Effects of inflation and other variables on economic growth

The research that I have conducted fundamentally enlightens the consequence of rising prices on economic growing along with three more variables ; Interest rates, Growth of money supply and FDI. Regression is run on the variables and the consequences show that three of the four variables are keeping important affect whereas one of the variables, i.e. , FDI is undistinguished. Furthermore, the consequences are analysed looking at the T-Statistics and decision is made on the footing of this. In add-on, the Adjusted R square shows a really favorable value of 82.917 % . Data of 10 old ages had been used i.e. from 1997-2007. Stat graphics is used to run the analysis.


Pakistan is a developing economic system that is confronting major issues like political instability, rising prices, less economic growing and high involvement rates. Due to the planetary recognition crunch, the development and the under developed states had to confront countless jobs. But Pakistan is lucky plenty to retrieve from the bad spot. It is on its recovery phase and hope to draw through it shortly.

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The research subject is about the economic growing of Pakistan. The information collected is from 1997 to 2007 which shows an overall addition boulder clay 2005 and so a little autumn. The variables that may impact the economic growing are rising prices, investings, wide money supply and involvement rates. They are measured excessively in order to see their relationship with economic growing.

By economic growing, it is meant economic advancement and promotion that may be achieved through assorted ways like development of substructure, addition in productiveness degrees and growing in the overall economic system.

Furthermore the economic growthA is a step of the rate of alteration thatA a state ‘s gross domestic merchandise goes throughA from one twelvemonth to another.It can be measured through the undermentioned expression: A

Economic Growth Rate

Pakistan ‘s economic system has shown great ups and downs because of the destructive temblor, but the future growing prognosiss for the economic system are good. Pakistan needs to increase the measure and quality of investing in the hereafter in order to keep rapid growing over an drawn-out period of clip. For this to go on, it should promote productiveness of labour and invention. The economic rate is an index of general way and magnitude of growing for the overall economic system. Developed and fast turning economic systems are likely to see rates of growing every bit high as 10 % or more. But this growing rate is improbable to be maintained over the long tally. Therefore, it lasts for the short tally.

In the research conducted, economic growing is affected by rising prices. A few more variables instigate rising prices due to which there is important impact on the economic growing of Pakistan. Inflation is the rate at which the general degree of monetary values for goods and services is lifting and causes a autumn in the buying power of the consumers. Cardinal Bankss attempt to halt the rough rising prices, along with terrible deflation, so that they can maintain the sky rocketing monetary values to a minimum.A The variables that might do a negative or a positive impact on the economic growing are as follows:

Interest rates

Investing ( foreign direct investing )

Growth in Broad Money


The variables can turn out to be the chances of rising prices which can further impact the economic growing. The variables can be easy measured to make a arrested development theoretical account which makes it easier to analyze the state of affairs.

Literature reappraisal

Abdul Qayum efforts to analyze the relation between the extra money supply growing and rising prices in Pakistan in his article, ‘Money, Inflation and Growth in Pakistan ‘ ( 2006 ) . The consequences indicate that there is a positive association between the two variables. The money supply growing foremost affects the existent GDP growing and farther affects rising prices in Pakistan. The of import point to be noted here was that the extra money supply growing has drastically caused a rise in rising prices during the survey was being conducted. This could be because of the relaxation of pecuniary policy that was adopted by the State Bank of Pakistan to demo the high precedence of growing aim. The rising prices of Pakistan can be controlled if State Bank of Pakistan tightens the pecuniary policy. The article on the whole concludes that rising prices in Pakistan is by no uncertainty a pecuniary phenomenon.

Min Li in his article ‘Inflation and Economic growing: Threshold effects and Transmission mechanism ‘ negotiations about the inauspicious consequences that high rates on rising prices have on existent economic growing in the long tally. Economists say that high rates of rising prices can be debatable for the aggregative economic public presentation. The paper foremost examines the relationship between rising prices and the economic growing by the usage of informations that comprises of 90 developing states along with 28 developed states. The consequences show that the relationship is nonlinear. Furthermore it shows that there is a difference in the nonlinearity of the developed and the underdeveloped states.

Mohsin S.Khan and Axel Schimmelpfennig in their article ‘Inflation in Pakistan ‘ ( 2006 ) inspects the factors that enlighten and help project rising prices in Pakistan. An rising prices theoretical account that is simple in nature may include variables like money supply, involvement rate and the exchange rates. The theoretical account calculates on monthly footing and the consequences show that recent rising prices is effected by pecuniary factors. These factors affect the rising prices with a slowdown of about one twelvemonth. Furthermore, private sector recognition growing and wide money can foretell the developments in rising prices. A long tally relationship exists between CPI and private sector recognition. Therefore, State Bank of Pakistan should put its pecuniary policy an twelvemonth before run intoing its rising prices mark.

‘Relationship between Inflation and Economic Growth ‘ ( 2004 ) was a paper written by Vikesh Gokal and Subrina Hanif which talks about the economic growing in Fiji. Several different theories were reviewed to find consensus on economic growing. Supply side theories are recalled here which emphasises on the demand to salvage and put if the state ‘s economic system is to turn. The paper besides reviews already published literature by Sarel, Andres and Hernando which provide some supervising for Fiji policymakers on the importance of keeping low rising prices so that higher economic growing can be encouraged. .Varied theories are discussed in the paper like the Classical growing theory and the Keynesian Theory. Furthermore the article negotiations about the degree of rising prices after which there could be a alteration in the economic growing. Michael Sarel ‘s paper gives a grounds that a structural interruption at 8 % gives a negative impact of rising prices on the economic growing.

Omoke Philip Chimobi in his survey “ Inflation and Economic Growth in Nigeria ” ( 2010 ) determines the being of the relationship between Inflation and Economic growing in Nigeria.CPI and GDP was used to mensurate rising prices and economic growing severally. A assortment of surveies were reviewed and the consequences showed that rising prices has ne’er been favorable for the economic growing. The survey was conducted from 1970-2005 during which there was no co-integrating relationship bing between economic growing and rising prices which resulted in no long term relationship between the two variables. But what concluded was that high rising prices is ne’er good for economic growing.

M.Ali Kemal in his article ‘Is Inflation in Pakistan a Monetary Phenomenon ‘ ( 2006 ) negotiations about the relationship between money supply and rising prices. He says that a encouragement in money supply over the long tally can ensue in a higher rate of Inflation. The article says that Inflation is for certain a pecuniary phenomenon. The money supply takes about 9 months to hold an impact on Inflation. On the other manus the survey might take longer than this to meet to the equilibrium if dazes persist in any of the three variables that are ; GDP, money supply and monetary values. This shows that it does n’t rapidly act upon the monetary value degrees. Co-integration technique is used to look into the long tally relationship between the two variables. Furthermore, Engle-Granger attack and the Johansen co-integration technique is used.

Erman Erbaykal and H. Aydin Okuyan study the relationship between rising prices and economic growing in Turkey in the article ‘Does Inflation Depress Economic Growth? ‘ ( 2008 ) . A Bound Test is developed in the survey that consequences in a co-integration relationship between rising prices and economic growing. Furthermore, a important negative short term relationship was found between the ARDL theoretical accounts. No long term relationship has been found. Policies that provide cost stableness are evident for a steady and upheld growing.

Yasir Ali Mubarik wrote an article ‘Inflation and Growth: An estimation of Threshold Level of rising prices in Pakistan ( 2003 ) . The survey estimates the threshold degree of Inflation for Pakistan and suggests 9 % as the threshold rising prices degree at which rising prices is an qui vive for the economic growing. The Granger Casuality trial is used in the survey that defines casuality way from rising prices to economic growing. Inflation mark can perchance be set by policymakers by utilizing the consequences for the trial. However the survey does n’t gauge that at what degrees the rising prices is excessively low for economic growing.

Haider, Adnan and Khan, Safdar Ullah, Research Department, State Bank of Pakistan analyses the impact of capriciousness in authorities borrowing on Inflation in Pakistan in the article, ‘Does Volatility in Government Borrowing Leads to Higher Inflation? ‘ ( 2009 ) . The Generalized Auto Regressive Conditional Hetroskedasticity ( GARCH ) theoretical account is used to gauge volatility in authorities adoption from cardinal bank. The grounds suggests that there lies some volatility in authorities adoption from cardinal bank and domestic rising prices. The survey farther helps in understanding rising prices in different developing economic systems like Pakistan.


Research Type

In order to understand the impact of rising prices on the economic growing of Pakistan, quantitative research is carried down.

Data Type

Secondary information is collected from assorted web sites and informations bases.

Beginning of Data

In order to roll up the secondary informations, web sites are consulted.


Arrested development analysis will be used as the statistical technique in this research after garnering secondary informations. Once the informations have been collected consequences will be analyzed through arrested development analysis.


Data is collected from 1997 -2007 for all the variables from the WDI web site.

Theoretical Model

Foreign direct investing



( Dependent )

Growth in Broad Money

Interest Ratess

Functional signifier:

Y=f ( x1, x2, x3, x4 )

Economic Growth=f ( Interest rates, Inflation, FDI, Growth in wide money )

Multiple Regression would be run to see the relationship of assorted variables and to place the variables which are important impacting the dependent variable.

Definitions and relation of variables.

Economic Growth:

ItA is the addition of gross domestic productA ( GDP ) , described as the one-year rate of alteration in existent GDP. Economic growing is derived by a alteration in productiveness, which means bring forthing more goods and services with the same inputs i.e labor, capital, stuffs etc. Economists say that there lies a difference between short-run economic growing and long-run economic growing. But the subject of economic growing is chiefly concerned with the long tally.


It is an addition in the cost of trade goods that are critical for worlds to populate, such as staff of life, milk, cheese, oil, shelter, vesture, medical services, cotton, electronics, etc or a lessening in the value of money so that it takes more currency to purchase the same goods and services it did in the yesteryear.

Higher rates of rising prices are traveling to hold inauspicious effects on the economic growing. There is less economic growing when there is high rising prices normally.

Interest rates:

A rate which is charged for the usage of money or the monetary value for borrowing money is known as an involvement rate. An involvement rate is expressed as an one-year per centum of the principal. Interest rates frequently change as a consequence of rising prices and Federal Reserve policies. Interest rates may change doing a alteration in other factors. If rising prices is higher it will ensue in higher hazard and investors will be sing higher involvement rate to impart their money. Therefore, when the involvement rates are likely to lift, it gives an addition to rising prices ensuing in less economic growing. Peoples will salvage more and invest less as they are likely to gain more net income on their nest eggs.


Investing is the usage of money in a manner that it earns you more money. Or it can be termed as the procedure of puting financess in an plus that is likely to gain you great money in the hereafter. Gains that might come from the plus invested in could be in the form of involvement, income or an grasp in the value of the plus over the clip. Foreign direct investing is defined as a concern or a concern from one state doing a physical investing into another country.A A The direct investing in edifices, machinery and equipment with doing a portfolio investing, is considered an indirect investing. Foreign direct investing plays a positive function in the procedure of economic growth.FDI helps in developing new merchandises and engineerings faster than local houses. This is one of the causes why developing states are acute to pull FDI.

Broad money:

Broad moneyA is a gage of theA money supplyA that includes more than merely physical money such as currency and coins.It includesA demand depositsA at commercial Bankss, and any dues held in easy approachable histories. Components of wide money are still really liquid, and can normally be converted into hard currency really easy.

The most normally used step of wide money isA M2, which includes currency and coins, and sedimentations inA look intoing histories, A savings histories, and non-institutionalA money market histories. This is the major step of the money supply, and is theA economic indicatorA normally used to measure the sum ofA liquidityA in the economic system. With the relaxation of money supply by the Federal Bank, there ‘s traveling to be a rise in rising prices taking to decelerate economic growing in most of the instances. But if the money supply is loosened for a shorter clip period, there is a likeliness that economic growing would raise.

Research Hypothesis

The aim of this survey is to mensurate the impact of rising prices on the economic growing

H0: Inflation does non hold an impact on Economic growing

H1: Inflation does hold an impact on Economic growing

H0: B1 = 0

H1: B1 =/= 0

The aim of this survey is to mensurate the impact of wide money on economic growing

H0: Broad money does non hold an impact on Economic growing

H1: Broad money does hold an impact on Economic growing

H0: B2 = 0

H1: B2 =/= 0

The aim of this survey is to mensurate the impact of involvement rates on economic growing.

H0: Interest rate does non hold an impact on Economic growing

H1: Interest rate does hold an impact on Economic growing

H0: B3 = 0

H1: B3 =/= 0

The aim of this survey is to mensurate the impact of FDI on economic growing

H0: FDI does non hold an impact on Economic growing

H1: FDI does hold an impact on Economic growing

H0: B4 = 0

H1: B4 =/= 0

The arrested development theoretical account is run with one dependent variable viz. Economic Growth and four independent variables.The sample size is the information from 1997-2007.


Dependent variable: Economic growing

— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —



Standard Error













Growth in Broad Money










Interest Ratess





Analysis of discrepancy

— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —


Sum of Squares

Degrees of freedom

Mean square













Entire ( Corr. ) 46.7273 10

R-squared = 89.7502 per centum

R-squared ( adjusted for d.f. ) = 82.917 per centum

Standard Error of Est. = 0.893445

Mean absolute mistake = 0.584784

Durbin-Watson statistic = 1.99174

Arrested development Summary:

The equation of the fitted theoretical account is:

Economic growing = 16.1883 – 0.143151*FDI – 0.296885*Growth in wide money +0.541243*Inflation – 0.655153*Interest rate

Since the P-value in the ANOVA tabular array is less than 0.01, there is a statistically important relationship between the variables at the 99 % assurance degree.

The R-Squared statistic indicates that the theoretical account as fitted explains 89.7502 % of the variableness in economic growing. The adjusted R-squared statistic, which is more suited for comparing theoretical accounts with different Numberss of independent variables, is 82.917 % .

The standard mistake of the estimation shows the standard divergence of the remainders to be 0.893445. This value can be used to build anticipation bounds for new observations. The average absolute mistake ( MAE ) of 0.584784 is the mean value of the remainders.

The Durbin-Watson ( DW ) statistic tests the remainders to find if there is any important correlativity based on the order in which they occur in your informations file. Since the DW value is greater than 1.4, there is likely non any serious autocorrelation in the remainders.

In finding whether the theoretical account can be simplified, notice that the highest P-value on the independent variables is 0.7805, belonging to FDI. Since the P-value is greater or equal to 0.10, that term is non statistically important at the 90 % or higher assurance degree. Consequently, FDI should be removed from the theoretical account.

Analysis of Findingss

The Adjusted R squared explains the per centum of fluctuation in the dependent variable because of a fluctuation in the dependent variable. Therefore, there is 82.917 % of fluctuation in the dependent variable if there comes any fluctuation in the independent variables.

Significance of Regressors

Foreign direct Investing

The T-Statistic is -0.29148 that is less than +/- 1.64. This shows that it has 10 % significance degree. It would non be considered as it does non hold a important impact on economic growing. As a consequence we will accept H0.

Growth in wide money

The T-Statistic is -3.40215 that is greater than +/- 2.58. This shows that it has 1 % significance degree. It would be considered as it has a important impact on economic growing. As a consequence we will reject H0.


The T-Statistic is 2.92753 that is greater than +/- 2.58. This shows that it has 1 % significance degree. It would be considered as it has a important impact on economic growing. As a consequence we will reject H0.

Interest Rate

The T-Statistic is – 5.26932 that is greater than +/- 2.58. This shows that it has 1 % significance degree. It would be considered as it has a important impact on economic growing. As a consequence we will reject H0.

Restrictions of the Study

Time restraint was a major factor.

Deducing values from different informations bases and web sites was tough as they normally varied.

One of the variables is demoing an undistinguished relationship i.e. FDI. This is because its T-statistic is demoing a value than does non fall between the needed scopes. This may be because there is less foreign direct investing in the state because of the prevalent political instability.


The survey reveals assorted of import and important factors that have an impact on the economic growing of Pakistan. Inflation is the root of all the jobs. The survey finds grounds that how economic growing is affected, negatively and positively. We come to a decision by analyzing the arrested development theoretical account that rising prices has a direct and positive relationship with economic growing. Whereas, involvement rates, FDI and growing in money supply has a negative relationship with economic growing. Three of the variables except for FDI have a important relationship with the dependant variable which means that a fluctuation in any of the variables can take to a alteration in the economic growing.


Figure 1.1

Fig 1.2

Degree centigrades: UsersAbu-HurrairaDesktop

Fig 1.3

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Pakistan Inflation rate ( consumer monetary values % )

Fig 1.4

Gross Domestic Product ( GDP ) Growth – Pakistan ( % )


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i»?Gross Domestic Product ( GDP ) Growth – Pakistan ( % ) , Source: Statistics Division – Government of PakistanA



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