Part A

Yi= 1 + 2X2+ 3X3 + 4X4 +i

Let Yi= Gross domestic product, GDP

X2= Consumer price index, CPI

X3= Birth rate

X4= Lending interest rate

Note: All references are made in regard to the country of Japan.

Relationship between Yi and X2

There is a negative relationship between gross domestic product (GDP) and consumer
price index (CPI). Consumer Price Index (CPI) defined as the current prices of goods and
services in terms of the prices during the same period of time in the previous year in
order to show the effect of inflation on consumers purchasing power. The higher the
consumer price index (CPI), the higher the inflation. In extension, inflation will slow
down the growth of gross domestic product (GDP).

Relationship between Yi and X3

Birth Rate Crude per 1000 people means that the ratio of total live births to the total
population in a certain area over a period of time and expressed as the number of live
births per 1000 of the total population per year. There is a negative relationship between
gross domestic product (GDP) and birth rate. The lower the birth rate, the higher the
gross domestic product (GDP). When the income of the populace is low, the birth rate of
population is high. In contrast, when the income of population is high, the birth rate of
population is low. Historically, Japan has always faced a declining birth rate since the
postwar period (Yashiro, N., 1998). This occurrence, where a culture of work has resulted
in higher productivity and less marriages and offspring, has resulted in the above
relationship.
Relationship between Yi and X4

In Japan, the Long Term Prime Rate (lending interest rate) is the average rate of interest
charged on loans by commercial banks to private individuals and companies, in essence,
lending rates to the private sector. There is a positive relationship between gross domestic
product (GDP) and lending interest rate. The higher the lending interest rate, the higher
the gross domestic product (GDP). The increases of gross domestic product of a country
will lead the increases of economys wealth and individuals wealth. So, the amount of
money supply in market increases and it will cause the lending interest rate decreases at
the same time.
Part B

Dependent Variable: GDP

Method: Least Squares
Date: 08/12/15 Time: 13:38
Sample: 1 49
Included observations: 49

Variable Coefficient Std. Error t-Statistic Prob.

C 22.57553 8.101767 2.786494 0.0078

CPI -0.156945 0.048915 -3.208503 0.0025
BIRTH RATE CRUDE
PER100 PEOPLE -0.691342 0.393490 -1.756947 0.0857
LENDING INTEREST
RATE 0.371898 0.262838 1.414933 0.1640

R-squared 0.467428 Mean dependent var 3.378078

Adjusted R-squared 0.431923 S.D. dependent var 3.676425
S.E. of regression 2.770953 Akaike info criterion 4.954367
Sum squared resid 345.5181 Schwarz criterion 5.108801
Log likelihood -117.3820 Hannan-Quinn criter. 5.012959
F-statistic 13.16521 Durbin-Watson stat 1.781105
Prob(F-statistic) 0.000003

BIRTH RATE
CONSUMER CRUDE PER 1000 LENDING
GDP PRICE INDEX PEOPLE INTEREST RATE
Mean 3.378078 80.27110 12.24749 5.022608
Median 2.831077 91.71667 10.20000 6.020167
Maximum 12.88247 103.7083 19.40000 9.113333
Minimum -5.526976 25.04614 8.200000 1.303750
Std. Dev. 3.676425 26.83973 3.858072 2.649344
Skewness 0.601126 -1.004729 0.760590 -0.169159
Kurtosis 3.721931 2.465641 2.080919 1.396742

Jarque-Bera 4.015129 8.827072 6.449004 5.481658

Probability 0.134315 0.012112 0.039776 0.064517

Sum 165.5258 3933.284 600.1269 246.1078

Sum Sq. Dev. 648.7727 34577.81 714.4665 336.9131
 Observations 49 49 49 49

According to the table above, the descriptive statistics that we found include:
mean, median, standard deviation and skewness. Calculations were made on a time series
collection of data from the World Bank Database, ranging from the years 1965 to 2013.

Mean refers to the average of the total numbers where the total is divided by the
number of numbers. The mean may not be a fair representation of the data because the
average is easily influenced by outliers. The means for GDP, Consumer Price Index
(CPI), Birth Rate Crude per 1000 people and Lending Interest Rate are 3.38, 80.27, 12.25
and 5.02 respectively. In Japans case, this particularly true for its birth rates since the
country has experienced a declining birth rate since the end of the Second World War.
Hence, the mean is not a reliable sum to estimate as the outliers involved are of two
extremes, namely the past (1965) and present (2013). This holds true for the other
independent variables also. For instance, the falling lending rates (Figure 1.5) reflects
Japans increasing economic wealth, while its CPI showed the increasing consumption of
goods and services by the Japanese public over time. However, the dependent variable
showed significant fluctuations. A priori, these fluctuations may well belong to economic
cycles. However, we cannot exclude certain structural changes for the dependent variable,
although it is out of the scope of this report.

In addition, median is defined as the middle value of the total numbers or the list
of number. Median for GDP is 2.83 while the median for Consumer Price Index (CPI) is
91.72. Birth Rate Crude per 1000 people has a median of 10.2 whereas Lending Interest
Rates median is 6.02. In extension, the median for Japan for all independent variables
can only provide a sketchy picture at best since Japan has undergone a huge economic
revival since its defeat in the war.

Besides, standard deviation is used to measure how spread out numbers are.
Based on the descriptive statistics table above, the standard deviation for GDP is 3.68
while for Consumer Price Index (CPI) is 26.84. Birth Rate Crude per 1000 people has
3.86 of standard deviation and 2.65 is the standard deviation of Lending Interest Rate.
Here we see a high standard deviation for CPI and similar figures for the rest. To take a
general picture, the increasing globalization has raised living standards, hence raising the
consumption of many necessities of life, since global prices have rose since the 1960s.
For the rest, Japans status as a developed nation has enabled it to encounter stable and
secure pathways of development denied other countries.

Furthermore, skewness refers to a measure of the degree of asymmetry of a

distribution. The negative skewness will occur when the left tail is more pronounced than
the right tail whereas the positive skewness will be formed if the right tail is more
pronounced than left tail. If the left tail and right tail are equal, zero skewness will be
formed. According to the table, GDP and Birth Rate Crude per 1000 people are positive
skewness as their skewness are 0.60 and 0.76 respectively. However, the skewness for
Consumer Price Index (CPI) and Lending Interest Rate are -1.00 and -0.17 respectively,
which mean that both are having negative skewness.
Part C

Dependent Variable: GDP_GROWTH

Method: Least Squares
Date: 08/13/15 Time: 10:12
Sample: 1 49
Included observations: 49

Variable Coefficient Std. Error t-Statistic Prob.

C 22.57553 8.101767 2.786494 0.0078

CONSUMER_PRICE_
INDEX -0.156945 0.048915 -3.208503 0.0025
BIRTH_RATE -0.691342 0.393490 -1.756947 0.0857
LENDING_INTEREST_
RATE 0.371898 0.262838 1.414933 0.1640

R-squared 0.467428 Mean dependent var 3.378078

Adjusted R-squared 0.431923 S.D. dependent var 3.676425
S.E. of regression 2.770953 Akaike info criterion 4.954367
Sum squared resid 345.5181 Schwarz criterion 5.108801
Log likelihood -117.3820 Hannan-Quinn criter. 5.012959
F-statistic 13.16521 Durbin-Watson stat 1.781105
Prob(F-statistic) 0.000003

BIRTH RATE
CONSUMER CRUDE PER 1000 LENDING
GDP PRICE INDEX PEOPLE INTEREST RATE
Mean 3.378078 80.27110 12.24749 5.022608
Median 2.831077 91.71667 10.20000 6.020167
Maximum 12.88247 103.7083 19.40000 9.113333
Minimum -5.526976 25.04614 8.200000 1.303750
Std. Dev. 3.676425 26.83973 3.858072 2.649344
Skewness 0.601126 -1.004729 0.760590 -0.169159
Kurtosis 3.721931 2.465641 2.080919 1.396742

Jarque-Bera 4.015129 8.827072 6.449004 5.481658

Probability 0.134315 0.012112 0.039776 0.064517

Sum 165.5258 3933.284 600.1269 246.1078

Sum Sq. Dev. 648.7727 34577.81 714.4665 336.9131

Observations 49 49 49 49
JB test

Step 1: State the null hypothesis and the alternative hypothesis

H0 : The error term is normally distributed

H1 : The error term is not normally distributed

Step 2: Select the level of significance

Significance level, = 0.05

Step 3: Find the critical value

2 2
Critical value: (,=2) = (0.05,=2)

= 5.991

Step 4: Decision rule

Decision rule: Reject H0 if the JB statistic is larger than the critical value, otherwise do
not rejectH0 .

Step 5: Determine the test statistic

2 (3)2
JB = n ( + )
6 24

1.004729 (2.465641)2
= 49 ( +
6 24

= 8.8249
Step 6: Decision making

Reject H0 , since the JB statistic (8.8249) is greater than the critical value (5.991).

Step 7: Draw a conclusion

The model did not meet the normality assumption on the error term.
F-test
Step 1: State the null hypothesis and the alternative hypothesis

Ho : 2 = 3= 4 = 0
H1 : At least one of the coefficient is different from 0.
Step 2: Select the level of significance

Significance level, = 0.05

Step 3: Find the critical value

F,k,n-k-1 = F0.05,3,49-3-1
= 2.84
Step 4: Decision rule

Reject Ho if the F test is greater than the critical value. Otherwise, do not reject Ho.
Step 5: Determine the test statistic

2 / 0.467428/3
= (12)/(1) = (10.467428)/(4931)

= 13.1699
Step 6: Decision making

Reject Ho. The F-test statistic (13.1699) is greater than critical value (2.84).
Step 7: Draw a conclusion

The model is significant to explain Y.

T-test
Dependent Variable: GDP_GROWTH
Method: Least Squares
Date: 08/14/15 Time: 21:08
Sample: 1 49
Included observations: 49

Variable Coefficient Std. Error t-Statistic Prob.

C 10.56304 1.278791 8.260177 0.0000

CONSUMER_PRICE_IND
EX -0.089509 0.015124 -5.918231 0.0000

R-squared 0.427007 Mean dependent var 3.378078

Adjusted R-squared 0.414816 S.D. dependent var 3.676425
S.E. of regression 2.812367 Akaike info criterion 4.945890
Sum squared resid 371.7421 Schwarz criterion 5.023107
Log likelihood -119.1743 Hannan-Quinn criter. 4.975186
F-statistic 35.02546 Durbin-Watson stat 1.614460
Prob(F-statistic) 0.000000

T-test
Step 1: State the null hypothesis and the alternative hypothesis

H0 : 2 = 0

H1 : 2 0

Step 2: Select the level of significance

Significance level, = 0.05

Step 3: Find the critical value

Critical value: , n-k-1 = 0.05 , 49-3-1 = 2.021

2 2

Step 4: Decision rule

Reject H0 , if the test statistic is greater than the upper critical value or smaller than the
lower critical value. Otherwise, do not reject H0 .
Step 5: Determine the test statistic

2 2 ) 2
(
Test statistic =

2 = ( )( )

2 (
2 )

0.089509(591.8672631) 3095.014001
= =
2.8123672 34577.81338

52.97744685
= = -0.089509
2.8123672

= -6.69802922

Step 6: Decision making

Reject H0 , since the test statistic (-6.69802922) is smaller than the lower critical value
(-2.021).

Step 7: Draw a conclusion

There is sufficient evidence to conclude that there is significance relation between

consumer price index (X) and GDP growth (Y) at = 0.05.
Part D

This research is made in regards to the effect of three variables, namely CPI, birth
rate, and lending rate on the GDP growth of Japan. A regression model was constructed
on a sample of 49 time series data from the years 1965 to 2013. We have chosen to focus
on the effect of CPI on GDP growth alone; an overall model is included for general
reference. For the sake of simplicity, we choose to ignore any underlying economic
changes. The time interval, we trust, will be able to show the changing trends of CPI and
GDP growth.

In almost half a century, Japan has seen an increase in lending rates, while its
GDP growth has remained relatively stable (Figure 1.6). Although the independent
variable has been shown to be significant in relation to Y, however, the assumption on
normality was not met, hinting that the presence of other factors exerting influence on Y.
Nevertheless, the results drawn is in agreement, a priori, about the negative relationship
between lending rates and growth as pointed out by Carlo DAdda and Antonello E.
Scorcu in their paper. However, other interpretations are possible; for example, the view
expressed by Sheng (2009), that the rising lending rates drove Japanese companies and
banks to diversify in other parts of Asia, causing volatility among the currencies there,
and so indirectly leading to the 1998 financial crisis and Japans subsequent period of
deflation. The economic policy implications are left to the reader. Hence, we find no
reason to diverge from the present mode of action taken by policymakers in regard to this
aspect.

As the normality assumption was not met, it can be prudent to suggest that the test
conducted should perhaps be inclusive of more variables, in order to cover a wider scope.
Another method is to adopt standardized calculation practices in calculating CPI to
conform to international standards. To quote the Department of Statistics, verbatim,

Although the CPI is calculated almost entirely based on the international

standards in the United States, the survey specifications in accordance
with the international standards are not defined in advance. Instead, a
unique method that allows enumerators to pick out items according to
 distribution of products for each shop and survey their prices, is adopted.
In this method, products picked out vary according to shops, and they may
include those which are classified as the same item but do not have the
same quality. As a result, it is likely that there will be large fluctuations in
prices within each item.

It is this variation which may result in biased data. As such, a revision of the current
system is recommended.
Appendix

Graphs and tables

16

12
GDP growth (annual %)

-4

-8
20 40 60 80 100 120

Consumer price index (2010 = 100)

Figure 1.1: Regression line for Consumer Price Index to GDP growth
16
Series: Residuals
14 Sample 1 49
Observations 49
12
Mean 2.15e-15
10 Median 0.230581
Maximum 4.900391
8 Minimum -8.662131
Std. Dev. 2.782917
6 Skewness -0.970195
Kurtosis 4.761629
4
Jarque-Bera 14.02309
2 Probability 0.000901

0
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5

Figure 1.2: Histogram-Normality table for Jacque-Bera test for Consumer Price Index to
GDP growth
 8
10
12
14
16
18
20

20
30
40
50
60
70
80
90
100
110
1965 [YR1965]
1965 [YR1965]
1967 [YR1967]
1967 [YR1967]
1969 [YR1969]
1969 [YR1969]
1971 [YR1971]
1971 [YR1971]
1973 [YR1973]
1973 [YR1973]
1975 [YR1975] 1975 [YR1975]
1977 [YR1977] 1977 [YR1977]
1979 [YR1979] 1979 [YR1979]
1981 [YR1981] 1981 [YR1981]
1983 [YR1983] 1983 [YR1983]
1985 [YR1985] 1985 [YR1985]
1987 [YR1987] 1987 [YR1987]
1989 [YR1989] 1989 [YR1989]
1991 [YR1991] 1991 [YR1991]
1993 [YR1993] 1993 [YR1993]
Birth rate, crude

1995 [YR1995] 1995 [YR1995]

Consumer price index

1997 [YR1997] 1997 [YR1997]
1999 [YR1999] 1999 [YR1999]
Figure 1.3: Graph of Birth Rates

2001 [YR2001] 2001 [YR2001]

2003 [YR2003] 2003 [YR2003]

Figure 1.4: Graph of Consumer Price Index

2005 [YR2005] 2005 [YR2005]
2007 [YR2007] 2007 [YR2007]
2009 [YR2009] 2009 [YR2009]
2011 [YR2011] 2011 [YR2011]
2013 [YR2013] 2013 [YR2013]
 1
2
3
4
5
6
7
8
9
10

-8
-4
0
4
8
12
16
1965 [YR1965]
1965 [YR1965] 1967 [YR1967]
1967 [YR1967] 1969 [YR1969]
1969 [YR1969] 1971 [YR1971]
1971 [YR1971]
1973 [YR1973]
1973 [YR1973]
1975 [YR1975]
1975 [YR1975]
1977 [YR1977]
1977 [YR1977]
1979 [YR1979]
1979 [YR1979]
1981 [YR1981] 1981 [YR1981]
1983 [YR1983] 1983 [YR1983]
1985 [YR1985] 1985 [YR1985]
1987 [YR1987] 1987 [YR1987]
1989 [YR1989] 1989 [YR1989]
1991 [YR1991] 1991 [YR1991]

GDP growth
1993 [YR1993] 1993 [YR1993]
1995 [YR1995] 1995 [YR1995]
Lending interest rate

1997 [YR1997]

Figure 1.6: GDP Growth

1997 [YR1997]
1999 [YR1999]
1999 [YR1999]
2001 [YR2001]
2001 [YR2001]
2003 [YR2003]
2005 [YR2005] 2003 [YR2003]
Figure 1.5: Graph of Lending Interest Rates

2007 [YR2007] 2005 [YR2005]

2009 [YR2009] 2007 [YR2007]
2011 [YR2011] 2009 [YR2009]
2013 [YR2013] 2011 [YR2011]
2013 [YR2013]
References

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DAdda, C, Scorcu, E, A. (1997). Real interest rate and growth: an empirical note.
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Sheng, A. (2009). From asian to global financial crisis. Cambridge University Press.
New York