An Empirical Analysis of the Relationship between GDP and Unemployment, Interest Rate and Government Spending

Abstract

This research work explores the impact of macroeconomic variables such as unemployment rate, interest rate and government spending on GDP of Malaysia in the light of 30 years data, for the period of 1981 to 2010. This research was secondary data based, and multivariate regression analysis was used to analyze the data. Econometric model used for analysis consisted of GDP as dependent variable while the independent variables were unemployment rate, interest rate and government spending. Data was taken for these variables from the website of Central Bank of Malaysia, World Bank and University data stream. The study found that there is significant impact of inflation, interest rate and exchange rate on GDP. As far as the signs of co-efficient are concerned, unemployment rate had negative relation with GDP while interest rate and government spending possessed positive relation with GDP. Based on results and its analysis it is recommended that government adopted tight monetary policy to reduce inflation as the results indicate that inflation has significant but negative impact on GDP. In case of developing countries like Pakistan high value of real exchange rate should be maintained because results show that there is significant and positive impact of exchange rate with GDP. Ceiling of interest rate should be removed in order to boost the economy.