Economic Analysis of Philippines

Jul 21, 2021 in Economics Essays

Abstract

The Phillips curve and Okun’s law are among the main macroeconomic ideas in modern economic science. At the same time, sharp contradictions among the economists are connected with the thesis about the inadequacy of these principles for the majority of economic processes in any modern country. The main issue lies in answering the question about the relevance of these principles to the conditions of different states, including the Philippines. To find the answer, the researcher has collected the economic data sample and studied it with the means of linear regression analysis. This method of study has allowed the scholar to determine the existence of a correlation between the discussed variables and form the equations that will be used to forecast the economic performance of the state.

The results of the research have proven the inadequacy of the Phillips curve and Okun’s law as the means of economic processes’ monitoring and forecast in the economy of Philippines. At the same time, the latter principle has emerged to be quite an attractive realistic economic principle, but it requires additional research with the increased data sample. In conclusion, the linear regression method of data analysis had demonstrated advantages in the definition of the true dependencies in modern economic processes.

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Economic Analysis of Philippines

In the modern macroeconomic theory, significant interest is observed to the question about the adequacy of basic macroeconomic principles in the world. Among such principles are the Phillips curve and Okun’s law that define the dependence between the levels of inflation and unemployment as well as the output of the state. The theoretical issue is connected with the thesis about the inadequacy of these two principles as the tools of economic processes’ forecast in a modern economy. The main task for this report is the presentation of the process of the Philips curve and Okun’s law estimation for the economic variables of the performance of the Philippines. Thus, each step of this process is to be described, including the collection and analysis of initial data, the provision of the estimates for both principles in question, and the discussion of the achieved results. The goal here is to show the potential advantages of the chosen methods’ usage for the analysis of the economic performance of a state. The usage of the linear regression analysis tools as a mean of the theoretical issue solution will help the researchers avoid insensible and irrelevant conclusions.

Literature Review

Initial Data for the Research

According to the task for this research, the list of initial data about the chosen country’s economic performance should include the description of dynamics for the next values: inflation rate, unemployment rate, and the real value of GDP. The sample size for each indicator includes the dynamics data for the last 20 years. To find the required statistical information, the resources of the World Bank Database have been used. In fact, the source of the initial information for the research was the World Development Indicators (World Bank, 2017). This source of data makes it possible for the researchers to acquire the required data for a certain period of time without the necessity to study irrelevant information. Since the amount of data types for this research was not substantial, the usage of only one source of statistics was enough to find necessary information.

Phillips Curve

The Philips curve is the basic law of modern macroeconomics. Created by P. Samuelson and R. Solow with the ideas W. A. Phillips at its core, it proclaimed the existence of a clear correlation between the rates of unemployment and inflation in each state (Huang, 2013). According to Phillips, the central statement of the theory is that in most economies of the world, there is an inverse relationship between the rate of inflation and the rate of unemployment (Huang, 2013). Further researches demonstrated the inadequacy of Phillips’ conclusions for the long-term dynamics of these mentioned values (Huang, 2013). The principle of the Phillips curve can be observed only in the short-term dynamics of the economic processes of any country. As a result, the concept of a short-term Phillips curve has been developed. The study of this principle on the example of the Philippines’ economy can help the researchers define the right side of the dispute over the nature of the discussed law.

Okun’s Law

The influence of Okun’s law on the macroeconomic policy of modern states is similar to the influence of the above-mentioned principle. The founder of this law, A. Okun, stated that there was a negative short-run correlation between the country’s level of unemployment and output (Ball, Leigh, & Loungani, 2013). Here, the main value of output for each state is the current GDP level. At the same time, like for the Phillips curve, the group of scientists stated that Okun’s law provided the wrong information about the real correlation between the discussed values and it could not be used for the definition of the macroeconomic policy of the state. Therefore, this research will try to answer the question of the law’s adequacy on the example of the economic performance of the Philippines.

Methodology

Sample Method

As mentioned earlier, the data sample included the dynamics of the variables of the inflation rate, unemployment rate, and the real value of GDP, with the selected variables for the last 20 years. The data was collected from the World Bank Database, specifically the economic performance of the Philippines. The status of the World Bank as an international financial regulator allows saying about the complete adequacy of the acquired statistical results for required values. At the same time, the orientation of this source of data has made it possible to find the latest information about the values of required variables, which will increase the relevance of conclusions.

Sample Calculations and Analysis

For a better understanding of the data sample, the researcher has also performed the study of the tendencies in the changes of selected variables over the considered period. Thus, the estimation of changes in discussed variables over the last 20 years has allowed defining the directions of the mutual change of variables, used in the study of the adequacy for both concepts in question. The results of the sample’s formation and study are presented in Appendix 1. Here, the presentation of data about the growth of discussed variables helps the viewers define the presence of a certain correlation between them at the initial stage of the research.

Research Method

To define the adequacy of the Phillips curve and Okun’s law for the economy of the Philippines, the methodology of Linear Regression Analysis (LRA) has been employed. This tool allows the researchers to determine the linear regression equation that can be used to forecast the dynamics of the dependent variable on the basis of the behavior of the independent variable. Such an approach to finding a solution of the research issue guarantees the relevant answer to the question about the adequacy of the Phillips curve and Okun’s law in the conditions of the Philippines. The actual means of LRA presuppose the usage of Microsoft Excel calculation tools that include the LINEST function of LRA equation coefficients’ estimation.

Data Analysis

The first part of the LRA for the Phillips curve included the estimation of a and b coefficients for the improved version of the classic Phillips curve. Here, the required equation was as follows:

; where

? – level of inflation at the required period of time;

Y – level of the country’s GDP in current local currency.

The main task of this equation is to show the dependence of the dynamics of inflation level and the value of the country’s GDP. To be able to employ the LINEAR function of Microsoft Excel for this target effectively, one should use the variables of GDP in current local currency and inflation growth from the initial sample that can be found in Appendix 1. The results of the a & b coefficients estimation are presented in Appendix 2. The statistical evaluation of the linear equation is also included in Appendix 2.

The second part of this research was focused on the estimation of the standard Phillips curve with the means of LRA. In this case, the linear equation was as follows:

; where

- mean level of GDP in current local currency for the selected period.

Another aim of defining this linear equation was to estimate the natural level of the selected country’s GDP. The results of the second equation’s study with the means of a LINEAR function are shown in Appendix 3.

The next step of this research was the estimation of the improved type of Okun’s law equation. According to the requirements of the study, the following structure of the equation was used:

; where

– the level of unemployment at the required period of time;

– the growth rate of real GDP at the required period of time.

In comparison to the standard type of Okun’s law equation, which discusses the connection between the change of unemployment level and the change of the country’s output, the equation under discussion estimated the dependence between the changes in the unemployment rate and the growth rate of GDP. Even though such an approach seems to be different from the standard type of this equation, it does not create significant differences between the results for the two types of the equation. The result of this equation’s evaluation is presented in Appendix 4.

The last equation that requires estimation in this research is the standard Okun’s law equation. Here, the researcher also must evaluate the variables of? and g, which is the normal growth rate of the Philippines’ GDP. The final equation for this part of the research is:

The final values of the coefficients for this equation and its statistical estimations are to be found in Appendix 5.

Results

In the process of LRA research, the author has managed to form four required linear equations for the standard and improved estimations of the Phillips curve and Okun’s law. The linear equation of the improved C was as follows:

;

For the standard Phillips curve, the equation was like this:

;

The form of the improved Okun’s law equation was:

;

The equation of standard Okun’s law was:

.

The observation of the results found in Appendixes 2-5 allows the researcher to say that the principles of the Phillips curve and Okun’s law cannot be properly implemented for the study of the economy of the Philippines. This statement is supported by the estimations that have been found for each type of the above-mentioned equations. The key finding of the presented research is the absence of a clear correlation between the variables that have participated in the formation of four presented equations.

Here, the most important factor that has defined the level of correlation between the values is the value of the determination coefficient. Thus, this coefficient is used to define the rate of changes independent variables that occurred due to the influence of the independent variable. In this way, the determination coefficient can be used as a key proof for or against the adequacy of the Phillips curve and Okun’s law statements in the conditions of the Philippines’ economy. According to Appendixes 2-5, the value of the determination coefficient for the standard and improved equations of the Phillips curve was about 1,7666E-06. Such a low level of coefficient makes it impossible for the researcher to say that the changes in the country’s output have ever been affected by the changes in the inflation rate during the last 20 years.

The same situation is common for the standard and improved equations of Okun’s law. Here, the value of the determination coefficient for both equations was 0,0642. It is obvious that any talks about the connection between the changes in unemployment level and the level of the Philippines’ output are also irrelevant.

Limitations of the Study

The limitations of the study include the discussion of the sample that includes only 20 values. For the Phillips curve, the obviously negative result makes further research unnecessary. However, for Okun’s law, whose results are much more attractive, the increase of the sample size could give more certain and clear results to the researcher.

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Discussion

The discussed results of the World Bank database analysis show the irrelevance of the Phillips curve and Okun’s law principles in the conditions of the Philippines’ economy. Among the arguments against the sensibility of using these concepts for the forecast of economic processes in the considered country, one can highlight the low level of determination coefficient for each type of developed linear equations as well as the characteristics of achieved coefficients for linear equations. Another argument that will also be discussed as evidence against the adequacy of these principles for the selected country is the graphs of the correlated dynamics between the supposed variables in linear equations.

The results of the determination of coefficient estimates for the created equations were discussed earlier in this report. That is why there is no need to consider this evidence more properly. At the same time, it is important to pay attention to the values of equations’ coefficients and the additional indicators that had to be evaluated according to the research requirements. Firstly, it can be useful to consider the acquired result for the value of the natural output of the Philippines’ economy. Thus, this result has been found according to the results of the standard Phillips curve linear equation. To discuss the adequacy of this equation and its relevance to the real behavior of discussed economic variables, one should compare the achieved level of natural output to the real mean value of the country’s output that has been found on the basis of the sample’s dynamics. From this point, the natural value of the variable is 3,29067E+14, while the real mean of the country’s output is 7,04614E+12. The difference between the supposed and the real level of output is about two orders of magnitude. Consequently, it is impossible to say that the obtained standard equation of the Phillips curve can be used for the estimation of dependence between the level of inflation and the output.

Another aspect of the provided estimations, which requires discussion, is the values of the equations’ coefficients. For the standard and improved Phillips curves, the linear regression coefficients are both negative and equal to a = (- 0,27914) and b = (- 8,66858E-16) respectively. Such a structure of the linear equation supposes the permanent decrease of the level of inflation in the conditions of the country’s growing outcome. Even more, the level of inflation is supposed to remain negative in the conditions of the positive value of GDP. As a result, the presented equation cannot be used for the modeling of the real processes in the Philippines’ economy. The main reason for such a situation can be the absence of a real correlation between the level of inflation and the GDP value in the country’s economy. That is why any tools of LRA in the annex to statistical data on this issue will not bring a positive result.

For the equations of Okun’s law, the situation is more relevant to the real economic conditions. Here, the coefficients of linear equations describe the real dependence between the level of unemployment and the output value. The higher increase in the GDP growth rate leads to the reduction of the unemployment rate. Nevertheless, the considerably low level of determination coefficients does not allow the researchers to use these models for the study of the real processes in the economy of the Philippines.

The last argument against the relevance of the Phillips curve for the conditions of the Philippines is the graph that demonstrates the statistical dynamics of changes in the values of unemployment and inflation rates. The graph is presented in Appendix 6, and it shows that the main principle of negative dependence between these values has become relevant and irrelevant for the economic conditions of the Philippines at the different stages of the country’s economic development during the last 20 years. That is why it is impossible to form a clear statement about the sensitivity of using the Phillips curve to forecast the economic situation in this state.

Conclusion

The discussion of the selected data sample of the economic performance of the Philippines allows the researcher to say that the usage of the Phillips curve as the tool for the study of economic processes in this state is not relevant. The LRA showed that the Phillips curve principles had not found their realization in the state’s statistical reports. The low level of determination coefficient and the illogical character of the linear equation’s coefficients make it impossible to use the obtained equations to forecast the economic development of the state.

At the same time, the usage of Okun’s law can be more sensitive due to the fact that its relevance had been proved by the study of the statistical material for the Philippines. In this way, further research should consider this question with the increase of the sample size for the study. In general, it is possible to say that the linear regression analysis tools have proven their effectiveness as the means of studying the socio-economic processes on the basis of statistical data research.

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