As expected, capital formation is positively correlated with economic growth. For every
percentage point increase in gross capital formation (%GDP), GDP growth will increase 0.181%.
However, in contrast to my theoretical prediction, inflation rate is not negatively correlated with
GDP growth. This research finds that there is 0.288% increase in GDP for every 1% increase in
inflation. The Balassa-Samuelson effect that might have taken place in a number of developing
countries could be the driving factor of this positive correlation. This effect underlines that high
productivity growth that is experienced by some countries will lead to higher wages and
eventually higher prices in non-traded goods. Therefore, it will result in inflation. Inflation tends
to rise faster in emerging economies which have more room for productivity improvement
compared to the developed economies (Investopedia). Therefore, the positive correlation
between inflation and GDP growth in the Model C can potentially be impacted by the high
productivity growth experienced by some emerging economies in the sample countries