Relationships between the variables (Regression and Correlation)

Table of Contents
Introduction ..................................................................................................................................... 3

Findings........................................................................................................................................... 3

Correlation ................................................................................................................................... 4

Regression (Impact of interest rate on GDP of the UK) ............................................................. 4

Conclusion ...................................................................................................................................... 5
Introduction
Economic growth is considered to be important as this helps in improving the quality of life and
helps enhance the standard of living. Growth in an economy helps in enjoying more goods and
services and helps in reducing the level of unemployment. For understanding the economic growth,
GDP growth rate is considered to be quite important. In this section of the paper, a detail analysis
is presented on the factors that influences the GDP of the United Kingdom. The timeframe of the
analysis is between 2000 and 2015. The following are the objective of the report:

1. To determine whether interest rate has a relationship with GDP of the UK.
2. To determine the effect of interest rate on GDP of the UK

Findings
Prior to the Great recession, between 1999 and 2008, the growth of GDP of the UK was 2.8% on
an average. The economy was hit hard due to the financial crisis caused due to overinvestment in
the housing industry and strong dependence of the customer on credit. The growth in GDP was
witnessed in 2009 by 5.2% due to the increase in the private investment. There was rebounded
growth in 2010 by 1.7% expansion (Focus Economics, 2019). The service sector specially the
financial sector plays a very important role in affecting the domestic demand. Interest rate is one
of the important variable that helps in understanding the financial market and also its influence in
the economy. The main reason for interest rate to have an impact on GDP is because a rise in the
rate of interest causes the opportunity cost of making purchases of capital more and this causes the
shift in the aggregate demand and reduces the real GDP. On the other hand, the higher rate of
interest rate causes consumers to reduce their level of consumption. The combine impact of the
GDP and interest rare are related inversely.

Considering the GDP data of the UK from 2000 to 2015, it has been observed that all the years
have witness positive GDP growth rate except for 2008 and 2009 as the country was hit by the
Great Recession. On the other hand, the interest rate is found to be positive. Other variables that
has some weak positive relation in the tourism receipt. This has revealed that the tourism sector
has a significant contribution on the GDP of the country (Asteriou and Price, 2001).
Correlation
Tourism
receipt
GDP (% of
growth Interest total
rate rate exports Inflation
GDP growth rate 1
Interest rate 0.618492 1
Tourism receipt (% of total exports 0.354576 0.188653 1
Inflation 0.396029 0.550943 -0.21856 1

Interest rate
30.0

20.0

10.0 y = 5.7128x - 10.136

R² = 0.3825
0.0
-5 -4 -3 -2 -1 0 1 2 3 4
-10.0

-20.0

-30.0

-40.0

-50.0

Correlation is a statistical test that is important for finding relationship between two variables. It
helps in determining the strength of association. The value of correlation should lie within -1 to
+1. A negative correlation shows that the variables are inversely correlated. In the above
correlation table, we have found the positive correlation of GDP with interest rate, inflation rate
and tourism receipt. There is a weak positive correlation of GDP and tourism receipt of 0.39. This
implies that a rise in the tourism receipt has an impact on the GDP of the UK. It is quite interesting
to note that interest rate has a positive relation with GDP growth. Tourism is one such potential
sector for the UK economy.

Regression (Impact of interest rate on GDP of the UK)

H0: There is no effect of interest rate on GDP of the UK

H1: There is effect of interest rate on GDP of the UK

 SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.618492
R Square 0.382532
Adjusted
R Square 0.338427
Standard
Error 1.52568
Observati
ons 16

ANOVA
Significa
df SS MS F nce F
Regressio 20.188 20.188 8.6732
n 1 72 72 51 0.01065
32.587
Residual 14 79 2.3277
52.776
Total 15 52

Coefficie Standar P- Lower Upper Lower Upper

nts d Error t Stat value 95% 95% 95.0% 95.0%
0.3817 4.8388 0.0002 2.6658 1.0283 2.6658
Intercept 1.847117 29 23 63 1.028391 44 91 44
Interest 0.0227 2.9450 0.0106 0.1157 0.0181 0.1157
rate 0.06696 37 38 5 0.018195 25 95 25

The value of R square is 0.33 which implies that 33% variation in the independent variable has an
impact on the GDP. The level of significance is 0.01 which is less than 0.05 so the null hypothesis
is reject. Thus, interest rate has an effect on GDP of the UK.

Conclusion
The UK economy is dependent significantly on a number of industries. However, the services and
the tourism sector is found to make a positive contribution sector. The higher interest rate is a
concern as this is found to affect the GDP of UK economy. Tourism is one of the significant sector
that can help improving the GDP significantly in the near future.
References

Asteriou, D. and Price, S., 2001. Political instability and economic growth: UK time series
evidence. Scottish Journal of Political Economy, 48(4), pp.383-399.

Focus Economics, 2019. GDP of the United Kingdom. Available at:< https://www.focus-
economics.com/country-indicator/united-kingdom/gdp>

Office for National Statistics 2019. Interest annual growth rate. Available at:<
https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/kgs4/qna> [Accessed 28
October 2019]

World Bank, 2019. GDP growth rate. Available at:<

https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=GB [Accessed 28
October 2019]
Appendix

Tourism receipt (%
GDP growth rate Interest rate of total exports Inflation
2000 3.453460554 21.1 7.302174798 28.08934
2001 2.840696245 2.3 6.517208445 -0.16866
2002 2.499726971 -6.7 6.599922992 0.855808
2003 3.339456189 0.2 6.399385857 -0.21712
2004 2.347792052 10.6 6.601046856 7.765279
2005 3.148724236 12.7 6.696960562 20.09447
2006 2.548078385 16.2 6.37603315 9.868137
2007 2.545500795 19.2 6.687958544 4.231362
2008 -0.345861044 13.1 6.209059588 20.47896
2009 -4.246605 -40.9 6.20844137 -18.0745
2010 1.711206445 -29.3 5.862517238 16.56432
2011 1.644770017 -2.0 5.840188751 12.68123
2012 1.447060443 7.6 6.585535095 -2.9419
2013 2.046355153 -8.8 6.885769506 -6.15792
2014 2.947560564 9.1 7.360553299 -0.85139
2015 2.349121443 -13.6 8.244673697 -8.92717
(Source: Office for National Statistics 2019, World Bank, 2019)