MACROECONOMIC DETERMINANTS OF

ECONOMIC GROWTH IN CASE OF PAKISTAN

By
Taha Najam Raja

NATIONAL UNIVERSITY OF MODERN LANGUAGES

ISLAMABAD
August, 2015

Chapter 1
Introduction
1.1 Introduction:
The total price of commodities produced and services provide in a state in the period
of one year is and within the boundaries known as economic growth and development
.Each country in this world want and its one of the main priority and purpose to
achieved the economic growth. Each country want to know as a developed country in
the world. Every developing country have a mission to able to control poverty, to
increased his standard of living, strengthening and strong their political and social
institutions of a country and then achieve good stability in his country. We were know
very well that without good and stable GDP of any country cannot be said to be good
developed country in our world. Economic growth and development is the flow of
capital market. The persistence of the economy of economic growth in each country.
It can be the determining opportunities to give, in which private consumption, the
budget deficit and external debt. But in this project our aim and objective is to
examine the growth of economy with the help of domestic investment, government
spending, domestic savings, inflation, and domestic exports. My work aims, factors
that influence to determine positive or negative economic growth. And my motivation
is to examine how economic growth of Pakistan is goes up.
In the 1980s the growth of Pakistan has come good due to good government polices
so outcomes is good for economic growth of Pakistan and even development. On this
moment, Pakistan is facing a lots of difficulties and problems. Pakistan per capita
income is very low at 1990 and 1995 for several reasons. As per the report of World
Bank, there is seven countries in which low-income and its decreasing with passage
of time Pakistan is one of them countries. For the government faces operating costs
and taxes was very poor. Low Gov. Expenditures, consumption and taxes is the best
thing for economic growth. They have all show the result in the country, whether its
positive or negative. If the Gov. of Pakistan done that then increases to balance
economic wealth and growth of economy in our country, but Pakistan fast moving
economic policies was weak or unstable from 1995 to 2000. In time of 2000 to 2006
Gov. of Pakistan make the economic policies in some diverse sectors and industrial
2

and agriculture sectors of economy like as cotton ginning, both cotton and rice, Health
policy, cotton ginning and flour mills for the purpose of good economic growth and
development policies. In that time our Pakistani currency is value against dollar$
numerous and better policies also valued in that period. And at that time main reason
is political stability because of new marshal law government by Perviz Musharaf and
that time the FDI is very high in especially in telecommunication sector and industrial
and also due to afghan war we also enjoy the foreign aid like in Zia era. So thats is
the main reason behind stability of Pakistani rupee and stable USD $.
From the time period of 2007 to 2010 the state of Pakistan economy faces most
horrible and pathetic situation because of many reasons like political instability,
terrorism, inflation, world economy collapse and also the major reason is corruption
in government then at that time gov. do not took the any step for good and better
judgment of capita, industrialized, Banking sector and goods plants and factories.
Hard to introduce power crisis and its one of the main problems of the Pakistani
economy. Because of these difficulties, which are pending at this time many industries
in Pakistan and Pakistan's economic expansion begins to plummet. So the government
does not provide an agreement in this economy so back .The main cause behind this
high taxes, energy and power crises, political instability and also on that time we have
no production for international trade so the clothes and textile units and production
houses are being stopped. As David Romer says in (1986) and Lucas (1988) money
gain and growing cause an increasing growth rates. According to Fischer in 1993 that
economic growth and inflation have a negative relationship and a positive result for
stable returns to scale, that is why we need a good human capital, venture to arrive the
(R & D) and technological developments R & D.
According to report of UN in south Asian countries there 1.4% poor inhabitants
lives. There are four components be careful when forming rate of increase in labor
productivity, capital person, skill and physical capital and two are close in view of the
income referred to occasionally as GDP (I) period is given by the sum of total return
expected for workers, including gross and companies not included and taxes less
subsidies. The output method is the most common movement to and is determined by
adding full utilization, investment, government and net exports. The country's
development have an ability to organize and overcome the poverty, and better
3

standard of living, and must be make it harder for their support and social
organization and stability. The backbone of the economy is the growth of economy. It
can be crucial across different types and private spending, budget shortages, foreign
money. But to pursue this matter in the main center is economic growth through
expense management, savings, price increases and foreign direct investment in the
1980s, public spending has been physically powerful for the growth of economy of
country.
From the period of 1991-2000 the stability in politics was terrible. In last of 1990'2
Decade United Nations impose sanctions on our country; because of main reason is
export is fell slowly. Administrative expenses will rise during this decade. Normally,
the cost of litigation is used to make a decision region war zone.
From 1988, the economic management of Pakistan were fully depend on SAP
(Structural Adjustment Programmed) .There is civilizing the bop, reducing budget
deficits, reduced to improve economic growth and rising prices. Improving the
balance of payments from one side to the local currency depression, cutting the
business lacks side; Trade liberalization and the fall of management size. Financial
growth is in the direction of the constant return of scale, therefore, be necessary
capital more funds in ID (research and development) to improve and technological
developments. As Fager berg says (1987), modernity and economic rise has strong
relationships. In 1980 it has wealth in administrative expenses subject to a wellconstructed growth. In the time period of 90 to 95, the per capita income is low in
Pakistan.
In the start of Zia-Ul-Haq era there is motion of higher rate. After the first half ahead
growth rate is at the level of 12.8%. We know very well GDP is really good in Zia era,
so our gross investment increased steadily. GDP is good at that time because
denationalized the industrial sector and high investment and even political stability.
Next Zia introduced depression in money for the purpose of to promote exports of a
country. Our balance of payments has been fully resolved by Zia, because our
products have managed to find a way to adapt their products to promote their
positions. Net wages of Pakistan in that time is symbolically a good example of the
current government. If, however, the rise in gross assets once again on the increase in
private consumption of goods and services enormously. Early in the decade Zia
4

administrative costs were low, but due to the armed conflict in Afghanistan increased
spending, the result of economic growth of our country. In short, it was Zia was good
and form larger role in stabilizing the economy. Even we sacrifices something for
afghan war but we also enjoy the good economic growth. There was also damage such
as deficit reduction in commodity prices and oil prices, the global economic crisis and
the debt crisis and increasing debt.

1.2 Objectives:

To check the relationship between different determinants of economic growth

like government expenditure, net exports, domestic savings and domestic
investment

To check the effect of inflation on growth of economy of Pakistan.

To check and examine the effect of government expenditure for the purpose of
economic growth.

1.3 Research Question:

.How dose domestic saving, domestic investment, net exports, government

expenditure and inflation impact on GDP growth in the period of both
short and long run of Pakistan?

1.4 Research Hypothesis:

H0: There is insignificant effect of Government expenditure on economic growth
of Pakistan.
H: There is significant effect of Government expenditure on economic growth of
Pakistan.
H0: There is insignificant effect of Net Exports on economic growth of Pakistan.
H: There is significant effect of Net Exports on economic growth of Pakistan.
H0: There is insignificant effect of Domestic Savings on economic growth of
Pakistan.
H: There is significant effect of Domestic Savings on economic growth of
Pakistan.
H0: There is insignificant effect of Inflation on economic growth of Pakistan.
H: There is significant effect of Inflation on economic growth of Pakistan.
H0: There is insignificant effect of Domestic Investment on economic growth of
Pakistan.
H: There is significant effect of Domestic Investment on economic growth of
Pakistan.

1.5 Plan of Study:

In our research and study there is 5 different chapters. The 1st chapter shows the
Introduction, objective of the project, questions which related to our study, Research
hypothesis and plan of our research. Then in 2nd chapter we show and tell the literature
review of our research. Then in 3rd Chapter we discussed the data, methodology, and
model specification, explanation of variables with graphical review of variables and
data description. The in chapter 4th we explain and show the estimations and results on
the behalf of different econometrics tools. And in last chapter 5 th we tell the
Conclusion and Recommendations.

CHAPTER 2
Literature Review
In economics, there are a number of different studies, the focus for economic growth
and development. Base abstract the main cause, if any theory that is associated with
economic interest in the process of changing the economic growth and development.
In our study here a lots of approaches which relevant to economic growth and even to
our study n they are fully described. This study and research tells us some set of
variables that are going to contribute greatly to changes in economic growth.
There are relationships between savings and economic growth, and is not only an
important but also its controversial subject for both academics and policy makers.
Most internationally renowned economists have analyzed this phenomenon as cause
and effect. A group of economists favored capital fundamentalists see that the savings
result in growth but others are in favor of Keynesian theory that savings depend on
the level of production. Many economists have analyzed the effect of savings on
economic growth and provide diverse and efficient results. Solow (1956) suggested
that the savings affected the economic growth due to increased savings as a result of
capital accumulation, which in turn, economic growth. There is strong empirical
evidence of the positive correlation between saving and growth (see, for example,
Modigliani 1970, 1990 and Madison, 1992). King and Levine (1994) showed the
strong connection between the two variables. From the interpretation of the evidence
of a causal chain of savings for growth. These results are fundamentalists capital
support; according to which capital accumulation was the main driver of high
economic growth
Carrol and Weil (1994) was tell and shows that saving has optimistic and good result
on economic growth of any country. Hussein (1995) suggests that much of the
differences in economic performance between Pakistan and Southeast Asian countries
rapid growth in the last two decades due to the low rates of savings and investment in
Pakistan. Therefore, it was stressed that differences in the rate of growth in developed
and developing countries is mainly due to the difference in savings rates. Therefore,
the World Bank, developing countries called for the policy that is conducive to saving
8

for higher economic growth (see Sinha and Sinha, 1998, p. 43) were adopted.
According to this view of saving is one of the main determinants of economic growth
and that growth occurs before.
More on saving rates are very good due to high income. Malik and Baharumshah
(2007) was showed and tell that countries enjoy the more economic growth and per
capita where savings rates are high and large. Pakistan is basically small incomegenerating country with weak capital markets and we are very dependent on national
savings or finance costs in the country and also we have not good and proper savings
intuitions. Hassan Butt (2008) has been proposed, and tell them that allows you to
save the house and sell goods and services to other income countries could increase
the growth rate and increased reducing the dependence of the economy on foreign
debt. Sajid and Sarfraz (2008) was the analysis of the short sides of causality level of
productivity (GDP) by household savings and government. Explain the results that
often trade, education and labor force in the short term and long term economy
growth in Pakistan decide Iqbal et al (2009) come to get them, short and long term,
profit levels It is very important and positive association with El Salvador power in
Pakistan. Afzal (2009) was the savings discussed the current main issue in Pakistan,
as it will adversely affect the economy development in Pakistan. On the other side the
growth of the population plays a vital role in the country, as it will rises the level of
participation in employment. Normally income generating savings are. Ahmad and
Mahmud (2013) analyzed the exchange rate and the price increase will have a
negative impact on national savings, but the rate of exchange has a significant effect.
Companies is positive with national saving in Pakistan, as do cause transactions to
increase profits and benefits of civilization for the market economy. Monetary
positively associated with national saving. The rise and increased income levels
adversely affect national economies of conflict.
The traditional starting point is the neoclassical economic growth model of Solow
(1956). The basic assumptions of this model are: constant returns to scale,
diminishing marginal productivity of capital, exogenously determined technological
progress and the interchangeability between capital and labor. As a result, the model
highlights the savings or investment rate as a major economic growth factor in the
short term. Technological progress, when examined in the long-term importance,
9

considered exogenous to the economic system and, therefore, is not enough for this
model. Regarding the issue of convergence / convergence model growth rates based
divergence says that poor economies grow faster, compared to the rich countries.
Investment plays all the time important role in the economy of Pakistan and also its
growth and more on Investment plays an important role in driving growth through
increase in productivity levels. Developing countries like Pakistan are marked by lack
of capital. The cause avid poor revenue in less developed countries. The lowest levels
of income tied savings in these economies are low and therefore low levels of
savings-investment spending in the economy. In economies hungry capital is difficult
to make capital expenditures. Low levels of poverty, income distribution only income
and higher levels of employment are taken into account, the Government's priorities
for the development of the economy. In the capital of hungry economies of scale of
the investment falls below the desired levels of investment.
In the history of the world a large number of economists believe the collision of
foreign direct investment and domestic investment in the economic growth of
different countries. Brzozowski and Barrell (2003) was to know and show the
collision, the rate of exchange for foreign direct investment and the nation that
exchange rates are an unenthusiastic impact of foreign direct investment. Azeem and
Nishat (2005) is to show the positive and great impact and effect of the reform on
foreign direct and domestic investment in Pakistan was. In DUASA (2007) analyzed
the assets of all foreign direct investment has to contribute to stability and economic
growth in Pakistan has auxiliary effect. And Falki (2008) as a set of additional
variables were also as home equity funds foreign aid and employment experienced
force. Examined Fatima (2010), which was economic and investment rates have
something to compare Pakistan to rising countries. The economic rate is often lower
than the rate of risk; an important part of our investment is the focus of external
resources and there is little participation in domestic investment.
Investment is a key determinant of the models of neoclassical and endogenous growth
identified both by economic growth. Arbatli (2011), the determinants of FDI
investigated factors extraction integrate sophisticated country and institutional and
macroeconomic variables Asghar et al push and universal factors. Foreign direct
10

investment (FDI) has played a crucial role in the recent international economic
activity and is a primary source for technology transfer and economic grwth.

Farhan Akram and was (2012) examined the relationship between investment and
economic growth, the rate of recognition to the private sector was the principal. Thus,
the assessment is that the private sector has a significant impact on economic growth
in the long run, and even in the short term.
For this phase not enthusiastic and insignificant direct investment relationship
between FDI and trade GDP .Foreign they are exposed to additional factors such as
political volatility, violence and legal and regulatory situations also unenthusiastic
collision.
In (2012) in a study on economic growth in Pakistan has been analyzed and is
unbalanced and worried about the debt, political instability and the state and the order
of the nation. The effect of this research shows a well-built development of foreign
direct investment, especially in crop growth and growing industrial sector for the
treatment of advanced capital structure. There luxury is a good relationship between
price and increased economic growth of a country, the show, which was Development
of GDP.
Farvaque (2009) examined the relationship between price increases and globalization
of the various countries of charm variables CPI, trade productivity gap sell to other
countries, prices. Ayyub (2011), examines the relationship among inflation and
economic growth in Pakistan. Inflation is constructive and important result of
economic

growth.

As per Li (2006) was deliberate price increases, a tax on real balance to reduce the
real returns of funds, causing an information kink resistance affecting the monetary
system? These money market frictions consequences ration credit and thus the
accessibility of the active border and finally the decline of assets negatively on
economy

growth.

11

According to Aurangzeb (2012) was considered, inflation and the exchange rate has a
positive result on the primary exchange. Interest rate without enthusiasm and
significant impact on the stock market and foreign direct investment affects stock
prices marginally.
Zakaria (2010) was the correlation between budget shortages and price increases on
economic growth with the help of co-integration study in Pakistan clarified. After
these studies to direct budget shortages expanded steadily to add to high price
increases. However learn conclusion that it is not connected in long price increases
long-term budget deficit, but only to the supply of foreign exchange and the money
supply has no material relationship with the lack of budget. Khan (2012) investigated
that fall in GDP means food shortages, high rates of price increases, lack of money,
lack

of

protection

and

net

exports

and

not

always

resources.

The relationship between price increases and economic increase in the country and
Mubarak Mukhtar (2005) were analyzed. The study shows that optimistic relationship
among these two variables. After review, little price increases and small budget
deficits are not important for high growth over a long period. Big inflation is
unreliable, with a stable economic growth. If there is not a shock is a decline in
inflation make significant improvement in the growth rate.
Mughal and Khan (2011) examined the financial shortage generated price rises. After
this review, inflation in Pakistan is mainly predictable scarcity and unsustainable
fiscal

life

was

linked

by

the

Optimist

Club

of

inflation

and

GDP.

Oseni (2009) was to examine each individual variables such as GDP, the base oil
prices, exchange rates and price increases were rate is closely linked to the share
price. Replacement rate and interest-heartedly associated with retail prices. Study
association has the evidence used to investigate the association between these
variables and retail prices. In (2011) Edwin and Shajehan was empirically propose
independent of increased workforce, both assets price increases physical and human
capital, and small and liberalization policies focus on economic growth are necessary.

12

Many studies in history has studied the association of administrative costs and GDP
growth. Gupta (2002) has shown that reductions in current expenditure growth has a
better collision that these increases basic income and reduced capital expenditures;
urbanized show that the smallest, while assigned to the largest gap for capital and
non-wage goods and leisure services, tend to faster in countries where the wage rate
to determine usage patterns economic growth. Anwar (2012) was the protection
expenditure examined in the light of the obvious and genuine doubts about the
security of Pakistan and its relationship with economic growth.
Guess and Koford (1984) was discovered in the fundamental connection between
government spending and price increases, GNP and private assets. You did not finish
the budget deficit change these variables reason. Looney (1995) was close to that do
not suffer from the real displacement associated with non-infrastructure investment
program of the government in the major industrial sectors, the private asset. Iqbal and
Star (2005) has come for government spending to close, remittances of foreign
workers on economic growth positively with high importance. But inflation, external
debt and the deterioration of the situation in relation to the business are clearly
connected

with

economic

growth

without

enthusiasm.

After the neoclassical, so the position of the private division resulted in the change is
significant because it reduces the price increases in the economy; in public funds by
increasing interest rates, which reduce the price increases in the financial system and
the question. The new-Keynesian multiplier effect there in the response and to fight,
to public spending to meet demand and thus on economic growth.

The importance of exports to economic growth comes from the writings of classical
as well as many modern economists. According to Marshall (1890), part of the
economic progress of a nation in the study of international trade. Nurkse (1961) refers
to international trade as an engine of growth. A number of economists was trying to
explore the collision of net exports to economic growth. Lancaster (1980) noted that
further growth could increase exports, which could lead to improved performance
occurred as a result of increased production and export promotion. And Sohail Ahmed
(2011), which was the goal of studying, in order with the help of Co to find the
13

determinants of import Pakistan integration method. Examines the long-term

correlation between Pakistan Joint Import and main macroeconomic device end
operation costs (total cost of GDP). This document consists of two parts. In the first
part of every common import function covers exist, and secondly, the function of
demand for imports is considered broken. Erecakar (2011) was analyzed, foreign
direct investment; Inflation and net exports are optimistic and statistically significant
effect on

GDP

growth collision.

Ahmad and Fatima (2010) was a deterioration in the terms of trade shock has a tepid
economic growth in Pakistan, which was reduced by the end of the gross domestic
product. Sohail (2011) was that the two partial addiction. In the first part of the
function of the total coverage of the common import demand and, on the other hand it
acts disaggregated demand for imports investigated. Shirazi and Manap (2004) the
relationship between real exports and real imports of goods production in Pakistan
were analyzed together, the short and long term. The study found evidence of
unidirectional causality burly of exports to economic growth. Ullah (2009) examined
the unidirectional causality for the export of GDP.
Chaudhary (2002), the situation has investigated the volatility of investment and
economic growth. Illustrate the impact of volatility in exports has had an impact on
economic growth and assets in Pakistan. Although export volatility may have to pay
an impact on currencies and hence would unenthusiastic crash imports and economic
growth. Episodes of experience and Zahid Iqbal (1998) was for the production of
commercial honesty known positively associated with economic growth, while the
budget deficit and external money and reduce output growth. Iqbal and Satar, (2005)
goal remittances from migrant workers have a significant impact necessarily block
economic growth. Public and private property is crucial to the foundation of economic
growth.
But the rate of increase in prices, foreign money, and a deterioration of the situation in
terms of trade, it seems economic growth should be connected without enthusiasm.
Finally, Shahbaz (2009) was re-evaluated in the crash of a number of macroeconomic
variables on economic growth. The consequences show that growth in the money
economy improves the performance of the economy in the long term. Loans for
14

private party in relation to GDP, as a substitute for the development of the currency is
a good indicator of economic growth container Pakistan. Similarly, in order to
stimulate the growth of exports and investment, economic growth, while reducing
rising import prices and economic growth. Strong economic growth is linked to the
small size of the State produced. Edwin and Shajehan (2001) study was to maintain
growth measures to isolate the active workforce skills and knowledge as well as our
low

prices

and

open

trade

is

essential

for

economic

growth.

Li (2006) argue that the price increases on the market, a tax on the balance of goods
decreased real savings income data that caused the circuit resistance affects the
monetary system. These money market frictions consequences tribute ration the
availability of the property and the property alleged to be limited in order to reduce
the negative impact on economic growth. Mubarak (2005) was the association
combines inflation and economic growth as part of the analysis. The study shows that
the positive relationship between these two variables. After checking, a little inflation
and small deficits are not important for continued growth over a long period. High
inflation is unreliable, with a stable economic growth. If no shock is lower inflation, a
significant improvement in the growth rate. Edwin and Shajehan (2001) empirically,
the growth of the labor force, active in both physical and human capital inflationary
policy, and small and liberalization of trade for economic growth required separately.
Carroll and Weil (1994), it is likely that the savings were optimistic about economic
growth. The highest levels of savings is the increase in per capita income. Typically,
income from savings generated

15

CHAPTER 3
Data and Methodology
3.1 Introduction:
Our research and study is conducted for checking of determinants of economic growth
in our country (Pakistan). We collect the time series data annually from 1980 to 2012
for the purpose of examine the economic expansion and its determinants in our
country (Pakistan). In our study the GDP is dependent variable, on the other hand
other variables are independent.

Explanation of Variables
In explanation of variable we show the graphical representation of our dependent and
independent variables and also explain the graph.

Gross Domestic Product:

The final output of goods and services which are producing in a country within one
year and within a boundary of country that is GDP
The GDP of any country show the development and economic growth of country.
When GDP of country is on better level and its also maintained at some good level so
that country known as developed country like Germany, England etc.
Figure# 1: Gross Domestic Product

Data Source: Economic Survey of Pakistan 1980-2012+ Statical Beaure of Pakistan

16

Explanation of Graph:
I took 32 years data of gross domestic product of Pakistan from 1980 to 2012. This
graph shows many fluctuations in the data of gross domestic product of Pakistan.
There are many fluctuations in GDP of Pakistan. Sometime it increases and sometime
decreases. Since independence Pakistan gross domestic product does not show good
performance. In 1982 Pakistan GDP is around 6 and from 1982 to onward it decreases
and gross domestic product of Pakistan shows increasing trend in the years of 2003 to
2007 due to private investment, foreign investment and financial aid from
international. Pakistan gross domestic product in 2012 is around 4 respectively.

Government Expenditure:
Government expenditure or public spending (formerly general government
consumption) includes all government current expenditures for purchasing of goods
and services
.As Keynes says the expenditure of government have a positive impact on economic
growth. If government spend his spending on some productive projects then
production will increase because output raise and the government will earn profit and
put tax and earns revenue from that particular projects like metro bus , power
generation house etc.
Figure# 2: Government Expenditure

Data Source: Economic Survey of Pakistan 1980-2011+ State Bank of Pakistan

17

Explanation of Graph:
I took 32 years data of government expenditure of Pakistan from 1980 to 2012. This
graph shows many fluctuations in the data of government expenditure in Pakistan. In
this graph there are more fluctuation in graph first it shows increasing trend in
government expenditure then starts to decrease. In 1980, government expenditure in
Pakistan is 10.03 then it starts to increase and reach up to 15.13 in 1990. Government
expenditures in Pakistan start to decrease and reach on 9.18 in 2007 respectively. In
2012 government expenditures made by government in Pakistan reach up to 8.33. And
also the main reason our war on terror that increase the govt. expending.

Domestic Investment:
Domestic investment and direct investment in the reporting economy includes all
assets and liabilities between resident direct investment enterprises and direct
investors acquired
The domestic Investment comes from the residential people of a country. As HarrorDomar 1930 model they show investment comes from savings. So thats why when
investment increases in the country then automatically increases in employment level
because of peoples of country investment in some projects and then its lead to
economic growth of country.
Figure# 3: Domestic Investment

18

Data Source: Economic Survey of Pakistan 1980-2008+ Statical Beaure of Pakistan

Explanation of Graph:
I took 32 years data of domestic investment in Pakistan from 1980 to 2012. This
graph shows many fluctuations in the data of domestic investment in Pakistan. From
1980 to 1990 there is normal fluctuation in the data but in 1991 it shows a high
increase in the data of domestic investment which increase from 1.49 to 23. From
1991 to onward mostly it shows an increasing trend in the graph. After it shows
fluctuations in graph but mostly shows increasing trend in the graph up to 2001. In
2001 the value of domestic investment is 25.77. After 2001 it starts to decline but in
the year of 2008 and 2009 it shows a high increase in domestic investment which
reaches up to 30.29 and 26.05 respectively. In 2012 domestic investment decreases
and reaches up to 15.34.

Net Export:
Net export minus net imports of the country. More on Net exports are the difference
between the total value of exports of a country and the total value of imports
As per Keynesian says that if demand of products of any country which exported they
strongly affected the level of real G.D.P. when exports of any country are larger than
its imports so its automatically lead to good BOP then economic growth of country
mean GDP were increased.
Figure# 4: Net Export

19

Data Source: Economic Survey of Pakistan 1980-2010+ State Bank of Pakistan

Explanation of Graph:
I took 32 years data of net exports in Pakistan from 1980 to 2012. This graph shows
many fluctuations in the data of net exports in Pakistan. Mostly net exports of
Pakistan remains negative values which shows that Pakistan net exports are less as
compare to imports. In 1985 Pakistan net exports were -12.39 which starts to decrease
gradually and in 2002 it reaches up to -0.090. In the year of 2003 Pakistan exports are
in positive values which remain in positive values for 2 years only. In 2003 Net
exports value was 0.593. After 2004 net exports values again fall in negative values
but in 2005-2006 in some months net exports of Pakistan goes up due to foreign aid
and high investment but in just few months not for the whole year. And in 2012 net
export of Pakistan is -8.15. More on Pakistan over-all net export are in minus from
1947 to 2012 because of large imports except 1951 and 1972 in that two years
Pakistan exports are more than imports 153 million and 172 million PRs. But over-all
our balance of payment and net exports in deficit.

Inflation:
The meaning of inflation is increases in prices due to increasing of money supply by
central bank. And Consumer Price Index (CPI) were taken for measuring of inflation,
the annual percentage change in a CPI is used as a measure of inflation
If inflation of country increases so the economic growth automatically leads to
decreases. But on the other hand as per William Phillips says (1958) if the inflation of
country going to be high the level of unemployment going decreased. In easy words
20

when inflation going to be high then level of employment automatically going up. The
main reason behind this in that period people prefers and want to save the money then
in near coming time they spend that money so in this way investment will go up then
its automatically leads to increasing of employment level so GDP of the country
going up.

Figure# 5: Consumer Price Index/Inflation

Data Source: Economic Survey of Pakistan 1980-2008+ State Bank of Pakistan

Explanation of Graph:
I took 32 years data of inflation in Pakistan from 1980 to 2012. This graph shows
many fluctuations in inflation of Pakistan. This graph shows that inflation of Pakistan
have a little bit ups and downs from year to year. In 1980 Pakistan inflation is 11.93
which starts to decrease and reach up to 3.56 in 1986 then starts to increase. In 1997
inflation in Pakistan is 11.37. There is a huge change in the graph of inflation in the
year of 2008. In 2007 inflation is 7.59 and in 2008 it reaches up to 20.28 which is
very high the main reason behind this high inflation because in 2006 and 2005 our
interest rate was increased so foreign reserved was high at that moment so thats why
our inflation is high in 2007 and 2008. So this is the main reason behind this issue. In
2012 inflation in Pakistan is 9.68.

Domestic Saving:
21

Gross domestic savings its come from when GDP is less and minus from final
consumption expenditure (total consumption)
As per Solow (1956) model they show that savings affected and impact on the
economic growth of country if savings are high then its lead to capital accumulation,
which is lead to economic growth of country.

Figure# 6: Domestic Savings

Data Source: Economic Survey of Pakistan 1980-2007+ Economics Watch

Explanation of Graph:
I took 32 years data of domestic saving in Pakistan from 1980 to 2012. This graph
shows many fluctuations in the data of domestic saving in Pakistan. There are normal
fluctuations in the data of domestic savings in Pakistan. Domestic saving in 1980 is
6.869 respectively. Domestic saving shows increasing trends in Pakistan. It reaches up
to 17.06 in 1992. After 1992 it starts decline and in 2000 reach up to 15.97. After that
increase in years of 2003 and 2004 then starts to decrease and reach on 4.36 in the
year of 2012 respectively.

22

Diagrammatical Review of variables:

Domestic
Investment

Domestic
Saving

Inflation

Gross
Domesti
c
Product
(GDP)

Governmen
t
Expenditur

Net
Exports

23

3.2 Model Specification

We make a model according to Keynesian model. In this model GDP is dependent
variable and other variables are independent. That we show in model equation like
(GE), (DS), (NX), (INF), and (DI) so basically that variables are determinants of
economic growth.

Dependent Variable:

(GDP)= Economic Growth (% of economic growth annually)

Independent Variables:

GE=Government Expenditure (% of GDP)

NX=Net Exports (% of GDP)

DS=Domestic Savings (% of GDP)

INF= Inflation (% of GDP)

DI= Domestic Investment (% of GDP)

Model Equation:

lnY=0+ln(GE)+ln(DS)+(NX) +ln(INF)+(DI)+

24

3.3 The Specification of our Variables

Variables

Description

Sources

GDP

Gross domestic product (GDP) is as the measure World Data bank /

of the total final output of goods and services for
final

use

occurring

within

the

(2014)

domestic

boundaries of a given country and within the

period of one year, regardless of the allocation to
domestic and foreign claims.
Domestic Domestic investment and direct investment in the World
Investment

Data

reporting economy includes all assets and (2015)

liabilities between resident direct investment
enterprises and direct investors acquired. It also
includes the transfer of assets and liabilities
between the company and foreign residents of the
land, which is the ultimate control of the nonresident

parent

company.

And

domestic

investment is the amount of capital expenditures

in GDP calculations used in measuring the
nation's economic activity.

25

bank

Government

Government expenditure or public spending World bank (2014)

expenditure

(formerly

general

government

consumption)

includes all government current expenditures for

purchasing of goods and services. It also includes
most expenditures on defense of a country and
security, but

excludes

government

military

expenditures that are part of government capital

formation.
Net Export

Net export minus net imports of the country. Economics Watch (2014)
More on Net exports are the difference between
the total value of exports of a country and the
total value of imports. Depending on whether a
country imports more goods and more goods
exported, net exports may have a positive or
negative value

Inflation

The meaning of inflation is increases in prices World Data bank

due to increasing of money supply by central

(2014)

bank. And Consumer Price Index (CPI) were

taken for measuring of inflation, The annual
percentage change in a CPI is used as a measure
of inflation.
Domestic Saving Gross domestic savings its come from when World Data bank
GDP is less and minus from final consumption

(2013)

expenditure (total consumption). More on its also

come from different sector of the economy like
household, private and public sectors. Its shown
as %age of GDP

26

3.4 Augmented Dickey Fuller Test

Variable

ADF (T-statistics)

Critical Values

Order of
integration

In CPI

In DI

In DS

In GDP

In GE

-5.741381

-4.394466

-5.432108

-5.805857

-7.644629

1%

--4.283585

5%

-3.542783

10%

-3.216251

1%

-4.254670

5%

-3.562772

10%

-3.215358

1%

-4.285481

5%

-3.568283

10%

-3.212565

1%

-4.307825

5%

-3.524233

10%

-3.211738

1%

-4.284670

5%

-3.562772

I(1)

I(1)

I(1)

I(1)

I(1)

27

In NX

-5.762187

10%

-3.215347

1%

-4.285580

5%

-3.563482

10%

-3.215276

I(1)

Note: we do analysis by us using the e-views 7 version.

Interpretation of Result:
The Augmented Dickey Fuller (ADF) test find the Stationary of all variables. Which
is commonly used in the field of economics for finding purpose to check the
stationary of variables. Stationary of our variables are not level because the values of
the ADF test is less than the critical value, it leads us to accept the null hypothesis.
Then we test again (ADF) to test applies to first difference stationary. Stationary of all
variables in the first difference, as values greater than a critical value in ADF then
reject the null hypothesis and accept the alternative hypothesis.

The technique of Estimation

3.5 Test of Stationary:
A stationary time series in mean and variance is stable and the variance is free to time.
For examination of stationary we apply the Unit root tool (ADF). The ADF test is
depends upon given below equation.
Yt = + 0 Yt-1+ 1 Yt-1+ t
When Critical value less than ADF statistics that known as non-stationary, on the
other hand stationary is made the when Critical value is larger than ADF.

3.6 Test of Johansen Co-Integration:

To control and checking of long-term relationship between the both dependent and
independent variables, we use co-integration test we use the Johansen co-integration
28

test, the analysis for the period 1980-2012. For the purpose of verifying the causality
between both dependent and independent variable in co-integration so then applying
of different tests. Then after that we were apply variance decomposition that used to
apply to investigate the effect on macro-economic shock.

3.7 Vector Error Connection Model:

We study the stationary or non-stationary residual in VECM. As co-integration
between the two variables in the time period is long term then unidirectional or
directional causality between these variables exist. That should be a level if that level
means applies. Whereas, if they are not stationary diversified. Means converts action
must be maintained at the end of the current period; while the average diversified to
be the result fall the next period

29

Chapter 4
Estimation and Results
4.1 Introduction:
In this chapter we do the estimation and results on the basis of Unit Root test (ADF)
and we check the non-stationary on the basis of co-integration test. Because series of
variable must be non-stationary and they are integrated at same level and in cointegration there is two or more series is involved. So in this chapter we apply the
Johansen

co-integration

tool.

Then

after

Co-integration

test

we

apply

(VECM).Because in vector error correction model (VECM) we see the stationary or

non-stationary of residual and more on VECM is using in the field of economics to
check the speed of adjustment. So our estimation and result of thesis depend on
Johansen co-integration test and (VECM).

4.2 Residual Stationary Results:

The table given below shows and check. Stationarity of the (Residual) and found and
data show that E is stationary in the level and interception and two lag value is in use
Dickey Fuller (ADF), which is used to check the stationarity. The value of the ADF
test is greater than all critical values 1%, 5% and 10%, and therefore rejects the null
hypothesis of non-stationary and accept the alternative hypothesis stationery.

Residual Stationary Results

30

In this table we check and show Stationarity of (Residual) and thats found through
the data of the E is on stationary level and intercept and lag value two. Its garneted
from (ADF) test.

Table# 1: Residual Stationary Result

t-statistics

t-statistics
-5.086708

Probability
0.0002

Conclusion
Stationary I(0)

4.3 Unrestricted co-integration Rank Test (Trace)

The Eigen Value is use for showing the co-integration of variables. The finding of Cointegration of equation from the Trace Statistics. The analysis show in given below
table after we apply the co-integration tool. In our table there is 6 co-integrating
equations result that were show in given below table at 5% because critical value is
less than the result of Trace Statistics.

Unrestricted co-integration Rank Test

That table shows the unrestricted co-integration rank test that is garneted from
eviews-5. If there is * only putted on zero then no co-integration exist but if * putted
on At Most so co-integration exist.

Table# 2: Unrestricted Co-Integration Rank Test

Hypothesized

Eigen value

Trace Statistics

0.05

Critical Value

None *

0.807345

145.9174

95.75465

At most 1 *

0.713015

96.66568

69.82876

At most 2 *

0.546573

59.32983

47.87614

At most 3 *

0.465265

36.21740

29.78710

At most 4 *

0.290423

17.38175

15.45475

No. of (CE)s

At most 5 *
0.210526
7.097375
3.846463
Trace test shows 6 cointegrating eqn(s) at the level of 0.05

31

4.4 Normalized Co-integration Coefficient

-ve sing mean on variable that is conversion and +ve sing mean diversion and that
table is garneted from eviews-5. And we applying the Johansen co-integration test.

Table# 3: Normalized Co-integration Coefficient

Variables

Coefficients

Standard Errors

T-statistics

GDP

1.000000

CPI

-0.298071

0.04372

-6.627614

DI

-0.113417

0.02516

-4.30043

DS

-0.57264

0.12718

-4.484963

GE

0.163216

0.05362

3.07596

NX

-0.262143

0.12838

-2.127234

The results and analysis of our above results are taken by apply of the Johansen cointegration tool. Our result clearly shows the inflation have a significant and the
shows positively impact on the economic growth. They show the 1% change in
inflation that show 0.298071% change in economy growth of our country (Pakistan).
According to William Philips (1958) shows that the Philips curve, they tell us if
inflation to fall automatically unemployment. In other scene, one can say that when
inflation upwards and increases with time to increase employment in the country and
time to time, because people want their money better in the present, because of this
money in a future spent to save time so this way investment increases at a time when
employment land increased such that ultimately increase coming in GDP. In our
32

county (Pakistan) when increase in inflation come then the profit of agri., service and
manufacturing sector also rises with passage time so producer produced more and get
lots of profit for this more output and the GDP of Pakistan automatically rises.
The Domestic investment of Pakistan also have a positive and significant effect on the
economy growth of Pakistan. We have a 1% change in domestic investment of a
country they shows 0.113417% change in economy growth of Pakistan. As per the
Harror-Domar model (1930) show that saving is important investment mode. If saving
a country rises with a little time, then the country's banks are low interest rates in
order to savings, so that the people of the country automatically discourage people
and then they will save less and invest their savings in equity capital markets and
various profitable projects. So this investment is in the country, resulting in increasing
the employment rate and make you and good impact on economic growth.
Domestic Saving have a positively and significant impact on the economy growth of
Pakistan. We have a 1% change in domestic savings of Pakistan that shows 0.57264%
change in economy growth of our country (Pakistan). As per Solow growth model in
1956 show that savings have a huge impact on economic growth. Capital
accumulation formation has big savings and then you made the economy growth of a
country automatically.
The Government Expenditures of Pakistan have a negatively and significant impact
on the economy growth of our country Pakistan. We have a 1% change in government
expenditures which show 0.163216% change in economy growth of our country. The
non-productive Expenditures from the govt. on non-profitable projects in the
economy of country e.g. expenditures on defense, metro bus and also subsides on
petrol or diesel they automatically leads to burden on economy of country so they
show the results in the form of decreasing in the economy growth of Pakistan.
The Net Exports of Pakistan have also a significant and positively impact on the
growth of economy of Pakistan. In net export we have 1% change in so that shows
0.262143% change in economy growth of Pakistan. As per Keynesian view of real
GDP for a country's exports in a country will affect. The country, which has more than

33

exports, in order to compare the imports of a country they automatically will move
towards economic growth.
lnYt= 0+ 1ln(CPI)+ 2ln(DI)+ 3ln(DS)+ 4ln(GE)+ 5ln(NX)+0
lnYt = (-0.298071)ln(CPI) + (0.113417)ln(DI) + (0.57264)ln(DS) +
(-0.163216)ln(GE) + (-0.262143)ln(NX) +0
That equation which we were show above its represents and show the value of the
coefficients of the variables. 1, 2, 3, 4, and 5 our coefficient of the variable
inflation, domestic investment, domestic savings, government spending and net
exports to show. So this is our interpretation of Johansen co-integration test that we
used before.

4.5 Vector error correction models:

VECM is to explain the speed of adjustment generally used in the field of economics.
If there are some negative signs of the coefficient value then this indicates that the
variable has a tendency to move towards equilibrium and converge in the long term. If
it is a positive sign for the coefficient values, then it seems that in the long run that
departs from equilibrium.

VECM with respect to Inflation

Table# 4

D(GDP)

D(CPI)

Coefficient
-0.768253

0.129076

(0.23741)

(0.18276)

[-3.20574]

[ 0.62785]

Standard errors

T-statistics

34

In the above given table of VECM with respect to inflation they show coefficient
value of GDP compared with the inflation it has a negative sign with them, showing
that this variable converge balance and its won in the long run.

VECM with respect to Domestic Investment

Table# 5
D(DI)

D(GDP)
Coefficient
-0.032076

0.242345

(0.03723)

(0.06714)

[-0.86467]

[ 3.19483]

Standard errors

T-statistics

In the above given table of VECM with respect to domestic investment they show
coefficient value of GDP compared with the domestic investment it has a negative
sign with them, showing that this variable converge balance and its won in the long
run.

VECM with respect to Domestic Savings

Table# 6
D(DS)
D(GDP)
35

Coefficient
-0.856845

0.020145

(0.28067)

(0.12362)

[-3.02376]

[ 0.16033]

Standard errors

T-statistics

In the above given table of VECM with respect to domestic savings they show
coefficient value of GDP compared with the domestic savings it has a negative sign
with them, showing that this variable converge balance and its won in the long run.

VECM with respect to Government Expenditures

Table# 7

D(GDP)

D(GE)

Coefficient
-0.651028

0.253726

(0.34062)

(0.06732)

[-2.06205]

[ 3.72814]

Standard errors

T-statistics

In the above given table of VECM with respect to Gov. Expenditures they show
coefficient value of GDP compared with the governor's spending it has a negative sign
with them, showing that this variable converge balance and its won in the long run.

VECM with respect to Net Exports

Table# 8

D(GDP)

D(NX)

36

Coefficient
-0.426476

-8.317321

(0.36200)

(3.00123)

[-1.21062]

[-2.77230]

Standard errors

T-statistics

In the above given table of VECM with respect to Net Exports they show coefficient
value of GDP compared with the net exports it has a negative sign with them,
showing that this variable converge balance and its won in the long run.

CHAPTER 5
Conclusion and Policy Implications
5.1 Conclusion
In our project and research, we conclude that inflation, domestic saving, domestic
investment, government expenditures and net exports have an impact on the economic
growth (GDP) of Pakistan and we show these variables are determinants of economic
growth. I show the graphical representation of our independent & dependent variables
they show the economic growth in Pakistan but Gov. Expenditure and high inflation
like in (2009-2011) is not good for economic growth. And after that we apply the
some different econometrics test. Firstly we apply the Unit Root test (ADF) on the
data of our variables to check the stationarity. And after that we apply the Johansen
co-integration test for the purpose of long run analysis after that we apply the Vector
Error correction Model (VECM) for the purpose of short run analysis of our study.
After apply of the Johansen co-integration test on our study we may conclude that
government expenditure have a negatively effect and impact on the economic growth
and on the other side and hand inflation, domestic savings, domestic investment and
net exports have a positively impact and effect on the (GDP) of Pakistan. As per
(VECM) results and analysis they shows domestic investment, government
expenditure, inflation, domestic savings and net exports with respect to GDP they will
37

converge to equilibrium level in the long run. There is an ups and downs in the GDP
of Pakistan since 1980 to onwards due to many reasons thats we discussed before in
introduction and methodology.
The economic growth of Pakistan increases with the passage of time but development
of Pakistan does not increases and going up due to and cause of many reasons e.g.
corruption, ineffective government policies. Political instability, terrorism etc.
The Govt. of Pakistan must be made and apply those policies which not only help to
increases the GDP of Pakistan but also helpful in the economic growth of a country.
Govt. must be introduce better and efficient policy for the sake of stable economic
growth of a country. Govt. of Pakistan must be increase the productive expenditures
like public investment, promote to industrial and agriculture sector and must should
overcome the nonproductive expenditures like expenses on nonprofit projects etc.

5.2 Policy Implications

In most of developing countries like our country (Pakistan) the ratio of saving is too
little because of low earnings and low per capita income so thats why peoples of
Pakistan just fulfilled the basic needs and do nothing save. Pakistan government must
motivate to the people to save more and more through increases the interest rate of
country and introduced different saving polices with more effective manners. Pakistan
Government must be reduced the taxes and duties on people and exporters so exports
of Pakistan increases via investment channel. Whenever the saving of country
increases then people of a country demand less goods and services and also
consumption is going overcome so inflation of the country (Pakistan) automatically
controlled cause of inflation arrive from demand side. Government expenditures must
be put on some productive projects like transportation projects, communication sector,
industrial and agriculture sectors etc. But not spend and expense on nonproductive
projects like subsidies on gas and power supply, food and oil etc.
Our research find out the number of key and better policy implications for the sake of
growth of economy and development of our country (Pakistan). So there are
following economic policies which is good for economic growth (GDP) of Pakistan.
38

Interest rate of banks must be increase in order to motivate to people to save and
the purpose of domestic saving but not increases too high.

Pakistan Government must be make the efficient and effective monetary and fiscal
policies to control the inflation of country. And also Pakistan government must
avoid the double digit inflation

Government of Pakistan must be overcome the nonprofit projects expenditures

like expenses on military, metro bus and subsidies on different things. Pakistan
Government must be increase productive expenditures and expend on profitable
projects like investment in Industrial and communication sectors.

Domestic Investment of the country must be promoted and increases through

different policies in order to maintain and stable G.D.P of Pakistan. More on
Government of Pakistan should be increases the investment in Pakistan for
creating of employment opportunities.

Government must be motivate to industrial and agriculture sectors to produce high

output through this way production and output of a country rises with passage of
time so then country have an ability to export surplus goods to other countries of
World. And also increased the export quota for exporter. By exports we earn the
high foreign exchange so this way G.D.P of Pakistan increases with passage of
time.

Government of Pakistan must promoted the policies of economist of Pakistan like

in 60s Chief economist is independent from government and they make polices
thats the main reason of high economic growth in 60s.

39

References of our Study

Kowalski '00, Elizabeth, "Determinants of Economic Growth in East Asia: A Linear
Regression Model" (2000). Honors Projects. Paper 74. http://digitalcom
mons.iwu.edu/econhonproj/74
Eggleston, Karen. "The Sustainability of East Asian Growth." ASEAN Economic
Bulletin July 1997.
NBER WORKING PAPER SERIES DETERMINANTS OF ECONOMIC
GROWTH: A CROSS-COUNTRY EMPIRICAL STUDY Robert J. Barro.
NBER Working Paper 5698 August 1996
THE MAIN DETERMINANTS OF ECONOMIC GROWTH, AN EMPIRICAL
INVESTIGATION WITH GRANGER CAUSALITY ANALYSIS FOR
Determinants of economic growth: the experts view
GREECE

Nikolaos Dritsakis1 Erotokritos Varelas2 - Antonios Adamopoulos1,

Department of Applied Informatics, University of Macedonia, 2 Department of

Economics

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42

Appendix
Reference of Stationary of Variables:
CPI/Inflation
Null Hypothesis: D(CPI) has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic based on SIC, MAXLAG=2)

Augmented Dickey-Fuller test statistic

Test critical values: 1% level
5% level
10% level

t-Statistic

Prob.*

-5.741381
-4.283585
-3.542783
-3.216251

0.0003

Domestic Investment
Null Hypothesis: D(DI) has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic based on SIC, MAXLAG=2)

Augmented Dickey-Fuller test statistic

Test critical values: 1% level
5% level

t-Statistic

Prob.*

-4.394466
-4.254670
-3.562772

0.0077

43

10% level

-3.215358

Domestic Savings
Null Hypothesis: D(DS) has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic based on SIC, MAXLAG=2)

Augmented Dickey-Fuller test statistic

Test critical values: 1% level
5% level
10% level

t-Statistic

Prob.*

-5.432108
-4.285481
-3.568283
-3.212565

0.0007

GDP
Null Hypothesis: D(GDP) has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 2 (Automatic based on SIC, MAXLAG=2)

Augmented Dickey-Fuller test statistic

Test critical values: 1% level
5% level
10% level

t-Statistic

Prob.*

-5.805857
-4.307825
-3.524233
-3.211738

0.0003

44

Government Expenditures
Null Hypothesis: D(GE) has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic based on SIC, MAXLAG=2)

Augmented Dickey-Fuller test statistic

Test critical values: 1% level
5% level
10% level

t-Statistic

Prob.*

-7.644629
-4.284670
-3.562772
-3.215347

0.0000

Net Exports
Null Hypothesis: D(NX) has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic based on SIC, MAXLAG=2)

Augmented Dickey-Fuller test statistic

Test critical values: 1% level
5% level
10% level

t-Statistic

Prob.*

-5.762187
-4.285580
-3.563482
-3.215276

0.0003

45