RELATION BETWEEN INFLATION RATE AND GROWTH RATE
Its very important for business that all variables which can effect the business outcomes are understood well. One of the very important factors to understand is the relationship between Inflation rate and Growth rate.
On the face it may look, that high Inflation rate means more profit margins. But, if we look carefully, we find a very remarkable relationship between Inflation rate and growth rate. It is this relationship, which determines the economy and the business running.
Many countries from time to time claim very high or impressive growth rates. In some cases I found the growth rates absurd and in some cases ridiculous. I sat out to investigate these claims and in most cases where I had objections to the growth rate claimed by a particular country, I found my estimates to be correct.
In almost all cases, both the growth rate and inflation rate predictions and actual figures are given by the governments who have a stake to project or actually show higher growth rates, to show their government performance in a more successful way. This is mainly done to impress the electorate.
Though economics and understanding it is not exactly rocket science but involves quite complex calculations and data collection and than data analysis to derive and come up with the right figures which even a layperson can understand.
The governments try to keep the calculations complex and results are projected favorably but in way not understood by everybody.
So, is there a way by which a lay person or a normal person not familiar with the jargon of economic calculations find out if the data given by their government is correct or not.
Any such magic formula should be easy to understand and calculate and should be less immune to manipulation. Several years back I was thinking about this predicament of the layperson that I came up with a brilliant formula, to catch the cheating governments red handed. What I am giving below is not only easy to understand but to analyze as well.
Some of the recent claims of high growth rates in various countries when they had high inflation rates set me thinking.
According to my calculations in an approximate way, the growth rate of a country cannot be more than half of the inflation rate.
For example if the inflation rate is 12%, then growth rate cannot be more than 6% for a country.
This is because if things are being produced in plenty in a country, according to efficiency index, it means that demand is being met with the prevailing growth rate and hence inflation rate will be low but if GDP and hence efficiency index is low, the demand will remain the same but it will not be fulfilled and hence there will be inflation.
Thus, growth rate and inflation have a inverse relationship
Growth rate~ 1/inflation rate
The above formula and relationship can help people:
*Can catch false claims of high growth rates
*Can predict approximate growth rate from inflation rate
*Can predict approximate inflation rate from growth rate
*Even a layman can understand the relationship between growth rate and inflation rate.
Thus, by using the above relationship the cheating in economy data presentation can be caught. Suppose this year the growth rate is 1% and inflation rate is 10%. Now lets suppose two scenarios. In one scenario, the inflation climbs down to 5%, than in such a case a very high growth rate can happen to the maximum value 0f 2%. Now, lets suppose the opposite scenario in which the Inflation rate climbs to 20%. In this second scenario, any claim of growth rate above 1 % will be absolutely false and bogus. Now using the above formula, the growth rate is likely to be nearer 0.5 % and any claim to a higher growth figure are likely to be false.
Though, I must emphasize that we have to work on a proportionately constant to exactly calculate the relationship between growth rate and inflation rate but even without the discovery of this proportionately constant, we can still come to approximate values of either if we have one data as correct.
But the above relationship is a good beginning!
COPYRIGHT © Tanvir Nebuchadnezar
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