Category: Economic System

Economic system is the mechanism by which countries and governments manage wealth and exchange goods and services. The production factors, including land, capital, labor and entrepreneurship are used to regulate the systems. In other words, how the people of a nation joined together to create a complex whole and perform economic transactions between each other. Economic systems are complicated as they depend on the fact that millions of people work together in the market, driving supply and demand. For instance, it sets off a chain reaction if millions of people rush to the Apple store for the latest iPhone. There are more batteries, glass, electronic chips, and other components that Apple needs to order. In turn, in those industries, that sets off demand. In order to meet the needs of its people, every society must answer three basic economic questions:

1. What should we produce?
2. How should we produce it?
3. For whom should we produce it?

A nation may decide to manufacture candy or vehicles and computers for instance. The products could be manufactured in privately owned factories by unskilled workers or by technical experts in government-funded laboratories. Once they are made, the items could be given out to the poor for free or sold at high rates that can only be afforded by the wealthy. So, the opportunities are endless. While each society answers the three fundamental economic questions differently, each encounters the same fundamental problems in doing so: allocation of resources and scarcity.

There are mainly four types of economic systems in the world: traditional economic system, market economic system, command economic system, and mixed economic system. Such economic structures are unique and have a complicated background associated with them. Such economic systems rely on a variety of structures and contexts and have their own strengths and weaknesses.

Traditional Economic System

A traditional economic system is the oldest and most conventional type economic system in the world. This economy focusses to manufacture products and services that are a direct result of its customs, beliefs, tradition, and culture. The parts of the world which follow traditional economy are mostly rural, second or third world and are very close to the land due to various farming, fishing, and cattle herding etc., where they can still be found in the agricultural areas of developing countries in Asia, Africa, and South America. This economy is based on a barter system and has no concept of money or currency. The people that fall under this type of economic system are placed around their tribes and families. This economy’s primary purpose is to produce goods to meet its community’s needs. There is no definition of trading, because in this kind of economic structure, people never worry of market surpluses. One most important advantage of the traditional economic system is that it preserves the tradition and custom of the area which is not possible in other economies. Each member of this economy has a particular and distinct function that makes individuals socially happy with this economy. The disadvantage of the traditional economic system is that the items widely available in other economies, such as medicines, technologies, and centralized services, are not experienced.

Market Economic System

A market economy is completely the opposite of a command economy and is similar to a capitalist system. The main segment of the economy, like vital resources and valuable goods and services, is not regulated by the government. Industries and households act in self-interest in the market economy and dictate how resources will be allocated, what sort of products will be generated or purchased. There is completely no government involvement or influence or other controlling power, which ensures that buyers or sellers are not limited. The economy is thus influenced by contributors to the economy and by the rate of demand and supply. For example, the United States of America is a capitalist nation, but the American government is still controlling moral businesses, fair trades, monopolies, government programs etc. as there is no true free market economy exist in the world. The major advantage of the market economic system is the separation of government and the market. As a result, the government is less powerful and gives some power in the hands of private institutions and businesses. Theoretically, a market economic system empowers a nation to experience a high degree of growth. Businesses create profitable goods and services in the free-market economy and offer private businesses a lot of incentives. There is an immense opportunity of innovation in the free market economic system because businesses invest a lot in research and development. Competition, on the other hand, leads to inequality and there is a risk that businesses will only think for profits and neglect elderly or disabled people. Monopolies will exploit consumers, and economic development would become a priority over social and human needs. Adam Smith was an 18th-century teacher and philosopher who is widely regarded as the father of classical economics. He wrote the seminal work, ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ in 1776. Smith formulated the idea of an ‘invisible hand’ which claims that individuals will often act in their self-interest, left to their own devices, and those interests will inadvertently balance out to achieve the best result for all. Smith believed that labor, specifically the division of labor through the specialization of tasks, was the key to prosperity.

Command Economic System

A command economic system is often referred to as a socialist or communist system. It is directed by a single centralized power such as government, which controls all activities of this type of economic system. The government has the right to make all decisions about the economy. It is responsible for determining the type of goods produced and the quantity of goods produced. The price of the products in the market is also determined by the government. The government owns everything from the industrial processes to equipment. Countries like China, Cuba, and North Korea are the practical examples of a command economic system. These economies are often referred to as planned economies, since all economic plans are controlled by the government and nothing is elected by the free market. In a command economic structure, there is no competition among the sectors, and in all businesses and segments, the government has a monopoly. No competition will lead to a lack of innovation because the need to take risks is not found by industries. The laws and regulations implemented by the government must be followed by all businesses and sectors. One of the major challenges facing these governments is creating opportunities for workers and providing goods and services at affordable rates. Most of the command economies focus on resources like oil. Due to their inflexibility and centralized design, command economies have slow development. Karl Marx was a philosopher, author, social theorist, and an economist (1818-1883). He was considered as ‘the father of socialism or communism’. In 1848, he wrote ‘The Communist Manifesto’. Marx believed that in the capitalist economy, the drive for profit by business owners would force worker wages to levels of ‘subsistence’ and that they would be abused. He said that, eventually, in a revolution, exploited workers will work together and overturn capitalism. This would replace capitalism with socialism. He believed that production would be centrally organized in this system, and the distribution of the products produced would be ‘to each according to its contribution’.

Mixed Economic System

A mixed economy is a combination of market and command economies. In comparison to the command economy, the government has less interference. Industries run the economy in most common countries, with strict government control in particular areas such as public transportation and public goods and services. Most of the western economies are considered mixed economies. In such economies, neither government nor the private sector can manage the whole nation. Private businesses will, thus, operate more effectively. The government may, however, intercede in order to take care of any business failures. The government, for example, has the power to demolish a business if the monopoly is exploited. Another example is that taxes on harmful substances like tobacco and alcohol are imposed by the government. The government is responsible for developing health care and social security services in mixed economies. In addition to all this, the government uses taxation policies to minimize inequality and fairly distribute income among its citizens. However, there are still few who agree that government over-interference is not good and another common concern is that government-run businesses become uncompetitive and cause government losses and debt formation. Eduard Bernstein was a German social democratic theoretician and politician, member of the SPD, and founder of evolutionary socialism or reformism proposed a form of mixed economy, claiming that a mixed public, cooperative and private business system would be essential for a long period of time before capitalism would grow into socialism on its own.

Conclusion

So, in this essay we have analyzed in detail the concept of economic system, as well as examined its main types, with a detailed analysis of the advantages and disadvantages of each of them.

The COVID-19 pandemic has led to huge social and economic upheaval globally. In March 2020, the US 10-year breakeven rate (the market-implied average inflation rate over the next decade) reached 0.55%, when the world was peering into a deflationary abyss. Fast forward a little over a year, and investors have flipped from fears of persistent deflation, to fears of persistent inflation at levels not seen since before the Global Financial Crisis.

The threat of sustained higher inflation not only has a potentially meaningful impact on our daily lives, but also has major implications for portfolio construction. To fully assess the impact of this we need to look at the reasons why the 10-year breakeven rate has now risen to 2.6%, but also consider why this rate may actually fall back, over our longer-term time horizon. In the short term, a little inflation is a positive thing for the global recovery.

We should however look at both scenarios in the context of wider risks to a multi-asset portfolio, not losing sight of the overall objective.

Following April’s US CPI number of 4.2%, it is clear increasing prints will be the norm across the globe over the coming months, as the deflationary effects of the pandemic last year (oil actually briefly traded with a negative price in futures markets) affect the base for this year.

These base effects will be exacerbated by short-term supply issues, for example, shipping containers which are randomly scattered in ports across the globe, then there is the semiconductor shortage, which is hurting the auto industry, and even cardboard (think online shopping) boxes. To link it all together if you excuse the flippancy – Cadbury’s owner Mondelez stated they cannot fill UK demand for their 99 flakes for soft-serve ice cream. It transpires the majority are made in a factory in Egypt, where until recently, a container ship literally blocked the Suez Canal.

There is an argument that if demand does bounce back sharply, supply will catch up, and thus any inflation surge will be temporary. However, US dollar weakness that has emerged in the last year will help inflation rise globally, coupled with the Fed’s new average inflation targeting framework which assists with inaction if inflation remains at higher levels, meaning that in the short-term investors need to be vigilant. We believe with our long-term perspective, structural trends weighing on inflation are unlikely to be reversed.

Demographics, debt, technology, output gap (may take years to close), labor mobility linking to anti-globalization are a few of the key disinflationary dynamics that face the world today.

To take demographics and debt as examples – fiscal stimulus is being utilized in this crisis, but most of it has been to replace consumption and investment impacted by the pandemic. Many economists argue that if debt is only used for consumption, then that simply brings forward consumption, weighing on consumption further out unless you can push debt higher and higher.

It is probable we will see low growth rates on count of aging demographics. US population growth in 2019 was the slowest since 1918 (even more remarkable as it was the year of the Spanish flu, and WWI) and unsurprisingly 2020 was even worse. China’s recent census delivered a similar message, revealing the depth of the demographic challenge.

World population growth in 2019 was the slowest since 1952, and advanced economies outside the United States are at multi-decade lows. The combination of deteriorating demographics and the overuse of debt capital (studies appear to show evidence that higher debt levels push down on the velocity of money) are powerful disinflationary forces.

In terms of portfolio positioning, it is imperative to remain focused on the longer-term objective, but we must consider viable inflation insurance assets for part of the portfolio construction. As inflation rises above 3%, bond and equity correlation has historically turned positive. A key advantage of multi-asset investing is the ability to be flexible, and to access the widest opportunity set of asset classes.

For example, real assets like infrastructure and property look more attractive than index-linked bonds. Certain areas of the equity market can benefit too (even technology stronger pricing power and less debt), also commodities such as gold, plus silver and nickel due to demand (short and longer-term) from electronics, solar panels, EVs and the batteries used to power them.

In summary, inflation numbers in the near term will likely remain elevated. However, for the reasons discussed we believe over the medium to long-term inflation will subside from these levels. The uncertainty in the short term will no doubt create some volatility, which in turn may provide us with some attractive investment opportunities for the longer-term time is rarely an enemy. Different assets offer different levels of protection against higher inflation. Our challenge is to cut through the noise and identify those that do this best in the context of the wider portfolio.

Inflation is not the only risk investors should be considering, and thus building an all-weather multi-asset portfolio requires a disciplined process and creative philosophy, which enables us to search for and select the most optimal diversification of assets to take into account all risks, whilst being able to deliver our investment objective.

Inflation is the measurement of how much more costly a collection of goods and services has gotten over time, generally a year. It’s possible that it’s one of the most well-known economic terms. Inflation has thrown countries into a state of insecurity for extended periods of time. Many central bankers aim to be dubbed ‘inflation hawks.’ Politicians have won elections by promising to fight inflation only to lose power when they fail to do so. In 1974, President Gerald Ford designated inflation to be the No. 1 Public Enemy in the United States. So, what exactly is inflation, and why is it so critical?

Measuring Inflation

Inflation is the rate at which prices rise over time. Inflation is usually defined as an increase in the total price level or the cost of living in a country. It can, however, be computed more precisely for some items, such as food, or services, such as a haircut. Inflation, in any context, refers to how much more costly a particular set of goods and services has gotten over a given time period, most often a year.

The cost of living for consumers is determined by the pricing of a variety of goods and services, as well as their proportion in the household budget.

Government agencies undertake home surveys to identify a basket of frequently purchased commodities and track the cost of purchasing this basket over time in order to determine the typical consumer’s cost of living. (The largest component of the consumer basket in the United States is housing expenses, which include rent and mortgages.) The consumer price index (CPI) is the cost of this basket at a particular moment stated as a percentage change from a base year, and consumer price inflation is the percentage change in the CPI over a given period. (Inflation is 10% over the period of the base year CPI is 100 and the current CPI is 110.)

By removing prices set by the government and the more volatile prices of things such as food and energy, which are primarily affected by seasonal variables or temporary supply conditions, core consumer inflation focuses on the underlying and persistent trends in inflation. Policymakers also keep a careful eye on core inflation. An index with greater coverage, such as the GDP deflator, is required to calculate an overall inflation rate—for a country, for example, rather than just for consumers.

The CPI basket is typically kept constant throughout time for consistency, but it is occasionally changed to reflect changing consumption patterns, such as to add new hi-tech goods or replace ones that are no longer extensively purchased. The GDP deflator’s contents change each year and are more current than the mostly set CPI basket since it indicates how prices move on average over time for everything produced in an economy. The deflator, on the other hand, includes non-consumer items (such as military spending) and so isn’t a suitable indicator of living costs.

The good and the bad

Households are worse off if their nominal income, which they receive in current money, does not rise at the same rate as prices because they can afford to buy fewer things. To put it another way, their purchasing power or real (inflation-adjusted) income decreases. The standard of living is measured by real income. When actual incomes rise, the standard of living rises with them, and vice versa.

In actuality, prices fluctuate at various rates. Some, such as the prices of traded commodities, fluctuate on a daily basis; others, such as contract-based pay, require longer to adjust. In an inflationary environment, unevenly growing prices lower some customers’ purchasing power, and this erosion of real income is the single most significant cost of inflation.

Inflation can also affect the purchasing power of fixed-interest rate receivers and payers over time. Take, for example, retirees who are guaranteed a 5% annual rise in their pension. When inflation exceeds 5%, a retiree’s purchasing power decreases. A borrower paying a 5% fixed-rate mortgage, on the other hand, would gain from 5% inflation because the real interest rate (nominal rate minus inflation rate) would be zero; servicing this debt would be even easier if inflation were greater, as long as the borrower’s income kept up with inflation. Of course, the lender’s real income drops as a result. When nominal interest rates aren’t adjusted for inflation, some people gain and others lose purchasing power.

While strong inflation is bad for business, deflation, or declining prices, is also bad. When prices are falling, buyers postpone purchases if they can, hoping for lower prices later. For the economy, this translates to reduced economic activity, lower producer income, and slower economic growth.

The majority of economists today agree that low, stable, and, most importantly, predictable inflation is beneficial to a country’s economy. When inflation is modest and predictable, it is easier to capture it in price-adjustment contracts and interest rates, which reduces the distortionary effects. Knowing that prices would rise slightly in the future encourages customers to buy now, boosting economic activity. Inflation targeting is a policy adopted by several central banks with the primary goal of ensuring low and stable inflation.

What creates inflation?

Lax monetary policy is frequently the cause of long-term high inflation. The unit value of a currency decreases when the money supply grows too large in relation to the size of an economy; in other words, the currency’s purchasing power decreases, and prices rise. The quantity theory of money is one of the oldest ideas in economics, and it describes the relationship between the money supply and the size of the economy.

Inflation can also be caused by supply or demand-side pressures. Supply shocks that disrupt production or boost production costs, such as high oil prices, can limit total supply and contribute to ‘cost-push’ inflation, in which the motivation for price rises originates from a disturbance in supply. The global economy was hit hard by food and fuel inflation in 2008, as steeply rising food and fuel prices were passed from country to country through trade. Demand shocks, such as a stock market boom, or expansionary policies, such as when a central bank reduces interest rates or the government increases expenditure, can enhance general demand and economic growth momentarily.

If, on the other hand, demand rises faster than an economy’s capacity to meet it, the consequent strain on resources is reflected in ‘demand-pull’ inflation. Policymakers must strike the correct balance between supporting demand and growth when necessary while avoiding overstimulation and inflation.

Inflationary expectations are equally important. People and businesses include increased prices in pay negotiations and contractual price changes if they predict higher pricing (such as automatic rent increases). This behavior influences inflation in the next period because expectations become self-fulfilling once contracts are fulfilled and salaries or prices rise as agreed. And, to the extent that people’s expectations are based on the recent past, inflation will follow similar patterns over time, leading to inflation inertia.

How do policymakers deal with inflation?

The best disinflationary policies, or those targeted at lowering inflation, are determined by the causes of inflation. If the economy has overheated, central banks can use contractionary measures to cool it down, usually by raising interest rates, if they are devoted to price stability. Some central bankers have attempted to enforce monetary discipline by fixing the exchange rate—tying the value of their currency to that of another currency, and hence their monetary policy to that of another country—with different degrees of success. When inflation is driven by global rather than domestic factors, however, such interventions may not be effective.

When worldwide inflation rose in 2008 as a result of high food and fuel prices, several countries allowed the higher global prices to trickle down to their domestic economies. In rare circumstances, the government may set prices directly. In most cases, administrative price-setting measures result in the government incurring huge subsidy costs to compensate producers for lost income.

As a weapon for reducing inflation, central bankers are increasingly depending on their capacity to influence inflation expectations. Policymakers proclaim their plan to temporarily reduce economic activity in order to lower inflation, in the hopes of influencing inflation expectations and contracts’ built-in inflation component. The stronger the impact of central banks’ pronouncements on inflation expectations, the more credibility they have.

Economics is a social science that studies how individuals, businesses, governments, and societies decide how to allocate resources to meet their needs and wants. It is a fundamental part of our daily lives and affects every aspect of society, from our personal finances to the policies and decisions made by governments and businesses.

Basic Concepts in Economics

In economics, the concept of scarcity is essential because resources are limited, and choices must be made about how to allocate them. In this sense, a government may choose to spend money on education or healthcare, because it can’t fund both at once. This is a reality for everyone – there’s only so much time in the day. When your schedule gets busy, it’s natural to feel that you just don’t have enough time to do everything you want to do. But when you look at your calendar, are you really making the best use of your free time? Or could you be more effective with some changes?

The supply and demand relationship is one of the fundamental principles in economics. It relates the availability of a product or service to the need or want for it. If there is more demand than supply, prices tend to rise, while a surplus of supply can cause prices to drop. Price isn’t just about the monetary value – it’s also a reflection of how valuable people find something. Price changes can act as an indicator of changes in people’s wants and needs.

Theories

The fundamental idea behind economics is the relationship between supply and demand – how price changes will affect how much of a good or service is supplied. Inflation, unemployment, and economic growth are some phenomena that can be explained with this simple concept. When prices go up, more of a good or service is supplied; when they go down, less is supplied. By understanding the intricacies of supply and demand, economists can better understand how economies work and make predictions on future outcomes.

Resources

In economics, resources are the inputs used to produce goods or services. They include capital goods (the machinery used to make goods), natural resources (the raw materials used), labor (the people who use their skills to produce things), and human capital (the knowledge that people have gained in order to be productive). The key takeaway here is that resources are anything that can be used in the production process: machines, people, and even land/natural resources.

Different Ways

Economics is a field that has been studied for centuries, and as it turns out, there are many different ways to approach the subject: microeconomics focuses on individual consumers and businesses, while macroeconomics looks at the economy as a whole. Economic models such as the circular flow model and the production possibilities frontier help us understand how resources are allocated and how economies grow over time.

Usage in Real Life

Economists and policy-makers often use the language of microeconomics to study how individuals and companies make decisions about their own behavior, as opposed to how governments would try to influence them. For example, if a government were trying to decide whether to subsidize a particular industry through lower taxes, it would be helpful to know how much that industry contributes in taxes, what taxes are being used for, whether lower taxes would lead to higher profits or more employment, and so on.

The most basic microeconomic analysis involves supply and demand. Economists use graphs showing the relationship between supply and demand to study market trends. They also monitor economic indicators like unemployment rates, interest rates, and gross domestic product, which help paint a picture of the current state of the economy and its future outlook.

Connected With Other Sciences

Economics is closely linked to other social sciences, such as sociology, political science, and psychology. For example, economists may study the impact of social norms on economic behavior, or the ways in which political decisions affect economic outcomes. In fact, many undergraduate economics courses are taught by faculty from other disciplines.

Economics is also closely related to business, finance, and public policy. Many economists work for government agencies like the Federal Reserve System or the U.S. Bureau of Labor Statistics or in private sector business such as banks or consulting firms. Others work at universities or research institutions like the Brookings Institution or the American Enterprise Institute.

Some economists specialize in specific topics, such as international trade or monetary policy; others may focus on specific regions, countries, or industries. For example, macroeconomists study broad economic trends across countries, while microeconomists focus on individual markets within countries (such as labor markets).

Conclusion

In conclusion, the field of economics has many different aspects and applications. Economics is generally considered a social science, but it also draws from the fields of mathematics, statistics, psychology, and sociology. The main goal of economics is to understand how societies use resources, allocate goods and services, and function as an economic system.

Therefore, economics provides us with the tools to make informed decisions about our personal finances, as well as to make policy decisions that can improve the welfare of society as a whole. Whether we are students, business owners, or policymakers, a basic understanding of economics is essential today.

I thoroughly believe I encompass a strong, representative example of the free enterprise spirit. The free enterprise economy adequately provides me with opportunities for involvement in work and the community. Free enterprise is private resources owned, and competitiveness will thrive economically with minimal government intervention. In many respects, I value my personal freedom from the choices I make in the economy to the choices I make in the election. The possible rewards of a free enterprise in many respects provide me with opportunities and involvement that directly impact the community I live in. Freedom is something I appreciate daily. Plenty of the decisions I invariably end up making, from the particular food I purchase to the decisions I create in my work, are impacted by free enterprise. Even more significantly, without free enterprise, my university degree would be unachievable. Everywhere in my life, I am exposed constantly to a broad variety of valuable goods. These goods can be endless with types, colors, and sizes, merely depending on the type of commodity. Without free enterprise building competitive markets, I would never be exposed to such a variety of goods. Not only that, heavy rivalry between businesses influences the buyer’s market. The competition takes the form of quality products and typically lower prices, which are both of enormous benefit to me in my investment decisions.

I have life goals; there are ambitions even for businesses and governments. We all embrace goals in our free enterprise system. What I personally ponder the vital economic and social goals should be environmental and economic equity. I undoubtedly find economic equality to be extremely essential for me because, in daily existence, a well-established tradition of justice, impartiality, and fairness must be essential. Sincerely, with equivalent work, I believe in fair pay. I could never discriminate based on age, sex, ethnicity, faith, or impairment at work or in my private life as a whole. As cultures of societies shift, I can foresee that not only I, but more people will consider a more sustainable environment to represent an important goal within free enterprise. Essentially, ultimately, we remain the ones deciding on the most meaningful goals for us. Our goals and objectives may promptly change in the near future.

Unmistakably, under a free enterprise system, I am divinely inspired, I have the opportunity to acquire prosperity on the grounds of my own diligent work and capability. The whole spirit of free enterprise fosters my self-confidence, inspiration, pride, and fierce joy. This gently encourages me to maximize my ability to do much more and be more self-sufficient. Such economic freedom remains a buoyant force that allows me a major say in my personal life. In my personal and professional life, I can conclude I have witnesses, peers, and colleagues able to work hard and prosper under free enterprise. We are all able to make a contribution to a booming and dynamic economy.

1 Background of the study

Macroeconomic stability is a fundamental macroeconomic policy objective of every country, whether developed or developing (Frimpong & Oteng-Abayie, 2010; Agalega & Acheampong, 2013). This has made the study of the relationship between inflation and economic growth of interest to economists for a long period of time (Khan, 2014). The primary objective of such studies has been to identify robust evidence of the sign of this relationship and its stability over time (Khan, 2014). Nonetheless, such theoretical and empirical studies have often yielded diverse conclusions regarding the direction of the impact of inflation on economic growth (Frimpong & Oteng-Abayie, 2010 ).

Key macroeconomic factors such as interest rate, exchange rate, and price stability (inflation rate) affect the economic performance of every nation, making price stability a major monetary policy objective in almost every country (Anidiobu, Okolie, & Oleka, 2018). Due to the vital role macroeconomic variables such as interest rates, inflation, and exchange rates play in the economic performance of a country, monetary and fiscal policies in Ghana have often aimed at sustaining high economic growth rates amidst low inflation or price stability. (Frimpong & Oteng-Abayie, 2010; Agalega & Acheampong, 2013). Although Ghana has been targeting a single-digit average inflation rate (Agalega & Acheampong, 2013), the country is still battling to overcome the persistent year-to-year increase in inflation, and also its causes and consequences (Anafo, Kweku, & Naatu, 2014). The inflation rate in Ghana had risen over the past few years and is still rising. In the month of September 2011, inflation in Ghana was 8.40% and in the month of November 2013, it had risen to 13.20%.

Zou et al. (2011) opine that inflation is a major cause of social and economic instability. Considered the most observed and tested economic variable theoretically and empirically (Farid et al, 2012), inflation is the major problem of most economies and exerts diverse influences on the economic growth of every country (Anafo, Kweku, & Naatu, 2014). Comment by Maison, Isaac: From Anafo, Kweku, & Naatu, 2014 Comment by Maison, Isaac: from Anafo, Kweku, & Naatu, 2014

Inflation, defined as the general increase in the level of prices of goods and services in an economy over a period of time, reduces the purchasing power of people, making it deleterious to economic growth (Anafo, Kweku, & Naatu, 2014). Thus, whereas Fischer (1993) concludes that inflation is not good for the longer-term growth of an economy, Barro (1996) opines that price stability is a central pillar of economic growth. ). The effects of inflation on economic growth in developing countries are thus of much interest (Gillman & Harris, 2009). However, theoretical and empirical studies on the inflation-economic growth nexus have been inconclusive and controversial. (Idris and Bakar, 2017; Majumder, 2016). While some posit a negative relationship (Fisher, 1993 and Barro, 1995), others conclude a positive relationship (Mallik and Chowdhury, 2001) with some unable to establish any relationship (Sidrauski, 1967). This has resulted in a knowledge gap regarding the relationship between inflation and economic growth. (Adusei, 2012). These diverse findings call for further research in the field. An answer to this question will therefore go a long way in guiding policymakers in choosing appropriate inflation targets to improve the macroeconomic management of Ghana’s economy (Frimpong & Oteng-Abayie, 2010).

2 Problem of the statement

This study is to determine the major macroeconomic causes of inflation and its effect on the economic growth of Ghana. Majumder (2016) opines that the question today is not only about the simple relationship between inflation and economic growth but also the level of inflation that can affect economic growth. Thus, recent empirical studies on inflation-growth nexus have sought to determine the threshold level above which inflation hurts economic growth (Adusei, 2012).). The question regarding the threshold level above which inflation harms the economy is thus empirically unanswered (Frimpong & Oteng-Abayie, 2010). There is however no consensus on the actual threshold level for Ghana (Ayisi, 2013).With most empirical studies in Ghana suggesting that inflation begins to hurt growth when it exceeds the single-digit threshold level (Adusei, 2012), monetary and fiscal policies have aimed at reducing inflation to single digits. (Ayisi, 2013). However, these studies have reported different threshold levels (Frimpong and Oteng-Abayie, 2010; Munir and Mansur, 2009; Hussain, 2005; Burdekin et al., 2004; Gillman et al. 2002; Khan and Senhadji, 2001; Ghosh and Phillips, 1998; Bruno and Easterly, 1998; Sarel, 1996; Fischer, 1993.

Although empirical results have posited non-linear effects of inflation on economic growth in developed countries, the effects of inflation on developing countries are less clear (Gillman & Harris, 2009). Also, cross-country panel studies have dominated existing empirical literature on the threshold effect of inflation on economic growth. Because factors pertaining to different countries are heterogeneous, country-specific studies need to be conducted to provide specific evidence relevant to the country under study (Frimpong & Oteng-Abayie, 2010 ). Comment by Ettandoh: the topic should be ‘the relationship between inflation and economic growth and the acceptable threshold that will positively affect economic growth

Finally, existing studies in Ghana have overly dwelt on the effects of inflation on the economy (Frimpong & Oteng-Abayie, 2010; Agalega & Acheampong, 2013; Adusei, 2012; Ayisi, 2013) without delving much into the causes of inflation in Ghana.

3. Objectives of the study

Comment by Ettandoh: objectives of the study: The relationship between inflation and economic growth (long run and short run)To determine the threshold level of inflation that hurts the economic growth of Ghana.

The main goal of the study is to examine the macroeconomic causes of inflation and its effects on Ghana’s economic growth. The study intends to achieve the following specific objectives:

1. To determine the major cause of inflation in Ghana.
2. To examine any long-run relationship between inflation and economic growth in Ghana.
3. To examine any short-run relationship between inflation and economic growth in Ghana.
4. To determine the threshold level of inflation that hurts economic growth in Ghana.

4 Hypothesis

Following the abovementioned objectives, the study will test the following hypotheses:

• HO4: There is a causal relationship between inflation and exchange rate, interest rate, government spending, and economic growth.
  • HA4: There is no causal relationship between inflation and exchange rate, interest rate, government spending, and economic growth.
• HO1: There is a significant long-run relationship between inflation and economic growth in Ghana.
  • HA1: There is no significant long-run relationship between inflation and economic growth in Ghana.
• HO2: There is a significant short-run relationship between inflation and economic growth in Ghana.
  • HA2: There is no significant short-run relationship between inflation and economic growth in Ghana.
• HO3: There is a threshold level beyond which inflation hurts economic growth in Ghana.
  • HA3: There is no threshold level beyond which inflation hurts economic growth in Ghana.

5 Significance of the Study

This research will benefit policymakers, academics, and other stakeholders like investors and economic/financial analysts. The study will examine the causes of inflation in Ghana. It will also assess the effects of inflation in Ghana and determine the threshold level beyond which inflation hurts Ghana’s economy. The question regarding the threshold level above which inflation harms the economy is empirically unanswered and an answer to this question will go a long way in guiding policymakers in choosing appropriate inflation targets to improve the macroeconomic management of Ghana’s economy (Frimpong & Oteng-Abayie, 2010). Thus, the study will assist policymakers in inflation targeting and offer them vital information needed to make inflation-targeting policies and predictions that will help Ghana achieve a desirable inflation rate needed to stimulate economic growth in Ghana. This is very important considering the efforts/resolves of the current Ghana government to curb inflation, achieve price stability, and sustained economic growth. Sowa (1994) opines that the macroeconomic conditions of Ghana are similar to that of most sub-Saharan African countries. Thus, the findings of this research will not only benefit Ghana’s policymakers but will also be of benefit to policymakers in other sub-Saharan African countries.

To academia, this research will add to current knowledge on the effect of inflation on Ghana’s economy. While inflation remains a persistent problem in most developing countries (Barro, 1995), making the effects of inflation on economic growth in developing countries of much interest (Gillman & Harris, 2009), the effects of inflation on developing countries are less clear (Gillman & Harris, 2009). Theoretical and empirical studies on the inflation-economic growth nexus have been inconclusive and controversial (Idris and Bakar, 2017; Majumder, 2016) (Fisher, 1993 and Barro, 1995), (Mallik and Chowdhury, 2001) (Sidrauski, 1967). These diverse findings call for further research in the field. Comment by Maison, Isaac: from (Majumder, 2016).

Also, Majumder (2016) opines that the question today is not only about the simple relationship between inflation and economic growth but also the level of inflation that can affect economic growth. while recent empirical studies on inflation-growth nexus have sought to determine the threshold level above which inflation hurts economic growth (Adusei, 2012), there is no consensus on the actual threshold level for Ghana (Ayisi, 2013; Frimpong and Oteng-Abayie, 2010). The question regarding the threshold level above which inflation harms the economy is thus empirically unanswered (Frimpong & Oteng-Abayie, 2010) and this paper will contribute to answering that question.

6 Scope and Limitations of the Study

The study will use GDP growth as a proxy for economic growth, in line with extant research (Oteng et al., 2016; Alhasan and Fiador, 2014). Although, economic growth has been conventionally measured as the percentage change in real gross domestic product (Oteng et al., 2016), Ivković (2016) argues that the measurement of GDP is affected by black market/informal transactions and poor record keeping. The GDP for Ghana will thus be affected by these factors. It is hoped that improved record keeping in the future and digitization of the Ghanaian economy will yield improved GDP measurements.

The study also uses inflation as an independent variable. Although inflation is available in monthly, quarterly, and yearly frequencies, this work will be restricted to the use of yearly data because it includes control variables such as FDI and labor, which are available only in yearly frequency. The use of monthly or quarterly data is thus restricted in this study. Future studies can explore other variables that will make the use of quarterly or monthly data possible.

7 Methodology

The study will employ the VAR/VECM techniques and use annual time series data from 1975 to 2018.

The study will use economic growth as the dependent variable while inflation will be the dependent variable. Labor, capital, trade openness, exchange rate, government expenditure, interest rate, and foreign direct investment will be used as control variables. Extant research has used variables such as real GDP growth as a proxy for economic growth (Oteng et al., 2016; Alhasan and Fiador, 2014). In line with these extant works, economic growth will be computed as, where Y represents economic growth, and is the real GDP at the time (t) while in the prior year’s GDP.

The first step will be to test the order of integration of the variables and to ensure that the variables are of order I(1). After the unit root test, the Johansen cointegration test will be performed to ensure that the variables move in a long-run relationship. The inflation rate will then be normalized in a vector autoregressive (VAR) model to determine the short-run and long-run causes of inflation. The VAR variance decomposition will be employed to determine the proportion of the movements in inflation rate that are due to “own” shocks, and the changes in inflation emanating from shocks to the other variables.

The VECM will then be used to determine the short-run and long-run effects of inflation on economic growth in Ghana. Following Begum, et. al (2015), Mwinlaaru and Ofori (2017), and Frimpong and Oteng-Abayie (2006), this work will adopt the Solow growth model/Cobb-Douglas production function, which is generally stated as: where Y represents economic or GDP growth, K represents capital, and A represents total factor productivity (the GDP growth attributable to other factors of production aside capital and labor). The following explanatory variables are added to derive the growth function: trade openness, exchange rate, government spending, interest rate, and foreign direct investment. The nonlinear effects of inflation on economic growth are considered by including the quadratic form of inflation and the basic equation is stated below:

Where Y represents economic/GDP growth, INF represents inflation, INFS is the quadratic form of inflation, L is labor, K represents capital, TRP is trade openness, GEX is government spending, ER represents exchange rate, FDI is foreign direct investment, INT is the nominal interest rate. is a constant, is the coefficient of the respective variables, is the time period while is the error term,

Following Begum et al. (2015), the Lind and Mehlum (2010) U test will be used to determine the threshold level beyond which inflation hurts the Ghanaian economy. The Lind-Mehlum U test will also determine whether the relationship between inflation and economic growth is u-shaped or inverse u-shaped.

8 Organisation of the study

This study is organized into five chapters. Chapter one, the introductory chapter, will discuss the background of the study, state the research problem and objectives, develop the hypothesis, and give the scope and limitations of the study. Chapter two will entail the theoretical and empirical literature review on the topic. The theoretical literature review will present the theories on inflation-economic growth nexus while the empirical literature review will discuss the empirical findings of other works on the topic. The third chapter will present the methodology adopted for the study. It will present the models for the study and discuss the detailed research methodology for the study. Chapter four will present the results of the study and analyze the results. The final chapter will present a summary of the work, state the main research findings, draw conclusions, and make relevant recommendations. It will also make suggestions for further studies.