The Effect of Gross Domestic Product and Money Supply on Inflation, Albanian Case

Abstract

One of the biggest macroeconomic issues is the correlation between economic growth, inflation and the total amount of money in circulation or in existence in a country. Case of Albania is quite sensitive since it has been under the communism for a long time. Only after the fall of communism which started deteriorating in 1990, Albanian economy started having a good performance on fighting the post-communism. Economic growth is the best indicator to measure the performance of a country in a year. Thus, it has to do directly, positively or negatively to other indicators. The methodology used to understand the relationship (effect) of GDP and money supply on inflation, is multiple regression analysis. In this case we examine a sample made of 14 years from 1994 up to 2008. The independent variables are GDP and money supply since both have a crucial effect on the increase in prices and fall in the purchasing value of money.