ECONOMIC REPORT ON

ECONOMIC GROWTH, INFLATION AND EXPORT

BY
ABDUR RASHEED
REG # 1261
MBA(E)

SUBMITTED TO:
MR. TEHSEEN JAWED

TABLE OF CONTENT
Page #
3
4
5
5
7
7
8
8
9
11

Section
2.1
2.2
3

Subject
Abstract
Introduction
Literature Review
Theoretical Background
Empirical Studies
MODELLING FRAMEWORK

4
5

Data for analysis

Estimation and results
Conclusion and Recommendation
References

Abstract
In this study the relationship between Economic growth, Inflation and Export is examined.
Several research papers of different authors in different time periods are used as a supporting
hand. This study show that how inflation affect the Economic Growth. And how Export affect
the Economic Growth. Due to Inflation, Export is also affected. Because in high inflation the
Export strategies become conservative which affect the investment on Export. And Export
affected.

1. INTRODUCTION.
Pakistans economy suffered from political instability, law and order problem, turmoil in
international financial market and high price for oil and other commodities. Some of the investor
has closed their businesses or transferred their business to other economy. Because due to some
political parties in Pakistan there is no security in the business sector. And also there are illegal
funding to the political parties and also some of the government forces are involved in it.
Pakistans economic growth is depending on the different sectors like lather, furniture, fiber,
marble, vegetables etc. but mostly depend on agriculture sector. Because Pakistan is an
agriculture economy. Beside huge dependency on this sector there is still insufficient technology
for this sector. Thats why the performance of the agriculture sector was dismal, with 1.5%
3

growth compared with 3.7% in 2007. GDP growth slowed to 5.8% in 2008, down from 6.8% in
the previous year. Manufacturing registered modest growth of 5.4% against 8.2% in the previous
year. GDP growth in 2008 was principally driven by the services sector, which posted a growth
of 8.2% against 7.6% in 2007. Due to global economic slowdown and internal difficulties, GDP
growth in Pakistan is expected to further moderate to 2.5% in 2009.

Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005 before
easing to 7.9% in 20061. Due to increase in higher international commodity prices, particularly
the prices of oil, and basic selected food item. In pakistan, inflation rose from 7.8% in 2007 to
12% in 20082. Food inflation was higher at 17%, driven primarily by an unprecedented rise in
global prices of food of a few items such as wheat, rice and oil etc. in 2008, following increase in
the petrol prices inflation has reached in pakistan as high as 25%. The central bank trying to
perusing tighter monetary policy while trying to preserve growth.
The export of goods and services play an important role in the economic development of a
country. And the most important sources of foreign exchange income. With increase export the
relation become strong with other countries. And it will provide a lot of opportunities for
employee in the economy. Pakistan export different items like rice, furniture, cottonfiber,
cement, tiles, marble, textiles, clothing, leather goods, sports goods (renowned for
footballs/soccer balls), surgical instruments, electrical appliances, software, carpets, and rugs, ice
cream, livestock meat, chicken, powdered milk, wheat, seafood (especially shrimp/prawns),
vegetables, processed food items.

2. LIRERATURE REVIEW
2.1 Theoretical Background:
ThorvaldurGyfason University of Iceland SNS Center for business and policy (19851994)show that export is the main component of economic growth. Because export is directly the
part of population and indirectly export facilitate imports. By rising export enhance static and
1
2

http://www.unescap.org/survey2009

dynamic efficiency of economic growth. He also state that export increase the imports of goods,
services, and capital, and thereby also of new ideas, knowledge and technology.
In conclusion he suggested four possible sources that linkages between inflation, export and
economic growth. These are the following.
1. inflation induced overvaluation of national currencies in real terms
2. inflation-induced production distortions driving a wedge between the returns to real and
financial capital
3. the potentially deleterious effects of inflation on saving and investment,
4. economic mismanagement, structural weaknesses, etc., of which inflation is
symptomatic3.
VikeshGokalSubrinaHanif Working Paper 2004/04 December 2004 Economics Department
state that high economic growth together with low inflation. For support this statement the
authors uses various theories like Classical economic recalls supply side theories. Keynesian
theory provided the AD-AS framework and Endogenous Growth theories sought to account for
the effects of inflation. He says that some consensus exists suggesting that macroeconomic
stability, specifically defined as low inflation, is positively related to economic growth. Inflation
also cause negative impacts on economy growth when it is interference with the economy
efficiency.
Inflation is a big problem for the future profitability of an investment projects. Because inflation
leads to more conservative investment strategies that will lead to the lower level of investment
and economic growth. Inflation may also reduce a countrys international competitiveness, by
making its exports relatively more expensive, thus impacting on the balance of payment4.
ErmanErbaykal and H.AydinOkuyan state in their study that inflation is one of the most
microeconomic problem. They shows that in the world economic crises of 1929, Keynesian
policies was effective because increasing in the total demand have caused increases not only in
products but also in inflation. They show the different countries problems which are arise by
3

October 1998 (revised).Exports, Inflation, and Growth by ThorvaldurGylfason*

University of Iceland; SNS Center for Business and Policy Studies, Stockholm, Sweden; and CEPR.
4

VikeshGokalSubrinaHanifWorking Paper2004/04December 2004Economics

Department
5

inflation like in American countries in the 1980 and in Turkey 1970 when there was
unemployment caused by the inflation. Inflation increased by the increasing price of petrol which
is the main input of industries. Due to which production prices increase and also raise in
inflation. In these countries when inflation was raised in 1989 as a result of financial
liberalization, interest and foreign exchange have lost their feature of being the policy instrument
oriented to real objective (Borative and Turkcan, 1993). High inflation rate has caused decline in
the real wages and domestic demand, and it allowed credit cost to increase in high rate.
Liwan, Audrey and Lau, Evan show in their study that the issue of the export promoting growth
has been a central theme for the international trade economists and policy makers. They show
that inflation and export play an important role to determine the economic growth of a particular
economy. They suggest that ever changing of technologies may improve the capabilities to
produce goods and services and this affect the export patterns and later enhance the economic
growth. This bring about the new dimension of management in an economy. And empirically
they suggest that in the long run equation indicates that the export and investment brings positive
impact to these economies throughout the estimation periods.

2.2 Empirical Studies:

Empirically it is found that inflation is significantly correlated with the growth rate. The
regration analysis confirm the relationships between inflation, inflation variability and growth.
The growth accounting framework made it possible to identify the main channel that inflation
reduce the economic growth. Vikesh Gokal and Subrina Hanif (2004) show that inflation
impacted on growth by reducing investment, and by reducing the rate of productivity growth.
And also examined that low inflation and small deficits were not necessary for high growth even
over long periods, high inflation was not consistent with sustained growth.
ThorvaldurGylfason stat in their study that 1985-1994, high inflation tended to be associated
with low exports in proportion to GDP and also with slow growth in a large group of countries at
all income levels.
Moreover, he also found that abundant natural resources may be a mixed blessing, if excessive
dependence on primary export tends to be associated with low total exports and slow growth.
6

Objective:
To determine the dependency of economic growth over the Inflation and Export, also the nature
of relation between dependent and independent variables.

Recommendation of test
As the economic growth depends on four independent variables therefore multiple regression
will be used.

METHODOLOGY:
Collection of data was from Pakistan Economic Survey 2008-09 which are mentioned in below
tables the base year set was 1998 .The data range is from 1998 to 2008 and the statistical method
apply is Linear Regression / Multi Regression over the software use is SPSS Version 11.5

3. MODELLING FRAMEWORK
The model investigate the relation of Economic Growth (GDP), Inflation and Export.
Consider the following function.

G.D.P = f (INFLATION)+ f (EXPORT)

The methodology use for the study is OLS ordinary least square method. The study show
that GDP variable is dependent and Inflation and Export variables are independent. There
for the model is.

G.D.P = INFLATON + EXPORT+

G.D.P: Gross Domestic Product
INFLATION: INFLATION
EXPORT: EXPORT
7

: ERROR
Data
YEARS
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

GDP
3260261000
3396664000
3529345000
3594124000
3705718000
3884952000
4134544000
4479850000
4860476000
5191709000
5404486000

EXPORT
373160000
390342000
443678000
539070000
560947000
652294000
709036000
854088000
984841000
839545000
940484000

INFLATION(%)
3.58
4.41
3.54
3.1
4.57
9.28
7.92
7.77
12
10.27
22.35

4. ESTIMATION AND RESULT:

variable
coefficient
C
2.26E+09
Export
2.291961
Inflation
44162220
Adjusted R-squared 0.899065

t-statistic
8.507711
4.085708
2.016795
F-Statistic
Prob(F-Statistic)

Prob
0.0000
0.0035
0.0784
45.53659
0.00043

SOFTWARE OUTPUT:
Dependent Variable: GDP
Method: Least Squares
Date: 12/16/09 Time: 22:45
Sample: 1998 2008
Included observations: 11
Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
EXPORT
INFLATION

2.26E+09
2.291961
44162220

2.65E+08
0.560970
21897228

8.507711
4.085708
2.016795

0.0000
0.0035
0.0784

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

0.919252
0.899065
2.38E+08
4.51E+17
-226.0007
2.166716

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

4.13E+09
7.48E+08
41.63649
41.74501
45.53659
0.000043

5. CONCLUSION AND RECOMMENDATION:

The above study and software output show that Export has positive impact on GDP Growth
and also decrease in inflation. Now there is need to increase Export. For this purpose it is
recommended that.
a) if Government uses Fiscal Expansionary Policy the Export will be increase. Because
when Government apply the Fiscal Expansionary Policy means they provide the facilities
to the firm. The Govt. increases their Expenditure and like decrease their taxes. The firms
owners will be motivated because their production cost will be minimum by decrease
taxes or electricity at low cost. The firms will increase production. And these products
9

will be Export more and more. When export increase the import will also be increase
because like raw materials for production. Which will decrease unemployment.And due
to export and import there will be increase in transaction of money. Like dollars will be
circulated in the economy.
b) If the Government apply the monetary expansionary policy. Like MARGIN
REQUIREMENT. In this policy the Govt. allows the firms to issue the securities and
minimum interest. The firms owners will be encourage and they will issue maximum
securities against money. When the firms owners have money in hand they will be able to
import manufacturing plants for more production. In this way the production will be
increase. And when the production increase the products will be Export. So in this way
the Export will be increase. By increase Export ultimately GDP will be increase and
inflation will be decrase.

10

References
VikeshGokalSubrinaHanif Working Paper 2004/04 December 2004 Economics Department
Reserve ank of Fiji Suva Fiji
byThorvaldurGylfason*University of Iceland; SNS Center for Business and Policy Studies,
Stockholm, Sweden; and CEPR. October 1998 (revised).
Liwan, Audrey and Lau, Evan University Malaysia Sarawak
10 July 2007
International Research Journal of Finance and Economics ISSN 1450-2887 Issue 17 (2008)
EuroJournals Publishing, Inc. 2008 http://www.eurojournals.com/finance.htm

11

ErmanErbaykalBalikesir University Faculty of Economics and Administrative Sciences

Bandirma, Balikesir
Shamim Ahmed Md. Ezazul Islam July 2006 Policy Analysis Unit (PAU) Research Department,
Bangladesh Bank Head Office, Dhaka, Bangladesh

12