The Relationship between the Ethiopian Economic Growth and the Decrease in Purchasing Power of Consumers

Abstract

There is no clear theory which states fixed relationship between inflation and growth. Controversy by quantity and institutional inflation theories also confirm this. According to quantity theorists, there is a long-run trade-off between inflation and economic growth but the supporters of institutional theory of inflation, are less sure about presence of negative relationship about inflation and growth. Thus, the relationship between inflation and economic growth is debatable both in the world and specifically to Ethiopia. Therefore, the objective of this critical review is to determine the relationship between the current status of the Ethiopian economy and the consumer price index by considering the economic development indictors and consumer price index. The nexus of inflation and economic growth is one of the most important macroeconomic policy problems that take the attention of researchers, policy makers and different scholars. Conducting this review will benefit developing countries by discovering what their current status is, as far as a person with a higher level of consumption is regarded as having a higher level of economic wellbeing than someone with a lower level of consumption. This study falls within the ambit of the pragmatism philosophical stance and exploratory in nature. This study applied the inductive method of reasoning and used secondary data. The Study found that there is a negative relationship between the Ethiopian economic growth and the purchasing power of consumer (consumer price index) synonymously measured by the inflation-macroeconomic growth trade-off. The review reveals that Ethiopian economy is highly growing and the consumer price index (purchasing power of consumers) is decreasing. This shows that the purchasing power consumer (consumer price index) in Ethiopia is not solely determined by the macroeconomic development, which in turn requires further investigation. It is recommended therefore that future research works will explore more on the relationship between the Ethiopian economic growth and the purchasing power of consumer or clearly can explore the effect of economic growth on the purchasing power of consumers (consumer price index).