Money Components

Money is anything that is generally accepted as payment for goods or services or

in the repayment of debts.
The purpose of money components is to measure the quantity and variation of
the money supply. These components are M0,M1,M2,M3 & M4.
 M0
M0 is the sum of currency.
M0 =Currency =Coins + Notes
 M1
M1 claims are liquid . That can be used directly, instantly and without
restrictions to make payment.
M1 = M0+Demand Deposits+ Travelers checks+ Other Checkable Deposits.
M0 & M1 are called Narrow Money
 M2
M2 claims that are not instantly liquid. It also fall broader category of
money.
M2= sum of M1+Overnight Repurchase Agreement + Money Market
Deposits Accounts+ Money Market Mutual Funds Share+ Savings & Small
Time Deposits(less than 24 hours).
 M3
M3 Includes items most people never see.
M3= Sum of M2 & Large Time deposits + Team Repurchase Agreements.
 M4
M4=Sum of M3 +Saving Bonds.
M2, M3 & M4 are called Broad Money.
Figure:Scatter Diagram of Broad Money.

Inflation
Inflation is the rate at which the general level of prices for goods & services is
rising and consequently, the purchasing power of currency is falling.
Types of inflation:
1. Demand Pull Inflation: This represent a situation where the basic
factor at work is the increase in demand for resources either from the
government or the entrepreneurs or the household. It involves
inflation rising as real gross domestic product rises and unemployment
falls.
2. Cost Push Inflation: It is inflation caused by an increase in prices of
inputs like labor, raw material etc. The increased price of the factors of
 production leads to a decreased supply of these goods. While the
demand remain constant, the prices of commodities increase causing a
rise in the overall price level.

Economic Growth (GDP)

Economic growth is an increase in the production of economic goods and
services, compared from one period of time to another. Gross domestic product
(GDP) is the most commonly used measure for the size of an economy. Gross
domestic product (GDP) is the total monetary or market value of all the final
goods and services produced within a country's borders in a specific period of
time.
GDP is defined by the following formula:
GDP=Consumption +Investment +Government Spending +Net Exports
Or more succinctly as GDP=C +I +G +NX where consumption (C) represents
private-consumption expenditures by households and nonprofit organizations,
investment (I) refers to business expenditures by businesses and home purchases
by households, government spending (G) denotes expenditures on goods and
services by the government, and net exports (NX) represents a nation’s exports
minus its imports.
Figure: Scatter Diagram of GDP.
GDP growth means The measure the percebtage change in real GDP from one
period to another.

% growth GDP=(GDPt –GDPt-1/GDPt)×100

Where,
GDPt=Current Year GDP
GDPt-1=Base Year GDP
Figure: Scatter Diagram of GDP Growth.

Exchange Rate
An exchange rate is a rate at which one currency will be exchanged for another
currency.
Types of exchange rate:
1. Fixed exchange rates: This means that two currencies will always be
exchanged at the same price.
 2. Floating exchange rates: This means that the prices between each
currency can change depending on market factors; primarily supply and
demand.

Figure: Scatter Diagram of Exchange Rate.

Foreign Trade:
Foreign trade is the exchange of goods and services between two countries in the
international market. Foreign trade creates a specialization in the production &
provides benefits of specialization.
Figure: Scatter Diagram of Trade.

Statistical Analysis :
Descriptive Statistics for Broad Money

N Range Minimum Maximum Mean Std. Deviation

Statistic Statistic Statistic Statistic Statistic Statistic

Broad Money(In % of GDP) 50 64.5065521 .0000000 64.5065521 32.523671251 19.1628560630

Valid N (listwise) 50
 Descriptive Statistics for GDP

N Range Minimum Maximum Mean Std. Devia

Statistic Statistic Statistic Statistic Statistic Statisti

50 409976754133 6288245867 416265000000 86530418147.26 1044174315

GDP (In Current US $)

Valid N (listwise) 50

Descriptive Statistics for GDP Growth

N Range Minimum Maximum Mean Std. Deviation

Statistic Statistic Statistic Statistic Statistic Statistic

GDP Growth(In Annual %) 50 23.5656850 -13.9737287 9.5919563 4.591919636 3.409637003

Valid N (listwise) 50

Descriptive Statistics for Exchange Rate

N Range Minimum Maximum Mean Std. Deviation Varian

Statistic Statistic Statistic Statistic Statistic Statistic Statist

Exchange Rate 50 77.3835791 7.7001842 85.0837633 46.948916597 25.0952643046 629.

Valid N (listwise) 50

Descriptive Statistics for Inflation

N Range Minimum Maximum Mean Std. Deviation Varia

Statistic Statistic Statistic Statistic Statistic Statistic Stat

Inflation 50 98.2001757 -17.6304193 80.5697564 10.299074332 15.2598554413 23
Valid N (listwise) 50

Descriptive Statistics for Trade

N Range Minimum Maximum Mean Std. Deviation V

Statistic Statistic Statistic Statistic Statistic Statistic S

Trade(In % Of GDP) 50 37.1152966 10.9956261 48.1109228 27.245346190 9.4560794892

Valid N (listwise) 50
Regression Model:

Model Summary

Model R R Square Adjusted R Std. Error of the

Square Estimate

1 .473a .223 .135 3.1709923034

a. Predictors: (Constant), Broad Money(In % of GDP), Inflation,

FDI(BoP,Current $), Trade(In % Of GDP), ExchangeRate

ANOVAa
Model Sum of Squares df Mean Square F Sig.

Regression 127.227 5 25.445 2.531 .043b

1 Residual 442.428 44 10.055

Total 569.656 49

a. Dependent Variable: GDP Growth(In Annual %)

b. Predictors: (Constant), Broad Money(In % of GDP), Inflation, FDI(BoP,Current $), Trade(In %
Of GDP), Exchange Rate

Coefficientsa

Model Unstandardized Coefficients Standardized

Coefficients

B Std. Error Beta

(Constant) 1.647 1.942

Inflation -.004 .033 -.018

Exchange Rate .050 .045 .368

1
FDI(BoP,Current $) 3.709E-010 .000 .088

Trade(In % Of GDP) -.017 .094 -.047

Broad Money(In % of GDP) .040 .055 .225

a. Dependent Variable: GDP Growth (In Annual %)

GDP Growth =(-.004)Inflation+(.050)Exchange Rate+(3.709E-010)FDI-(.017)Trade+

(.040)Broad Money+1.647
se =(.033) (.045) (.000) (.094) (.055) (1.942)
 t= -.118 1.114 .367 -.179 .732 .848
R2=.223
The regression model implies if the inflation increase say one percent then the GDP growth will
decrease by 4% & also if exchange rate , FDI, Broad Money increase ,GDP growth also
increase.R2 value is about .223 means that about 23% of the variation in GDP growth is
explained by inflation, exchange rate, FDI,Trade, broad money jointly.