Program: Financial and Economic Sector Policies

Course title: International Macroeconomics and Policy

Assignment title: Analyzing relationship between inflation rate and per capita GDP growth

INTRODUCTION

There have been different theories for explaining crucial relationship between inflation and per capita GDP growth. In this paper we will consider the neoclassical model and wage equation. This approach is very useful in terms of flexibility to understand underlying assumptions behind the theory. Along with this, this model does include the adjustments in real wages, which is very important while determining relationship between unemployment, inflation and growth. To prove that this theory holds in practice we will examine a country based example. For this purpose we will analyze some macroeconomic data of Azerbaijan and try to link them to see how the theory works in reality.

In the first part we will have a look at some theoretical issues and describe the relationship between inflation and unemployment, and then inflation and per capita GDP growth. The second part deals with economic processes that have been happening in Azerbaijan during last few years. Obviously, to understand the essence of macroeconomic statistics and some correlations and deviations from theory it is very important to know some key facts about economy. And finally, in the third part, we will look through some statistics and figures and try to observe theoretical issues in practice.

NEOCLASSICAL WAGE EQUATION, PHILIPS CURVE AND OKUN'S LAW

The following equation is called neoclassical wage equation:

(1)

Where, left hand indicates wage inflation, and right hand holds two variables: expected price inflation and difference between natural and actual unemployment rates. If we consider expected price inflation constant (because, it is usually hard to measure), from this equation, we can see that wage inflation is negatively related to...

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