analyze the indicators of economic growth

analyze the indicators of economic growth

The exchange rate refers to the worth of a country’s currency when compared to the value of another currency. Although the exchange rate is calculated independently from the economic growth rate, the two factors are interdependent implying that the exchange rate has some impact on the economic growth rate and also the economic growth rate has some impact on the exchange rate. Several indicators of economic growth exist in a country’s economy including the consumer price index and the inflation levels among others.

We aim to analyze the indicators of economic growth to determine features in their shifts over time. This analysis will be compared to the analysis of the exchange rates to determine their relationship and the impact they have on each other.

The figure below shows the trend line for the exchange rates for China.

The data displays no trend whatsoever. However, there are periodic fluctuations observed in the trend line. The fluctuations are cyclic variations in nature. The variations are cyclic because they are observed regularly and in less than a year. The variations may be due to error correction of the values of exchange rates or other occurrences in the financial environment.

The figure below shows the summary descriptive statistics for the exchange rates compared to the US Dollar.

From the graph, it is observed that the data is not normally distributed. The highest frequencies of sales prices are found at the end of the year. The lack of normality in the exchange rates is further supported by a very high Jarque_Bera statistic. The number of outliers in the exchange rates is also very minimal implying that the prices fall within a particular range. The absence of outliers is symbolized by the proximity of the mean to the median.

Inflation is one of the main measures of economic growth. Inflation measures the rate of increase in the prices of a certain basket of products over time as the economy continues to develop either positively or negatively. The figure below shows the trend line for the inflation levels in China

The trend line above displays the presence of an upward trend in the inflation levels in China. The inflation prices have been on the increase from the beginning of the process of data collection. In the beginning period between 1992 and 1996, there was a steep increase in the inflation levels followed by a relatively less steep increase in inflation levels. The increase in inflation over time means that the prices of commodities are generally increasing over time.

The figure below shows the descriptive statistics of the inflation levels in China.

The data displays the presence of extreme values in the inflation levels as symbolized by the huge difference between the mean and the median of the series. Observing the histogram for inflation prices, inflation can be described as normally distributed. The normality is shown by the highest frequencies being located at the middle of the histogram and is supported by the Jacque-Bera statistic having a very low value.

Exports are an important indicator of economic growth. Exports earn a country’s foreign income and strengthen the currency of a country. The trend line below shows the movement of exports over time.

The exports show an increasing trend over time up to the period before the beginning to mid-2019. After this period, the volume of exports significantly takes a downward trend. This is the period when the economy of China was hit the greatest by the Coronavirus. Due to the closing up of borders, reduction of consumption levels in some countries and the overall changes in the world explain the decrease at the end of the period.

Exports display normality. There is a fair distribution of the frequencies with only one outlier. The normality of this data set is supported by the low value of the Jarque-Bera statistic. Absence of normality implies that assumptions of ordinal=ry least squared do not apply.

Another indicator of economic performance and growth is the consumer price index. The Consumer Price Index(CPI) indicates the changes in prices for a certain basket of goods that are purchased by local households. The figure below shows the trend line for the consumer price index in China.

The data on the consumer price index displays no uniform trend. There are very high fluctuations in the data. The movement in the graph can be explained by the regulations in the market. Variations are highly regulated hence the almost bar-shaped subsets of the trendline. The regulation of fluctuations may be due to government interference in the market for products such as the offering of subsidies for certain products in the market.

The figure below displays the summary descriptive statistics for the consumer price index in China.

The summary statistics indicate the presence of some very high points. This is symbolized by the huge difference between the mean and median in this instance compared to the maximum and minimum consumer price index. The data does not show normality. The lack of normality is displayed by the clumping up of bars indicating the highest frequencies at the beginning of the graph i.e where prices are lowest. The absence of normality is also supported by a very high value of the Jacques-Bera statistic.

The consumer price index also displays stationarity as shown by results from the KPSS non-parametric test below.

Stationarity is supported by the KPSS test statistic being greater than the critical values. This leads to rejection of the null hypothesis which states that the series is non-stationary.

The exchange rates market should follow all the guidelines of the Market Efficiency Hypothesis (EMH). According to the Efficient Market Hypothesis, it is not possible to gain an advantage when trading in the exchange market from having extra information either through technical analysis or insider information. To test for the obeying of the Efficient Market Hypothesis, we test for stationarity in the exchange rates.

The figure below shows the Augmented Dickey-Fuller Test statistic.

The figure below shows the test for stationarity through the KPSS method.

The ADF test is a parametric method while the KPSS method is non-parametric. The probability from the ADF test is less than 0.05 indicating the stationarity of the exchange rates through the rejection of the null hypothesis for the ADF test which states that there is a unit root test. The stationarity in the ADF test is also supported by the ADF test statistic is less than the critical value at all levels i.e., 1%,5% and 10%. The stationarity is also supported by the KPSS method. The KPSS test statistic is greater than all the asymptotic critical values at all levels reading to the rejection of the null hypothesis which states that there exists no unit root in the data. The series is therefore stationary. The presence of a unit root test fulfils the requirements of the efficient market hypothesis since the prediction is inaccurate from stationary model data.

As stated earlier, there exists a relationship between the exchange rate and the rate of economic growth. To test for this relationship we perform the Johansen Co-integration test. The table below shows the results of the Johansen Cointegration test.

Results from the Johansen integration test indicate the presence of cointegration at 5% alpha level of confidence. The Johansen cointegration test for both trace and eigenvalue provide evidence for the presence of co-integration. The existence of cointegration equation implies that the series for the exchange rate. This supports the claim that indicators of economic growth affect exchange rates in the Chinese market.

During the period after mid-2019, the world was plagued by the coronavirus pandemic which has greatly affected global economies and exchange rates. The virus broke out in the Chinese province of Wuhan. China was, therefore, the first country to feel the bite of the virus. China experienced a decrease in the number of exports, an increase in inflation levels through the overpricing and hoarding of goods and also a sudden increase in the consumer price index in the final period of analysis. These changes have led to the predicted decrease in exchange rates especially for the period before the virus had spread to other parts of the world.

There is a need to determine the best mode of the exchange rate between the floating exchange rate and the fixed the exchange rates. In a fixed exchange rate, a monetary authority firmly sets the nominal exchange rate depending on a basket of foreign exchange currencies while in a floating exchange rate, the demand and supply in the market are used to determine the exchange rate. In the floating exchange rates, the value of a currency is suspect to any changes in the financial markets. These changes include the Coronavirus that has plagued the world. In the fixed-rate, the Central bank of the country is responsible for determining how much the currency the print will be traded for.

Due to the impact and continued spread of the virus, it is best advisable for the exchange markets to be fixed. Fluctuations of prices for commodities and the reduction of exports has led to a decrease in the value of the Chinese Renminbi. If the central bank of China fails to implement these policies while the value of the currency is on a decline there is a possibility that the currency will become less valuable when compared to other strong currencies such as the US dollar. However, the adoption of the fixed exchange rate policies is likely to yield some negative results. Some of these negative results include a reduction in international investments. Reduction in international investments may have little impact at the moment due to the continues spread of Coronavirus and the imposition of lockdowns in most countries. Lockdowns limit international trade. The implementation of the fixed exchange rate policies leads to a decrease in transaction costs and helps reduce inflation levels.  However, these conditions are likely to come to an end when the pandemic is contained. Incase the pandemic is contained, there is a high probability that international travels will increase and the economies will be trying to recover from the impact of the disease. Continues implementation of the fixed exchange rate by China will likely lead to negative results whose effects can now be felt as investors look for new opportunities. After the pandemic, China should implement the floating exchange rate to encourage investments in the country.  The policy should be changed despite the risk posed by an increase in inflation when floating exchange rates are adopted.