Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
BY
ECO/010/01
SUPERVISOR
MOI UNIVERSITY
ELDORET.
DEGREE IN ECONOMICS.
© AUGUST 2005
DECLARATION
I declare that this is my original work, and it has not been submitted to any other institution
of higher learning.
Sign: Date:
This research dissertation has been submitted for examination with my approval as the
university supervisor.
Sign: Date:
i
DEDICATION
When there was darkness you held the candle for me to see,
Walking with me along the way, a journey that had ups and down,
ii
ACKNOWLEDGEMENT
The journey has been tough, from commencement to completion of this study; I received
tremendous help, cooperation, support and encouragement from different authorities, friends
and family. First of all, I express my deepest sense of gratitude to the authorities of Moi
I express my indebtness to my supervisor, Dr. P.L. Onsando under whose guidance I was
To the Economics department lecturers who have imparted in me the knowledge that I have.
Special thanks to Dr. M.M.M. Kadenyi, a mother, true friend and mentor who was there
when I was about to give up. Thank you for you great assistance, it is much less than you
deserve.
I would also like to record my appreciation to Rono who assisted me in typing this
manuscript. Friends like Sawe, Njuga, Sammy, Njiriri and many others who gave me hope
Last but not least to my family for their tireless efforts towards ensuring my academic
success. Their support financially, socially and emotionally was always there for me. While
This is all for you. It will not be an exaggeration to say that by thanking them am thanking
myself. To God is the glory for seeing me through the period of study.
iii
ABSTRACT
two other variables; unemployment and inflation tells us about other important aspects of
Inflation affects a country’s growth, which may slow the rising trends of the economy.
Inflation will determine the general price level in the economy and therefore of much
Unemployment rate is the ratio of the number of people who are unemployed to the number
of people in the labour force. Why care about unemployment? It is an indication of whether
the economy is operating above or below its normal level of activity. In addition it is often
associated with social consequences and affects the welfare of the unemployed.
Over the period between 1995 and 2004, the economy has shown mixed signals (no general
trend of increase in growth or decrease). This is also the case for inflation where in one
The research is an investigation into the effect of inflation and unemployment on economic
growth over the period. The findings of this paper indicate that there is a negative
The government should come up with the necessary policies to counter the negative effects
of unemployment and inflation on economic growth. There are positive signs of economic
growth while unemployment rate is decreasing with lower levels expected in future.
iv
TABLE OF CONTENTS
Declaration i
Dedication ii
Acknowledgement iii
Abstract iv
List of acronyms vi
List of figures vii
CHAPTER ONE 1
1.0. INTRODUCTION 1
1.1. Background of the Problem 1
1.2. Statement of the Problem 2
1.3. Statement of Objectives 3
1.3.1. Broad Objective 3
1.3.2. Specific Objectives 3
1.4. Statement of Hypothesis 4
1.5. Justification of the Study 4
CHAPTER TWO 6
2.0. LITERATURE REVIEW 6
CHAPTER THREE 11
3.0. RESEARCH METHODOLOGY 11
3.1. Research Design 11
3.2. Sampling Design 11
3.3. Data Collection 12
3.3.1. Secondary Data 12
3.4. Data Presentation and Analysis 12
3.4.1. Conceptual Framework 12
CHAPTER FOUR 14
4.0.0. DATA ANALYSIS 14
4.1.0. Inflation, Unemployment and Economic Growth over the Period 14
4.2.1. The Regression Model 16
4.2.2. Trend Analysis 18
CHAPTER FIVE 21
5.0.0. FINDINGS, CONCLUSION AND RECOMMENDATIONS 21
5.1. Findings 21
5.2. Conclusion 22
5.3. Recommendations 23
Limitations of the Study 24
REFERENCES 25
APPENDICES 26
APPENDIX I 26
APPENDIX II 33
v
LIST OF ACRONYMS
CBS – Central Bureau of Statistics
vi
LIST OF FIGURES
Table 4.1. Summary of Inflation rate, Unemployment rate and the Real GDP growth rate between
vii
CHAPTER ONE
1.0. INTRODUCTION
The recently presented Kenyan budget did not state the rate of monetary expansion to be
targeted. The monetary expansion rate determines the inflation rate in a country. With
reported growth in the economy in the year ended July 2004 to June 2005, the Kenyan
economy grew by 4.6%. The budget was presented as a poor man’s budget, however,
inflation ends up hurting the poor most in present day Kenya and they too feel the pinch of
unemployment.
Inflation is a continuous increase in the price level, sustained over a period of time. Inflation
may be caused by a continuous increase in the supply of money, a continuous decrease in the
demand for money, or a combination of the two. Government might very well and often do
increase the money supply continuously. If the demand for money were fixed, then the price
level would grow at the same rate as money supply. Rising real incomes usually cause the
demand for money to rise over time. This tempers the inflationary effect of money supply
growth, and so the price level typically grows more slowly than the money supply. Even so, a
higher rate of money supply growth is expected to cause a higher rate of inflation.
The term unemployment does not necessarily mean the number of people who are without
employment. The unemployment rate is the percentage of the labour force that is without
unemployment that occurs because individuals choose not to accept available jobs at the
current wage rate, and involuntary unemployment, which is as a result of the quantity of
labour, supplied exceeding the quantity demanded for labour at the going wage rate.
1
Unemployment can be further divided into cyclical unemployment, frictional unemployment,
Full employment is achieved when everyone who is willing to work and is able to work has a
job. This state of economy is hard to achieve. Serious unemployment must be avoided
because of its economic consequences for the total economy and the hardships it brings to
Inflation and unemployment are normally referred to as the twin evils and have detriments to
the economy.
In the calculation of GDP, most economists do not account for the effects of inflation and
unemployment on the overall performance of the economy. Economic growth has been
pegged to the GDP measure; a measure of output to evaluate the state of the economy.
National income accounts are a measure of output in terms of prices. In determining the
market prices, National income accounts do not factor in the effect of inflation on the prices
of goods and services. For example, if the cost for a packet of Unga between the year 2003
and 2004 rose by Kshs.10, will this increase be due to economic growth especially in the
Thus, an increase in prices may reflect an increase in output, which will be reflected in the
increased GDP amount holding inflation constant which in not the case.
Inflation is computed separately mainly through the consumer Price Index (CPI) and the
2
Employment contributes towards the overall calculation of the GDP in terms of wages and in
some cases man-hours used in production processes. However, the effects of unemployment
are more severe on the economy in that it reduces the amount of disposable income being
The unemployment ratio is mainly used to describe the hardships of the people who are
willing to work and are actually striving to do so. Their effect on the economic growth model
Since inflation and unemployment affect the general economic behaviour, a more
• To understand and explain the factors that contribute to the behaviour of the
economic growth model of Kenya from 1995 to the year 2004 and study the effects
• To study and explain how inflation affects the growth rate of the economy through
3
• To analyze and determine the relationship between inflation, unemployment and
• High rate of inflation and unemployment leads to a low growth rate of the
economy.
• High rates of economic growth are not as a result of low levels of inflation and
unemployment.
Inflation and unemployment are referred to as the two evils of the economy. Though not
tangible, they affect the majority of the population. Its effects are felt directly by all persons
ranging from the rich and more so among the poor of the population. Unemployment is
chronic and intractable in nearly every developing country. Unemployment rates in Kenya
have held the two-digit percentage over the period under study (1990-2004).
The relationship between inflation and unemployment affect the other and hence, it is only
proper to consider their total effects on the economic growth of a country. An analysis of
both helps in the development of a monetary policy that will assist in achieving a positive
Inflation and unemployment cannot be cured simply by accelerating growth. More so, their
4
As long as unemployment and inflation exists, it will be a precursor to multiple economic
problems. For example, increased inflation rates lead to a reduction in the purchasing power
of households hence a reduction in aggregate demand. High levels leads to low incomes,
This study aims at helping understand and find solutions to the twin problems of inflation
5
CHAPTER TWO
National income accounts and other related accounts do not cover all of the important
measures of economic performance. Inflation and unemployment are not only more visible to
unsophiscated observers, but they have formed the basis of most policy initiative of many
Inflation is measured by a price index that is not part of the accounts, though it is closely
related to most components of the national income accounts like consumption levels.
The above sentiments further highlight the point that, in the computation of national income
mainly given in terms of output (GNP does not consider inflation and unemployment),
ignorant of the fact that they affect the whole economy both directly and indirectly.
Both inflation and unemployment are economic problems that affect the trend of economic
activities. The trend of inflation and unemployment in an economy will determine future
“When making decisions, people think about the future, and their expectations of the
future can be modeled by assuming that they have a sense of economic fluctuations
and use their information to make unbiased (but not error-free) forecasts.”1
Economic fluctuations like inflation and unemployment are recurrent from one business
cycle to another and hence need to be considered in dealing with overall economic
performance of Kenya.
1
Robert E. Hall and John B. Taylor, Macroeconomics: Theory, Performance and Policy, pg.478.
6
Macro policy makers try to achieve the best combination of employment and inflation for an
economy. This means that, though not reflected in the overall GNP figure annually and hence
avoided in deciding the level of economic growth, inflation and unemployment are still
Inflation is measured as a rate of change in price index from one period to the next.2 Inflation
is not an increase in all prices. it is instead, an increase in the general level of price and
costs. Deflation is exactly the opposite, and disinflation is a reduction in the rate of inflation.
The rate of inflation is the percentage change in the average price of all goods in the
economy.
Inflation is defined as a time of generally rising prices for goods and factors of production.
In any economy inflation is undesirable. This is because of the specific economic costs
associated with inflation. First, when inflation is high, currency and non-interest-bearing
checking accounts are undesirable because they are constantly declining in purchasing
power. Secondly, there are tax distortions, for example, when inflation rages, the actual value
of these deductions are much less than it should actually be. There are also unfair gains and
losses. When inflation hits, some people gain and some lose for example people whose
stable unit of purchasing power. Some people may not understand the relation between their
own incomes and rising prices. To them, higher prices represent diminished real income.
The marginal social cost of unemployment is higher when unemployment is high. Since
labour supply is inelastic, the marginal value of time in other uses falls if unemployment
rises, and rises if unemployment falls below normal levels. Therefore, the economy is better
2
Gary W. Yohe, Study Guide to Accompany Samuelson-Nordhaus Macroeconomics.
7
off with stable output at optimal employment level, as against fluctuating output and
Economists are quick to recall Okun’s Law when they are asked to evaluate the economic
Okun’s Law says that, for each percentage point by which the unemployment rate is above
the natural rate, real GNP is 3 percent below potential GNP. The percentage of GNP from
departures of real GNP from potential GNP. The slope of the relationship is roughly 3
Gary W. Hoye (Ibid) notes, Economists are quick to recall Okun’s Law when they are asked
to evaluate the economic cost of unemployment. These loses are astronomical when they are
compared with the efficiency costs of monopoly and other forms of imperfect competition,
the costs of strict environmental controls or even the estimate waste in government spending.
Nonetheless, it misses the human cost: the cost of repairs when homes are broken by the
unemployed people, anguish of workers in thousands who show up to any interview among
others. To him, unemployment is one of those topics that bring dismal science out of the
This is to mean, even the unemployment figures have shortcomings in themselves and hence
Studies that have been made on inflation and unemployment on the same analysis mainly
centre on the trade-off between inflation and unemployment giving the Phillips-curve
3
Robert E. Hall and John B. Taylor, pg.60.
8
analysis. The Phillips-curve analysis however will hold only when unemployment is below
the natural rate, which is hard to achieve by many countries especially in LDCs and
At the natural rate of unemployment and the inertial rate of inflation in short and long-run
curves, unemployment rates lower than the natural rate are associated with inflation above
Inertial inflation is expected and sustained because it is built into contracts and other
financial agreements. Inertial inflation therefore reflects an internal rate of inflation with
which an economy seems to be comfortable. Individuals expect it, and expectations tend to
There are various types of inflation. Demand-pull inflation is the result of excessive
aggregate demand and can be associated with higher levels of real as well as nominal GNP.
Cost-push inflation is caused by increased costs, which push aggregate supply up; it is
therefore associated with lower levels of real GNP, nominal GNP can be higher or lower.
Modern theory suggests that there is no trade-off between inflation and unemployment in the
long-run; the long-run Phillips curve is therefore vertical at the natural rate of
unemployment.5 No economy has yet managed to maintain full employment over long
It is not easy to measure the precise amount of impact of or arising from higher inflation
experienced among population in their respective income groups. Higher inflation stems
from higher prices of goods and services consumed across the economy. [Central Bank of
Kenya.]
4
Ibid, pg.175.
5
Ibid, pg.181.
9
The Kenyan overall inflation in the month of May 2005, overall inflation has been on a rising
trend due to several factors, which include; development in food prices, development in
energy costs, lagged effects of monetary expansion and high increases in wages.6
Similarly, the unemployment levels have been on the rise. More so, the Kenyan economy has
unemployment and economic growth though not directly can be put in economic terms. High
6
CBK Monthly Review, May 2005.
7
Economic Survey 2005.
10
CHAPTER THREE
This research seeks to explain a casual relationship between inflation, unemployment and the
secondary data giving annual figures of the dependent and independent variables in the
model. The data is used to develop, and prove the reliability of the model hence assist in the
The annual inflation rate is generated by the Central Bank of Kenya and published in its
Annual Report of 2004. To give a nationwide outlook, the implicit price deflator is used. The
unemployment rate is generated from employment figures in the Annual Statistical Abstract8
by the Central Bureau of Statistics and the working population figures from the Kenya
Economic growth rate is as presented in the Kenya Economic Survey by the Central Bureau
of Statistics.
A 10-year period between 1995 and 2004 was selected on which the research was based. The
period between 1995 and 2004 is representative enough in analyzing the relationship that is
The period between 1995 and 2004 to consist of sample data has undergone several phases
like economic recovery just after the 1992 general elections, a stagnant period between 1997
8
CBS, Statistical Abstract 2004.
11
and 1999, and a recession period, which was heavily felt in 2000. The economy has been on
Data collected for the research was from secondary sources mainly found in official
government publications and other government departments like the Central Bank of Kenya.
Secondary data was useful in building the regression model and conducting tests thereon.
This research set out to investigate the effect of inflation and unemployment on economic
Y = b0 + b1 X 1 + b2 X 2 + u
Where;
12
X2 is the unemployment rate
It is assumed that the random variable U has a normal distribution with zero mean;
Ε(u ) = 0
Y = b0 + b1 X 1 + b2 X 2
The significance of the model was determined by testing for the variation in Y as explained
The student t-test is conducted on the variables to determine the significance of the variables
in the model.
13
CHAPTER FOUR
Over the 10-year period from 1995 to 2004, the growth rate of the economy did not show a
steady or regular pattern. In the year 1995 and 1996, the rate of economic growth in real
GDP was 4.8% and 4.6% respectively. This is the highest growth recorded over the period.
However, in the year 1997, the growth rate went to dismal levels of 0.5% and this may be
attributed to being a period when general elections were being held, then the government was
The lowest level of economic growth to be achieved in Kenya economy was in the year 2000
with a real GDP growth rate of 0.2% but rose in following years to 4.3% in 2004.
The unemployment level in Kenya has been very high. Nearly half the Kenyan population is
unemployed.9 The available statistics show that, unemployment was higher between 1997
and 2002 but the unemployment was higher between 1997 and 2002, but began falling in the
years 2003 and 2004. This may be attributed to the various policies initiated by the new
opportunities – ‘500000 job opportunities per year’ – and focusing on economic growth. Still
unemployment levels are still high with structural unemployment being rampant in Kenya as
The inflation rate has generally been maintained at one figure level. Between 1995 and 1996,
the government was able to confine underlying inflation within the single digit range. This
was mainly due to tight monetary policy introduction by the Central bank of Kenya.
9
The employment figures in the Statistical Abstract published by the CBS include casual workers, part-time
employees, part-time workers, directors and partners serving on a regular basic salary contract. A portion of
self-employed persons and family workers who do not receive regular wages are excluded. Also excluded are
employment from informal sector, rural small-scale agriculture and pastoralists activities.
14
However, in 1997, inflation shot up to 11.9%, reason being that it was period when general
elections were held in Kenya, there were cases of bribery and excess circulation of liquid
Higher inflation is also seen in the year 2000 and in the year 2004, mainly being as a result of
Table 4.1. Summary of Inflation rate, Unemployment rate and the Real GDP growth rate between
High rates of unemployment over the period may be attributed to a previous high population
growth rate, coupled with lack of opportunities for employment. In the year 2001,
investments were low and many companies were closing down moving out of the country
and relocating to other areas with cheap operating costs. For example, World Hope
organization closed its HQs in Kenya and relocated to Tanzania citing high costs of
operation. In addition, due to political uncertainty, investment level was very low.
10
See footnote 11.
15
4.2.1. The Regression Model
b0= -8.68
b1= -0.232
b2= -0.27
Y=-8.68-0.232X1-0.27X2
11
See Appendix
16
This true regression model shows both inflation and unemployment have an indirect
relationship with the real growth of the economy, that is, the real GDP growth rate.
This means that an increase in inflation and unemployment will lead to a decrease in the level
of economic growth.
-1.96<tc<1.96
For b0, b1 and b2, they all fall in the critical region with the value of –0.751, 1.013 and 1.607
respectively. With the tc falling in the acceptance region i.e. –t0.025<tc<t0.025, we accept the null
hypothesis and conclude that the variables are not significant in explaining the model. This
means the t-test shows there is casual relationship between inflation rate, unemployment rate
12
See Appendix
17
GRAPH 1: INFLATION, UNEMPLOYMENT AND GDP GROWTH VERSUS TIME
70
INFLATION , UNEMPLOYMENT, REAL GDP
UNEMPLOYMENT
60
50
GROWTH (%)
40
30
20
INFLATIO
N
10 REAL
GDP
0 GROWT
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
YEARS
Over the period [1995-2004], unemployment rates have remained at high levels. Between
1997 and 2003, unemployment rates remained stable at high levels. The rates of
unemployment however began to fall from the year 2003 to lower levels in 2004.
Inflation has also remained at higher levels than real GDP growth. Inflation was high in 1997
and in 2000 and lowest in the year 2002. Since 2002 to 2004, inflation has been on the rise
with higher levels projected in 2005. Overall inflation has been on a rising trend since the
year 2000. The rising trend in overall inflation is due to the following:
• Developments in food prices: delayed rains in the 2000 and 2001 put pressure on
the prices of basic foodstuffs such as vegetables and fruits thereby pushing up the
food basket prices. In addition, the recent sugar shortage contributed to the
18
• Developments in energy costs: oil prices have remained consistently high, in the
range of US$ 55-60 per barrel in the international market, thereby resulting in
higher pump-fuel prices in the domestic economy. The high oil prices also imply
higher transport costs and higher costs for commodities whose production uses oil
as an input.
• Demand pressures arising from huge increases in wages, especially in the public
sector (teachers, nurses, the police, members of parliament, the Judiciary and other
government officers).
Real GDP growth at low levels over the period with the lowest level in 200 at 0.2 % . From
the year 2002 to 2004, GDP growth in increasing with a higher level of expected in the year
2005.
An increase in real GDP growth rate is accompanied by an increase in inflation rate. This is
observed between the years 2002 to 2004.
There is no linear relationship that can be easily denoted or graphed out of the data collected.
This shows that, the relationship that is between inflation rate, unemployment rate and real
GDP growth rate is not a linear one. This is seen if each variable is plotted against GDP
growth rate, the points are scattered on the grid as shown in the graphs below.
19
Graph 2: Inflation Rate and GDP growth Rate
14
12
10
Inflation (%)
8
6
2
0
0 1 2 3 4 5 6
GDP growth (%)
52
51
Unemployment Rate (%)
50
49
48
47
46
45
44
43
0 1 2 3 4 5 6
GDP growth (% )
20
CHAPTER FIVE
5.1. Findings
The basic economic model for the relationship between inflation, unemployment and
Inflation and unemployment rates account for 30.4% of the changes in economic growth. The
variables are not very significant in determining the model of economic growth.
Over the period from 1995 to the year 2004, the unemployment rates remained at high levels.
Variations in unemployment remained low. In trend analysis, from 1997 to 2002, the rates of
unemployment remained at near constant level but at very high rates. Slight decreases are
With high levels of unemployment rate and inflation, economic growth still remains at low
levels. Increase in the real GDP growth does not correspond to decreases in inflation and
unemployment rates.
Between the year 2002 and 2004, an increase in real GDP growth rate related to an increase
in inflation but during the same period there was a decrease in unemployment rate.
From 1996 to 1998, the relationship merely holds where economic growth rate corresponds
to an increase in inflation but a decrease in the unemployment rate. However, the real casual
relationship is mainly affected by the fact that, the government has not taken major steps to
21
ensure a constant move in the economic growth pattern. One period of economic increase
unemployment are eminent but an increase in the levels of inflation. This is seen between
2003 and 2004 and in the projections for the year 2005. The inverse relationship however
5.2. Conclusion
In this analysis of effects of inflation and unemployment on economic growth, though not
clearly shown, a relationship still exists between the three variables. More so, the effects
cannot be ignored by the policy makers when coming-up with the right fiscal and monetary
It is not easy to measure the precise amount of impact arising from higher inflation
experienced among different income groups. This is because, as noted, higher inflation
stemmed from higher prices of goods and services consumed across the income divide. Fuel,
energy, and food items are the best examples of these commodities. Residents in urban
centers doubtlessly suffered most considering the range of fuel, energy and transportation
goods and services at their disposal relative to residents in rural area. This contributes to what
distorts the relationship between inflation, unemployment and economic growth. Currently
the economy is on a recovery model. However, changes in the crude oil prices pushers up the
prices of basic commodities and services like transport. This has the effect of a high inflation
in the economy
22
Lack of data for some of the variables like the unemployment statistics will mean that some
vital element of the model are excluded which makes the model less reliable.
Economic theory will mainly hold in normal circumstances like the full employment level or
at the natural rate of unemployment. In extreme cases mainly facing developing nations like
Kenya, there are high levels of unemployment, inflation is high and fluctuating and the levels
of economic growth are extremely low. This makes it hard for economic models to hold in
In the case of Kenya, the relationship may be best understood with the use of trend analysis
rather than using a linear regression model. High levels of unemployment and inflation have
that economic growth rate is or remains at very low levels. Decrease in inflation and
unemployment does not necessarily mean an increase in the level of economic growth.
On a general level, for the economy to grow, there is need for a decrease in the levels of
unemployment and inflation rates. A good working economy corresponds to low levels of
5.3. Recommendations
establish the real relationship that exists between unemployment, inflation and
economic growth.
should be inclusive of all employment people. This will help in determining the real
23
Limitations of the Study
1. Data Collection
Relying on secondary data also mean that any error in the source will also be carried out in
the research. That is, errors and assumptions not disclosed in the source document will also
reoccur in the research. For example, unemployment data is not inclusive of data from all
Non-availability of data like the unemployment statistics means that using a combination of
data like employment levels from the Statistical Abstract and working population data from
2. Assumptions
Economic growth rate is affected by many factors. These include foreign investment,
without of holding employment constant will have the effect of affecting economic growth.
The ceteris paribus, taking only inflation rate and unemployment rate in coming up with a
causal relationship leads to a weak model. In this case, the random variable u is significant.
Thus,
Ε(u ) ≠ 0
Ε(u ) = 0
24
Most economic studies conducted inflation, unemployment and economic growth have not
been done on the twin effects of inflation and unemployment on economic growth.
The research attempts to come up with the model and thus a new concept in the study of
economics. There exists no previous model to base the study upon and hence act as a
4. Time
The research was conducted over a short period of time. Data collection had to be limited
and verification of the collected data being near impossible. Reliability depends on the source
of the data.
5. Lack of Resources.
Lack of resources limited the researcher to use other forms of collecting data like
questionnaires and interviews with people who are knowledgeable on the areas of inflation,
25
APPENDICES
APPENDIX I
Mean;
Y =
∑Y
n
27 .4
=
10
2.74%
Y =
∑X 1
76 .3
=
10
= 7.63%
X2 =
∑X 2
488 .5
X2 =
10
= 48.85%
ˆ (∑ y1 x1 ∑ x22 ) − (∑ y1 x2 ∑ x1 x2 )
b1 =
∑ x12 ∑ x22 − (∑ x1 x2 ) 2
−1224 .54465
=
5281 .8611
26
=-0.232
(∑ y1 x2 ∑ x12 ) − (∑ y1 x1 ∑ x1 x2 )
bˆ2 =
∑ x12 ∑ x22 − (∑ x1 x2 ) 2
−1427 .2587
=
5281 .8611
=-0.27
=-8.86
7.334
=
28 .124
=0.304
=30.4%
Ry1 x1 = ∑x y 1 1
(∑ x ∑ y
2 2
1 1
18 .962
=
(101 .624 x 28 .124 )
27
18962
= =0.355
53 .46
bˆ1 ∑x1 y1
Ry 1 x 2 =
(∑x 22 ∑ y12 )
10 .87
=
(94 .825 x 28 .124 )
10 .87
=
30 .267
=0.277
=27.7%
δ =∑
2
2 e 1
n−k
u
But ∑e 2
1
= ∑ y1 (1 − R 2 )
Then δ u2 =
∑ y (1 − R
1
2
)
n−k
27 .4(1 − 0.304 )
=
10 − 3
=2.724
δ =∑
2
2 e 1
n−k
u
ˆ
2 1
X 12 ∑ 22 + x 2 ∑ x12 − 2 x1 x2 ∑ x1 x2
b0 = δ u +
n ∑ x12 ∑ x22 − (∑ x1 x2 ) 2
28
ˆ 1 [( 7.63) 2 (54 .825 )] + [( 48 .85) 2 (101 .621)] − [ 2 x 7.63 x 48 .85 x − 17 .015 ]
var b0 = 2.724 +
10 [(101 .621)(54 .825 )] − (17 .015 ) 2
1 258376 .07
= 2.724 +
10 5281 .861
= 2.724 x 49 .018
=1.33 .525
Standard Deviation;
= 133 .525
=11 .555
ˆ
Var b1 = δ u
2
∑ x12
2
∑ x1 ∑ x2 − (∑ x1 x2 )
2 2
= 0.0524
= 0.0524 = 0.229
29
∑ X 22
ˆ
Var b2 = δ u
2
2
∑ X 1 ∑ X 2 − (∑ X 1 ∑ X 2 )
2 2
=0.0283
= 0.0283
=0.168
H 0 : bˆ0 = 0
H 1 : bˆ0 ≠ 0
bˆ0
tc =
S (bˆ0 )
−8.68
=
11 .555
= −0.751
30
ˆ;
Hypothesis testing for b1
H 0 : bˆ1 = 0
H 1 : bˆ1 ≠ 0
bˆ1
tc =
S (bˆ1 )
− 0.232
=
0.229
=-1.013
H 0 : bˆ2 = 0
H 1 : bˆ2 ≠ 0
bˆ2
tc =
S (bˆ2 )
− 0.27
=
0.168
=-1.607
31
APPENDIX II
32
REFERENCES
6. Moguru Tom, “Inflation Threatens Growth Forecast” in, The Standard Business, Friday
7. Robert E.H. and John B.T. Macroeconomics: Theory, Performance and Policy, New York,
9. Shapiro Edward, Macroeconomic Analysis, 5th Ed, 1992, New York Golgotia Publications,
pvt. Ltd.
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