1

Scope
There were huge scopes to work in the area of this Case Study. Considering the dead line,
and exposure of the paper has been wide-ranging. The study has covered overall scenario of
Relationship between the inflation, and growth trend in perspective of Bangladesh.
Macroeconomics situation of Bangladesh can be measured by the living standard of mass
people. We have a chance to work on the economic variable used in modern economic world. By
doing the assignment, we are able to know that the importance of inflation, & growth trend to
assess how the people of the country living in. In the case study we have showed how the above
variables are inter related on each other.

Methodology
We have used the concept of the course, information of the case study. Sources of Data
Here the secondary sources of information were used. The secondary sources are:
Books.
Website.
Case Study
Journals


Limitations
While conducting the report on A case Study of Bangladesh: Inflation &Growth Trend,
some limitations were yet present there:
o Because of time shortage many related area cant be focused in depth.
o Website in different organization of Bangladesh contains poor information.
o Recent data and information on different activities was unavailable
Inflation
In economics, inflation is a sustained increase in the general price level of goods and
services in an economy over a period of time. When the general price level rises, each unit of
currency buys fewer goods and services. Consequently, inflation reflects a reduction in the
purchasing power per unit of money a loss of real value in the medium of exchange and unit of
account within the economy. A chief measure of price inflation is the inflation rate, the
annualized percentage change in a general price index (normally the consumer price index) over
time.

2
Inflation's effects on an economy are various and can be simultaneously positive and
negative. Negative effects of inflation include an increase in the opportunity cost of holding
money, uncertainty over future inflation which may discourage investment and savings, and if
inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that
prices will increase in the future. Positive effects include ensuring that central banks can adjust
real interest rates (to mitigate recessions), and encouraging investment in non-monetary capital
projects.
In another word Inflation means that your money wont buy as much today as you could
yesterday.
Definition of Inflation rate (consumer prices)
The rate at which the general level of prices for goods and services is rising, and,
subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along
with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.
Effect on the economy:




General Effect
Inflation is viewed as being undesirable because of some serious economic and social
effects. Inflation impacts on income distribution making a random redistribution of real income.
Those receiving fixed money incomes (e.g., pensioners, beneficiaries etc.) are usually
disadvantaged because often their incomes are not adjusted upwards fast enough to compensate
for the effects of continually rising prices. Their real incomes (i.e., the goods and services their
incomes will buy) will fall. Individuals whose incomes rise more rapidly than the inflation rate
will experience increasing real incomes. Generally, the pattern of income distribution tends to
become more unequal than it was before inflation. If the rate of inflation is high, individuals with

3
money tend to buy real assets such as property, gold and antiques, which often increase in value
faster than the rate of inflation. This group will gain by increasing the size of their share of the
nation's wealth.
An increase in the general level of prices implies a decrease in the purchasing power of
the currency. That is, when the general level of prices rises, each monetary unit buys fewer
goods and services. Increases in the price level (inflation) erode the real value of money (the
functional currency) and other items with an underlying monetary nature (e.g. loans and bonds).
For example if one takes a loan where the stated interest rate is 6% and the inflation rate is at
3%, the real interest rate that one are paying for the loan is 3%. It would also hold true that if one
had a loan at a fixed interest rate of 6% and the inflation rate jumped to 20% one would have a
real interest rate of -14%.
Negative Effect
High or unpredictable inflation rates are regarded as harmful to an overall economy. They
add inefficiencies in the market, and make it difficult for companies to budget or plan long- term.
Inflation can act as a drag on productivity as companies are forced to shift resources away from
products and services in order to focus on profit and losses from currency inflation. Uncertainty
about the future purchasing power of money discourages investment and saving and inflation can
impose hidden tax increases. In case of international trade, Higher inflation in one economy
than another will cause the first economy's exports to become more expensive and affect the
balance of trade.
Positive Effect
Positive effects include ensuring central banks can adjust nominal interest rates (intended
to mitigate recessions), and encouraging investment in non-monetary capital projects. It puts
impact on Labor-market adjustments, Room to maneuver, Mundell-Tobin effect, Instability with
Deflation etc.
Investment, in economics, means the creation of new capital goods. Investment can only
take place if there is saving. Inflation encourages spending and discourages saving, so funds that
might otherwise have been available for investment tend to dry up. With lower levels of
investment there is likely to be a slowing of the rate of growth of national output (GDP). This in
turn leads to a reduction in new jobs and so can increase the level of unemployment. Inflation
can distort market price signals and the market may fail to allocate resources efficiently.
Planning and investment decisions become more difficult to predict as firms are unsure what will
happen to prices and costs during times of inflation. If firms are unable to pass on the increase in
costs to consumers this will impact on profits possibly causing some firms to close or cut back
production and subsequent employment.




4

Scenario of inflation in Bangladesh:

Year Year Inflation
rate (Consumer Price)

Year Year Inflation
rate (Consumer Price)

1991 8.0 2003 3.1
1992 3.8 2004 5.6
1993 3.0 2005 6.0
1994 3.5 2006 7.0
1995 8.8 2007 7.2
1996 7.0 2008 9.1
1997 2.6 2009 8.9
1998 7.0 2010 8.12
1999 9.0 2011 8.80
2000 9.0 2012 10.62
2001 5.8 2013 10.39
2002 5.8 2014







8
3.8
3
3.5
8.8
7
2.6
7
9 9
5.8 5.8
3.1
5.6
6
7
7.2
9.1
8.9
8.12
8.8
10.62
10.39
0
2
4
6
8
10
12
1985 1990 1995 2000 2005 2010 2015
I
N
F
L
A
T
I
O
N

R
A
T
E

(
%
)

YEAR

5

Causes of Inflation:

Excess of money
Inflation can happen when governments print an excess of money to deal with a crisis. As
a result, prices end up rising at an extremely high speed to keep up with the currency surplus.
This is called the demand-pull, in which prices are forced upwards because of a high demand.
In the above diagram we can see that, when government increases money supply in the
economy, the value of money decreases, there for it is clear that too much money supply by
government in the economy can create inflation.
Rise in production cost
Another common cause of inflation is a rise in production costs, which leads to an
increase in the price of the final product. For example, if raw materials increase in price, this
leads to the cost of production increasing, which in turn leads to the company increasing prices
to maintain steady profits? Rising labor costs can also lead to inflation. As workers demand wage
increases, companies usually chose to pass on those costs to their customers.


6


In the above model it is clearly shown that when the wages of the employee increases the
demand of worker decreases therefore firm need to do their operation with few worker which
increases production cost and as we know that higher production cost means higher prices of
products.
International lending & national debt
Inflation also caused by international lending and national debts. As nations borrow
money, they have to deal with interests, which in the end cause prices to rise as a way of keeping
up with their debts. A deep drop of the exchange rate can also result in inflation, as governments
will have to deal with differences in the import/export level.
Government taxes
Finally, inflation can be caused by Government taxes put on consumer products such as
cigarettes or fuel. As the taxes rise, suppliers often pass on the burden to the consumer; the catch,
however, is that once prices have increased, they rarely go back, even if the taxes are later
reduced.
Limitations of Economic system:
The quarterly data on budget deficit and government expenditures are not available,
which hinders the analysis on the supply side determinants of inflation. The wage rate is not
considered here because of the developing country nature, Labor is assumed to be abundant. The
key findings:
Inflation in Bangladesh can be explained by money supply growth as money supply has
statistically significant power of forecasting the movement in CPI. It might be channeled through
either the effects of money supply on GDP or the effects of money supply on exchange rates.

7
The deposit rate of interest is a relatively weak determinant of fluctuations in inflation in
Bangladesh, whereas deposit rate of interest is a moderately strong determinant of nominal
exchange rate, but only in the short run.
Money supply is a moderate determinant of fluctuation in real output, at the same time;
money supply is a moderately strong determinant of fluctuation in nominal exchange rate in
Bangladesh during the period FY90-FY10.
Trend Analysis:
The government introduced policy and institutional reforms encompassing the fiscal,
financial, exchange rate, trade and industry, public resource management and public enterprise
sectors. But some of those measures were not strongly pursued and some of the intended
structural reforms were postponed. Monetary control in the initial years had a positive impact on
the control of inflation.
The regarded decision are taken below-
1. To increase investible funds with the banks, the minimum cash reserve requirement and
statutory liquidity requirement were reduced gradually from 8 and 23 per cent
respectively on 25 April 1991 to 5 and 20 per cent respectively. This decision has
reduced the inflation rate.
2. In 1991 the lending rate was 14.99, which was high during 1992, but then it started to be
reduced at 14.39 (1993) and 12.22 at 1995.
3. With the flexible use of the monetary instruments, broad money growth (Money Supply)
was brought down from high rates of growth (14.1 percent) in the mid-1992 to 10.6 per
cent in June 1993 to reduce the rate of inflation.
4. In the year 1995 government was thinking to increase the money supply, which was
brought to 16 percent for that reason inflation rate increased.
5. In the year 1995 government was thinking to increase the total domestic credit, which
was brought to 17.6 percent from 4.9 percent (1994). For this reason the inflation rate
increased.
6. In the year 1995 government liberalized Credit to the private sectors in fiscal year 1995
by reducing lending rates including those in the three selected sectors of agriculture,
exports, and small and cottage Industries had to be restrained due to the rise in price
levels. For this reason inflation rate has increased
7. With a view to ensuring an adequate flow of finance to productive sectors and to boosting
economic activity, Bank rate was gradually lowered from 9.8 per cent on 30 June 1990 to
5.5 per cent on 3 March 1994 to control the inflation rate.
8. On 24 March 1994 Bangladesh accepted the Article VIII obligations of the International
Monetary Fund, a commitment to declare its currency convertible for current account
transactions and liberalize exchange transactions on current account. Foreign exchange
controls, which had constrained transactions for a long time, were lifted for the majority
of current account transactions. An interbank foreign exchange market has been

8
established. The exchange rate policy is being managed flexibly so as to avoid
appreciation of the real exchange rate and to maintain macroeconomic stability.
9. Moderate economic growth and modest change in the wage index contributed to the
relatively low rate of inflation (i.e., lower than 5 per cent) in 1990-1994.
10. Higher money supply growth and lower deposit rate in FY95 contributed to the
comparatively higher inflation rates in 1995.
11. In 1996 the lending rate was 13.41, which were accelerated to 14.16 in 1999.
12. Supply shortages in the rural areas originating from political instability in FY96 and
disruption due to floods in 1998 caused serious shortfall of food and also hampered all
other agricultural production, which ultimately caused higher inflation rates in 1996,
1998 & 1999.
13. A lower growth rate, because of lower production and relatively higher depreciation of
the exchange rate due to food imports, also contributed to the higher inflation rate in the
flood-affected years.
14. Larger depreciation of the exchange rate has accelerated the inflation rate 2.79 (2002) to
4.38 (2004). Exchange rate might have played a significant role in causing inflation in
2005-2006 because of the introduction of flexible exchange rate regime since May 2003.
15. A higher growth of money supply (13.84 at 2004 to 19.51 at 2006) added a lot to
inflation in 2005-2006.
16. In 2001 the lending rate was 13.75, which were lowered to 10.93 in 2005.
17. In 2001-2006 high inflation in food (more than 5 percent) sector at international market
was so much responsible for the fluctuation of inflation.
18. Typically import occupies a significant place in the Bangladesh economy, accounting for
as high as above 20 percent or more of GDP in FY06. At the margin, most of the
essential food items (for example, sugar, rice, wheat, onion and edible oil) and, more
generally, machineries, intermediate goods and raw materials used in production are
imported. Cost of imports can, therefore, be expected to have a substantial influence on
domestic inflation (during 2001-2006) directly (through final goods) or indirectly
(through intermediate goods).
19. Unfair cartel among the suppliers might seriously hamper the course of the economy by
engendering inflation via the creation of a false supply shortage even during a period of
robust growth in production. Such an undesirable event allegedly occurred in FY06 when
the food inflation remained high (7.76 percent) in the same fiscal year despite the growth
in food production (4.49 percent8 vis--vis 2.21 percent in FY05). Monopolistic control
of several food items such as sugar, onion, pulses and edible oil by market syndication
seems to have led this situation.9 Obviously such manipulation is a type of supply side
disturbance.
20. Inflation has emerged as a global phenomenon in recent months largely reflecting the
impact of higher food (The IMF food price index was 44.4 percent at June 2008) and fuel
prices and strong demand conditions especially in the emerging economies. In line with

9
global trends, Bangladesh also experienced rising inflation with the 12- month average
CPI inflation touching 9.94 percent in June 2008.
21. In the fiscal year 2009, global oil price has shifted upward dramatically so fast. So that
the price of fuel & power has driven very sharp impact on our economy by increasing the
price of Industrial product and reduces the output of industry. Though our government
has taken needed initiatives to minimize the inflation rate but they have failed up to the
expectation.
22. In the fiscal year 2010, global food price has shifted upward dramatically so fast. So that
the price of food has driven very sharp impact on our economy. Though the inflation has
decreased to a reasonable rate (5.4 percent), the price of food is beyond to the normal
people.
23. Because of the insufficiency of credit to productive sectors it is unable to invest money in
productive sectors whereas the money are using in less productive sectors which causes a
high rate of inflation.
Needed steps:
These results have important policy implications for both domestic policy makers and the
development partners.
First, taking into consideration that the inflation rate is not indexed in the wages and
salaries, inflation will lead to a decrease in the purchasing power and an increase in the cost of
living.
Second, given that the country frequently has to balance the credit requirements by the
private and public sector against both inflationary and balance of payments pressures, it is not
always possible for the monetary authority to increase (or adjust) the nominal interest rate above
the expected (or actual) inflation rate through contractionary monetary policy 11. In this regard,
the monetary authority can think of an alternative way by working on the expectations channel to
reduce inflation. This requires credibility of the monetary authority in following through its
monetary program as communicated in advance to the stakeholders.
Growth Trend
Economic growth is the increase of per capita gross domestic product (GDP) or other
measures of aggregate income, typically reported as the annual rate of change in real GDP. The
trend of the growth of the real GDP is called Growth Trend. Economic growth is primarily
driven by improvements in productivity, which involves producing more goods and services with
the same inputs of labor, capital, energy and materials. The topic of economic growth is
primarily concerned with the long run. The short-run variation of economic growth is termed the
business cycle.



10
Theories on economic growth
Classical growth theory

The classical theory was that productive capacity, itself, allowed for growth and the
improving and increasing capital to allow that capacity was "the wealth of nations". Whereas
they stressed the importance of agriculture and saw urban industry as "sterile", Smith extended
the notion that manufacturing was central to the entire economy.

The neoclassical growth model
The notion of growth as increased stocks of capital goods (means of production) was
codified as the Solow-Swan Growth Model, which involved a series of equations which showed
the relationship between labor-time, capital goods, output, and investment. According to this
view, the role of technological change became crucial, even more important than the
accumulation of capital. This model assumes that countries use their resources efficiently and
that there are diminishing returns to capital and labor increases. From these two premises, the
neoclassical model makes three important predictions.
First, increasing capital relative to labor creates economic growth, since people can be
more productive given more capital.
Second, poor countries with less capital per person will grow faster because each
investment in capital will produce a higher return than rich countries with ample capital.
Third, because of diminishing returns to capital, economies will eventually reach a point
at which any increase in capital will no longer create economic growth. This point is called a
"steady state".
Technology improves, the steady state level of capital increases, and the country invests
and grows.
Last Ten years GDP growth of Bangladesh are given below

Country 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Bangladesh 6.27 5.96 6.63 6.43 6.19 5.74 6.07 6.71 6.32 6.01


11


The Gross Domestic Product (GDP) in Bangladesh expanded 6.01 percent in the fiscal year
2012/2013 from the previous year. GDP Growth Rate in Bangladesh is reported by the
Bangladesh Bank. From 1994 until 2013, Bangladesh GDP Growth Rate averaged 5.6 Percent
reaching an all-time high of 6.7 Percent in June of 2011 and a record low of 4.1 Percent in June
of 1994. Bangladesh is considered as a developing economy. Yet, almost one-third of
Bangladeshs 150m people live in extreme poverty. In the last decade, the country has recorded
GDP growth rates above 5 percent due to development of microcredit and garment industry.
Although three fifths of Bangladeshis are employed in the agriculture sector, three quarters of
exports revenues come from producing ready-made garments. The biggest obstacles to
sustainable development in Bangladesh are overpopulation, poor infrastructure, corruption,
political instability and a slow implementation of economic reforms
Historical Trends of Inflation and Economic Growth
Our economy has experienced accelerated economic growth during the early 1990s in
comparison with the 1980s. However, after that period, the economy experienced most severe
exigency states like increasing inflationary pressures, deteriorating governments budgetary
balances and decreasing foreign exchange reserves. Throughout the first half of the 1990s,
inflation rate was, on average, 5.37 percent, while GDP growth rate was 4.06 percent.
Inflation rate increased, on average, to 5.52 percent in the second half of the 1990s, the
growth rate of GDP continued to increase.
The beginning of the new decade after 1990s and inflation was observed at 4.14 percent,
on average, during 2001 to 2005, when growth rate of GDP was, on average, 5.19 percent.
6.27
5.96
6.63
6.43
6.19
5.74
6.07
6.71
6.32
6.01
5.6
5.8
6
6.2
6.4
6.6
6.8
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

12
What the average GDP growth rate is when inflation rates are 3 percent or less during the
period from 1981 to 2005 and so on. Illustrates a positive relationship between inflation and
GDP growth up to the inflation rate of 7 percent (approximately) and a negative relationship is
observed after that level of inflation rate.

Needed Steps

Our first and foremost concern is to keep the inflation rate under 7 percent cause with this
inflation rate growth is positive.
Our government should take initiative to reduce deterioration of budgetary balance
because budget deficit is the major obstacle to growth trend.
Our government should take steps to increase foreign exchange reserve, which will add a
lot to growth.
Relationship with Inflation



Above diagram shows that when the inflation rate is high, firm needs more money to
produce products there for the supply of the product can be decreased in the economy. Anther
way if there is a high money supply in the economy then the price of the product will increase as
the quantity theory of money states and if the money supply as well as price level increases than
the nominal income might be increased but the real national income will decrease.
Over the past few decades, the nexus between inflation and economic growth have drawn
extensive attention of macroeconomists. Specifically, the issue that whether inflation is
necessary for economic growth or it is harmful generates a significant debate both theoretically
and empirically.

13
In this connection, Mundell (1965) and Tobin (1965) predict a positive relationship
between the rate of inflation and the rate of capital accumulation, which in turn, implies a
positive relationship to the rate of economic growth. They argue that since money and capital are
substitutable, an increase in the rate of inflation increases capital accumulation by shifting
portfolio from money to capital, and thereby, stimulating a higher rate of economic growth
(Gregorio, 1996).

From the above Philips curve shows that when the inflation rate is high the
unemployment rate is low there in that way we can say that at a minimum level inflation rate is
good for economy but if the inflation rate is too high than it is negatively impact the economy.

Findings of the study

The intension of this study is to know how to work with digital information system. The
major findings of the overall study are discussed below:
Importance of inflation, and growth trend.
How they are interrelated with each other.
Reason behind the factors (inflation, and growth trend)
Historical trend of these macroeconomic factors.
The overall economic & monetary scenario of Bangladesh.
Conclusion
After completing this study we have learnt that inflation, and growth trend are highly
correlated. Authority cannot overlook factor individually. In our country inflation rate is highly
relying on supply side and exchange rate. Inflation is positively related with growth rate up to 7
percent after that it gets negative. In our country, labor factor cannot be counted so effectively to
calculate inflation.


14
References:
1. www.bb.org.bd
2. www.mol.gov.bd
3. www.economywatch.com
4. www.en.wikipedia.org
5. http://www.tradingeconomics.com/bangladesh