantly negative when some
plausible instruments are used in the statistical procedures. Thus, there is
some reason to believe that the relations reflect causation from higher longterm inflation to reduced growth and investment. It should be stressed that
the clear evidence for adverse effects of inflation comes from the
experiences of high inflation. The magnitudes of effects are also not that
large; for example, an increase in the average inflation rate by10 percentage
points per year is estimated to lower the growth rate of real per capita GDP
(on impact) by 0.2-0.3 percentage points per year.
Over long periods, these changes in growth rates have dramatic effects
on standards of living. For example, a reduction in the growth rate by 0.2-0.3
percentage points per year (produced on impact by10 percentage points
more of average inflation) means that the level of real gross domestic
product would be lowered after 30 years by 4-7%.14 In mid 1995, the U.S.
gross domestic product was over $7 trillion; 4-7% of This amount is $300-500
billion, more than enough to justify a keen interest in price stability.

Literature reviews from Vikesh Gokal and Subrina Hanifs working paper,
Relationship Between Inflation and Economic Growth (2004)

stated

that inflation may have slightly positive effect on growth:

Non-linear effects of inflation on economic growth by Michael

Sarely: There is evidence of a structural break that is significant. The break is
estimated to occur when the inflation rate is 8 percent. Below that rate,
inflation does not have any effect on growth or it may even have a slightly
positive effect. When the inflation rate is above 8 percent, however, the

estimated effect of inflation on growth rates is negative, significant, robust

and extremely powerful. This study also demonstrated that when the
structural break is taken into account, the estimated effect of inflation on
economic growth increases by a factor of three. The results suggest that the
existence of a structural break also suggests a specific numerical target for
policy: keep inflation below the structural break.
Role of Macroeconomic Factors in Growth

by Stanley Fischer:

Inflation is significantly correlated with the growth rate. The simple panel
regressions confirm the relationships between inflation, inflation variability
and growth. The growth accounting framework made it possible to identify
the main channels through which inflation reduces growth. The author
pointed out that, in line with past theory and studies, the results of the paper
implied that inflation impacted on growth by reducing investment, and by
reducing the rate of productivity growth. Examination of exceptional cases
also showed that while low inflation and small deficits were not necessary for
high growth even over long periods, high inflation was not consistent with
sustained growth.

CHAPTER 3
RESEARCH METHODOLOGY
This chapter discussed the designs and procedures undertaken during
the conduct of the study. It presented the research method used, instrument
used, and validation of instrument, data gathering procedures and statistical
treatment of data.
RESEARCH METHOD USED
Descriptive research is a method used in the process of finding
adequate and precise interpretation of the facts presented. The researches
employed this research method to emphasize the problems revolving around
the situation rather than simply identifying them. To define the descriptive
type of research, Creswell (1994) stated that the descriptive method of
research is the gathering of information about the present existing condition.
The aim of descriptive research is to verify formulated hypotheses that refer
to the present situation in order to elucidate it. Moreover, this method uses a
flexible approach, thus, when important new issues and questions arise
during the duration of the study, further investigation can be conducted.
The descriptive research is one in which information is collected
without changing the environment Sometimes these are referred to as
correlational or observational studies. The Office of Human Research

Protections (OHRP) defines a descriptive research as Any research that is

not truly experimental. Moreover, it is also conducted to demonstrate
associations or relationships between things in the world around.
A case study on the other hand, is an in-depth study of a particular
research problem rather than a sweeping statistical survey. It is often used to
narrow down a very broad field of research into one or a few easily research
examples. The case study research design is also useful for testing whether a
specific theory and model actually applies to phenomena in the real world. It
is a useful design when not much is known about a phenomenon. Since this
study regarding the relationship between the economic growth and the
inflation rate is a time series research, this type of study is the best suit.

INSTRUMENT USED
To gather data that will be subject to different processes to yield
meaningful information that may support or reject the presented hypotheses,
the researchers used library method in researching pertinent data. Through
surfing in the internet in various websites of the government and other
reliable non-government organizations, the researchers were able to get
secondary data to be subject for cross-validation.
VALIDATION OF THE INSTRUMENT
The secondary data garnered by the researchers are considered more
reliable given the fact that the sources of these records have already been
processed to alleviate fallacies and to accomplish authenticity.
DATA GATHERING PROCEDURE
The researchers endeavored to look for sufficient data from various
websites of the government such as the National Statistics Commission
Board Office and the Bangko Sentral ng Pilipinas and even the nongovernment organizations like Trade Economics. Com and Worldbank.org.

The researchers gathered the required data from June up to July of 2014 and
this duration gave them enough time to gather sufficient data.
STATISTICAL TREATMENT OF DATA
To yield meaningful information from the data gathered from various
sources that can lead to the deeper analysis of the processed data, the
researchers used the Econometric Views (EViews).

After the data are

collected, the researches face the task of converting numbers into

assertions; they must find a way to choose among the hypotheses the one
closest to the truth. Statistical tests are the preferred way to do this, and
software programs like EViews make performing these tests much easier.
EViews organizes data, graphs, output, and so forth, as objects. Each of
these objects used for further analysis. EViews is a powerful program which
provides many ways to rapidly examine data and test scientific hunches. It
can produce basic descriptive statistics, such as averages and frequencies,
as well as advanced tests such as time-series analysis and multivariate
analysis. The program also is capable of producing high-quality graphs and
tables. Knowing how to make the program work for you now will make future
work in independent research projects and beyond much easier and more
sophisticated.

CHAPTER 4
PRESENTATION, ANALYSIS, AND INTERPPRETATION OF DATA
This chapter presents the findings obtained from the primary
instrument used in the study. It shall discuss the results obtain from the data
processed through Eviews to come up with precise conclusion regarding the
problem. In order to simplify the discussions, the researcher provided tables
and

graphs.

Presented below is the result from Eviews to answer the question, if

there is a significant relationship between the inflation rate and Gross
Domestic Product growth rate in the short run basis.

The table above shows that R-squared obtain from the short run data is
0.100847 which means the variance of Gross Domestic Product growth rate
can be explain by inflation rate by 10%. This entails that the model has a
very small capability to fit and explain the relationship between the
independent variable which is the inflation rate and the dependent variable
which is the Gross Domestic Product growth rate. Inflations coefficient is
0.623 connotes that there is a positive relationship between the two
variables but since the r-squared is low, its positive relationship is less
significant. T- statistics probability is 0.44 and is less than 5% which indicate
that the first null hypothesis is rejected, GDP growth rate and inflation rate
has significant relationship and the 0.82 of the T-statistics means that the
even theres a positive relationship among the two variable, but still it has a
minor effect. Moreover, the F-statistics probability, 0.443, which is less than
5%, denotes that the independent variable influence the dependent variable
and since the value of F-statistics is 0.64, inflation rate can influence GDP
growth rate by 64%. Given that the result is significant, the null hypothesis is
rejected.
Short Run Model

The table above containing the results obtain shows the model to be
used to prove if theres a relationship between the inflation rate and Gross
Domestic

Product

growth

rate.

After substituting the inflation rate to the model, the result obtain in
which was presented on the previous page show that if there is direct
relationship between the independent and dependent variable it is very little
that it is neglected and assume to be less significant, which proves that there
is significant relationship between inflation rate and GDP growth rate.

Following is the presentation of the table of the long run result

processed from data dated from 1984-2013 through Eviews.

The table shows that the R-squared is .566 which denotes that the
model fitted good to explain the relationship of the independent variable and
dependent variable since the result obtain is near 60% that set as the
benchmark of being the best model. T-statistics probability is zero and is less
than 5% percent thus; the second null hypothesis is rejected. The -6.0448
value of T-statistics tells that the inflation rate negatively explains the GDP
growth rate. The coefficient -.0284 means there is a negative relationship
between the inflation rate and GDP growth rate. On the other hand, the Pvalue of F-statistics is 0.00002, less than 5%, indicates that there is a
significant relationship between the inflation rate and GDP growth rate and
IR
rate

can

influence GDP growth

by

36.54 as stated in F-

statistics.
Long

run

Model

The table shows the model to be used to prove the negative

relationship between the inflation rate and GDP growth rate in the long run.
IR
53.3
17.6
3
7.5
9.6
9
13
16.5
7.9
6.8
10
7.6
7.7
6.2
22.4
6.6
5.7
5.5
4.2
3.2
5.5
5.8
4.9
3.1
7.5

GDP
-9.198550145
5.950656513
5.097980716
3.818967021
3.222093963
3.392629122
2.25572806
1.26093963
3.705276915
4.017924707
3.108403857
3.790544494
3.762121968
4.188459866
-0.415989437
4.07476976
4.330572499
4.387417552
4.756910397
5.041135663
4.387417552
4.302149972
4.557952711
5.06955819
3.818967021

2.8
4.2
4
1.9
2

5.154825769
4.756910397
4.813755451
5.410628508
5.382205982

The result obtain by substituting the value of inflation rate indicates

that there is a negative relationship between the inflation rate and GDP
growth rate. For instance, if the inflation rate is 53.33% its equivalent GDP
growth rate is -19.20 and if the IR is 1.9% the GDP is 5.41. This result entails
that a large increase in the inflation rate gives a large decrease on the
growth rate in the economy. This proves that there is a significant
relationship between inflation rate and Gross Domestic Product growth rate
in the long run.

CHAPTER 5
SUMMARY OF FINDINGS AND CONCLUSION

The very purpose of this study is to determine the effect of inflation on

economic growth. The results were accumulated by conducting least-square
estimation of inflation and Gross Domestic Product growth rate through Eviews 7.
The main objective has been to indicate whether the general increase in prices of
commodities could or could not hamper the growth of the economy in the short-run
and long-run period. This chapter will report the conclusion reached from the
conduct of this undertaking.

The results suggested that in the long-run, inflation imposes a significant

negative effect on GDP growth rate. When inflation soars, GDP growth rate will be at
its bottom. In converse, when inflation resorts in low level, GDP growth rate will
ascend. As it were, Aggregate Demand falls as inflation rises since it lowers the
level of consumer spending, investment and exports.
This assertion was corroborated by reasonably high result of R-Squared, which is
57%, and the calculation of probability, with 0%, presenting a significant
relationship between the variables used, Inflation and GDP growth rate.
A sustained rise in the general price level can do economic damage by
distorting

consumption

decisions.

Distortions

result

from

households

and

businesses uncertainty about inflations future course. Inflation makes goods

produced in the Philippines more expensive, towing exports to decrease. Yet it
causes imports to increase by making goods made abroad less expensive. Also, this
occurrence poses a stealth threat to investors because it chips away at real

savings and investment returns. Most investors aim to increase their longterm purchasing power. Inflation puts this goal at risk because investment
returns must first keep up with the rate of inflation in order to increase real
purchasing power.
On the other hand, the obtained outcome of the estimation has shown that
inflation prompts substantial growth in the short-run. Having an R-Squared of 10%,
it is understood that growth could be explained by the hike in prices of
commodities.
The rationale of this finding could be explained by building up of output, with
the producers having the myopia that they will be gaining more, believing that
prices of products would be high.
In conclusion, the researchers were able to recognize the weight of inflation rate
to both short-run and long-run period in the Philippine context. Though the said
phenomenon was proven not to be on the way of attaining growth in the short-run,
inflation should still be controlled for it deteriorates progress in the long-run.