Impact of Money Supply, GDP and Exports on Inflation; Comparative Study Between UK And China.
Impact of Money Supply, GDP and Exports on Inflation; Comparative Study Between UK And China.
Introduction
One of the essential determinants of volatility and growth in the economy in any given nation is the trade rate as it has a significant effect on the international trade. Inflation and money supply are also other two indicators of a government’s economic development. The high inflation rate has the potential of destroying the competitiveness of a country (Yoshino & Taghizade-Hesary, 2014 p. 2). High inflation rates make a country suffer from further negative exports, domestic currency and level of consumption. Central banks all over the world have an obligation of stabilizing the prices of commodities through effective monetary policy as it will consequently control the rate of inflation (Seka, Teoa, & Wong, 2015 p. 632). The monetary policy as a tool used for the administration of microeconomics is essential for the balance of equilibrium in payments, full employment, economic growth and price stability. Acceleration in the real GDP rate, stable exchange rates, and slower population growth are some of the factors that lead to a rise in the general currency of any nation (Ramzan, Fatima, & Yousaf, 2013 p. 220). This study has a purpose of assessing the impacts associated with the money supply, GDP and exports on inflation with comparing the case scenarios between the UK and China.
Research Question
1. Comparatively, what is the effect of GDP, Money Supply, and Exports on Inflation in the United Kingdom and China?
Literature Review
Significant inverse effect exists between commercial supply, exchange rates, and inflationary pressure. The inverse impacts could possibly be justified by the effects due to availability of money and the prevailing market prices. Inflation can result from hiccups in the provision of both domestic and foreign goods. Direct impacts, however, exist between real output growth and foreign policy and inflationary pressure. Akinbobola (2012) authored an article that had the aim of providing a quantitative analysis of the dynamics that are related to inflation, exchange rates, and monetary supply. The paper is based in Nigeria. The source of information for this study is the secondary records source obtained from IFS (International Financial Statistics).
According to Ali, Mahmood and Bashir, (2015), Rate of exchange is one of the vital determinants of growth of an economy in a nation in addition to its volatility. Exchange rates hence have a remarkable effect on international trade. The study conducted by these authors established that inflation and exchange rates volatility have both short and long run relationship. Inflations rates increase due to high money supply and elevated rates of interest. High inflation rates lead to increased exchange rate volatility. The study conducted by these researchers had an aim of investigating the impacts that are associated with interest rates, inflation, and money supply when it comes to the exchange rates volatility. The study used a secondary source of data.
The government often has the principal objective of improving economic growth as it has high impacts on the living standards of its citizens. Babatunde and Shuaibu (2011) aimed at estimating the growth model for monetary developments that took place in Nigeria. The researchers hence examined if there was presence of a long run connection amid economic development, capital stock, inflation and money supply. The study utilized secondary sources of information and hence tested the approach to cointegration. They studied a mechanism for error correction to ensure that the date retrieved was reliable. From the research results; it became apparent that a positive relationship exists between capital stock and money supply while negative correlation exists between growth and inflation (Babatunde and Shuaibu, 2011 p. 157).
A study conducted by Seka, Teoa, and Wong (2015), relied on an empirical analysis that was performed to assess the effects oil price fluctuations had on the inflation rates in different countries. The researchers additionally compared the relative effect that the changes in oil prices had on other factors such as domestic output, exchange rates and production costs for exporters. The focus of the study was on analyzing two countries with high oil dependency index and those with low oil dependency index. The classifications were done by the available data. For the methodology adopted, the researchers modified the ERPT equation to fit in the variables in the oil prices (Seka, Teoa, and Wong, 2015 p. 633). From the results obtained, in small oil dependency groups, oil prices had a direct effect on the domestic inflation.
The study conducted by Ramzan, Fatima and Yousaf (2013) had a purpose of empirically determining the relationship between openness and inflation in Pakistan. The authors utilized time series analysis of secondary data published between 1970 and 2009. The data tackled issues on financial developments, openness to trade, inflation, and gross domestic product. The data was gathered from a variety of issues of World Development Indicators and the economic survey on Pakistan (Ramzan, Fatima, and Yousaf, 2013 p. 223). The study checked the correlation between run regression and independent variables. Results for the survey established that there was a moderate correlation between GDP and money supply.
Dragos, Mihaela and Stefan (2013) carried out research that had the intent of analyzing the relationship between the economies of different countries. The study examined the association between interest rates, money supply and their power on the height of inflation in the economies of nations. The study was based in USA and China and utilized secondary data available between 1987 and 2011. The study proved to be unique as it employed a different statistical approach in the analysis of effects associated with interest rates in inflation and supply of money. The results revealed that China and the US have different economies that however rely on each other.
The study conducted by Bibi, Ahmad, and Rashid (2014) had the purpose of examining the relationship existing between trade openness and growth rates, exchange rates, inflation, foreign direct investments, and imports. The study used data sources that are retrieved from studies and articles published during 1980 to 2011. The study focused on the empirical analysis to finding the information that was related to the survey subject. The techniques used for the estimation process in this study included Co-integration, tests for PP; ADF, DF-GLS and DOLS. The results from the cointegration proved the presence of long run association amongst the variables. Through the production of substitutes for imports and creation of trade surplus, adverse impacts of trade openness can be overcome.
Bhattarai (2011) carried out a study to assess inflation, growth rates as well as interest rates within the UK. The study discovered that the growth in these factors is simultaneously determined within the country. Depreciation in the UK starling pound increases international competitiveness that consequently is a significant contributing factor to growth. International competitiveness is adversely affected by inflation resulting from the growth of money, higher interest rates and the depreciations in the Sterling pound. London is a hub of international trade and market. Persistence is hence experienced in terms of higher interest rates and other factors such as increased liquidity in the financial system. Kaaresvirta and Koivu (2008) reported that China combined slow inflation rates with increased rates of economic growth for over a decade in order to achieve the economic developments that the country aimed at achieving. Nonetheless, even with the strategies adopted by China, the rate of inflation continued to accelerate due to several contributing factors. The bloom in the foreign currency is of advantage to China as it has led to increased money supply. In the paper written by these two authors, estimations postulate that there is high likelihood of continued acceleration of economic growth above the current potential that the country had registered. The direct impacts caused by globalization when China interacts with other markets have led to rise in level on inflation.
Methods
This study will use secondary sources of evidence that shall have been retrieved from books, periodicals, journals, articles and government publications. This study is qualitative in nature as the fundamental objective is to collect and analyze detailed data on the topic under investigation. The data used will be dated within the duration of time ranging from 2000 to 2015. These data sources will provide precise and detailed information regarding GDP, money supply and export and inflation within the UK and China. Keywords that will be used while searching for data will include export on inflation, money supply, and GDP. The inclusion criteria will consider the presence of these keywords in the sources being examined for the study. Year of publication will also be exclusion criteria as those studies that do not exist within the time range of time will not be included in the survey. Only studies that provide information regarding the subject under study within the UK and China will be incorporated.Discussion
China Government Polices on Money Supply, GDP and Export
The economy of China is one that is export-driven and hence runs on trade surplus. China sells more products compared to the ones it purchases. The country’s economy has undergone significant reforms that have modified its market orientation. China controls forex rates by absorbing the massive inflows of foreign capital from the trade surplus. It has a sterilizing process in which the banks in the country increase the excess of the nation’s local currency within the local markets (Morrison & Labonte, 2013). The move increases the chance of inflation and hence to counter the adverse impact, the government buys the required number of domestic bonds thus taking away the excessive cash. China also applies the local printing currency. It uses the reserve ratio changes in which commercial banks keep a percentage of the total deposit amount within the central bank. China has a policy of intervening in currency markets which has consequently acted against the currencies of other nations such as The US dollar.
UK Government Polices on Money Supply, GDP and Export
The economy of the UK is tightly integrated with the broad universal economy. Therefore, any global developments have impacts on the country’s economic growth. The United Kingdom has faced various shocks in its economy due to the trade linkages it has with other nations. The monetary policy is also a standard policy that affects different economies, and the UK is not excluded. The UK, however, has evaluated the monetary policy to ensure that the little interest boosts spending in a liquidity trap (Chowla, Quaglietti and Rachel, 2014 p. 167-168).
Conclusion
The economy is a major determinant of the performance of government in diverse countries. Comparison between the UK and China’s economy regarding the effect of the supply rate of finances, GDP and exports on inflation. From the analysis of the writing above, it is evident that there are no studies that have conducted a comparison of these economic factors in the two countries. This study hence has an obligation of addressing the gaps.
References
Kaaresvirta & Koivu, T. 2008. China’s Inflationary Pressures and Their Impact on Inflation in Euro Area. Available at: http://www.suomenpankki.fi/pdf/156386.pdf [Accessed on 4th Dec 2016]
Bhattarai, K. 2011. Impact of exchange rate and money supply on growth, inflation and interest rates in the UK. International Journal of Monetary Economics and Finance, 4(4), 355-372
Akinbobola, T. O. 2012. The dynamics of money supply, exchange rate and inflation in Nigeria. Journal of Applied Finance & Banking, 2(4), 117-141.
Ali, T. M., Mahmood, T. M. & Bashir, T. 2015. Impact of interest rate, inflation and money supply on exchange rate volatility in Pakistan. World Applied Sciences Journal, 33(4), 620-630.
Babatunde, M. A. & Shuaibu, I. M. 2011.Money supply, inflation and economic growth in Nigeria. Asian-African Journal of Economics and Econometrics, 11(1), 147-163.
Bibi, S., Ahmad, S. T. & Rashid, H. 2014. Impact of trade openness, FDI, exchange rate and inflation on economic growth: A case study of Pakistan. International Journal of Accounting and Financial Reporting, 4(2), 236-248.
Chowla, S., Quaglietti, L. & Rachel, L. 2014. How have world shocks affected the UK economy? Quarterly Bulletin, 2, 167-180.
Dragos, P., Mihaela, S. & Stefan, M. 2013. The influence of money supply and interest rate on inflation. China-USA Business Review, 12(6), 543-551.
Morrison, W. M. & Labonte, M. 2013. China’s Currency Policy: An Analysis of the Economic Issues. Available at: https://www.fas.org/sgp/crs/row/RS21625.pdf [Accessed on 1st Dec 2016]
Ramzan, Fatima, K. & Yousaf, Z. 2013. An Analysis of the relationship between Inflation and Trade Openness. Interdisciplinary Journal of Contemporary Research in Business, 5(3), 215-230.
Seka, S. K., Teoa, X. Q. & Wong, Y. N. 2015. A comparative study on the effects of oil price changes on inflation. Procedia Economics and Finance, 26, 630-636.
Yoshino, N., Taghizade-Hesary, F. 2014. Economic impacts of oil price fluctuations in developed and emerging economies. IEEJ, 1-17.
Yousfat, A. 2015. Money growth and inflation: Empirical evidence from GCC region. European Journal of Business and Social Sciences, 4(7), 142-153.
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