SUBMITTED TO DR

KHALID
SUBMITTED BY M RASHID SHABBIR
AG# 2015-AG-1036 | MPHIL ECONOMICS 1ST

MACROECONOMICS:
Macroeconomics is the branch of economics that studies the
behavior and performance of an economy as a whole. It focuses
on the aggregate changes in the economy such as
unemployment, growth rate, gross domestic product and inflation.

IMPACT OF MACROECONOMICS
INDICATORS ON PAKISTAN
ECONOMY:
The impact of major macroeconomic indicators includes inflation
rate, GDP growth rate, interest rate, FDI, exchange rate,
unemployment, BOP, government policies and on economic
growth of Pakistan. Interest rate unemployment and inflation rate
have negative impact on Pakistans economic growth while
exchange rate, GDP growth rate government policies have
optimistically impact on the economy of Pakistan.

Macroeconomic Indicators are as follows:

A. GDP (Gross domestic product)
B. Balance of Trade
C. Income and Wages
D. Poverty
E. Inflation
F. Unemployment
G. FDI (Foreign Direct Investment)
H. Balance of payment
I. Interest rate
J. CPI (Consumer Price Index)
K. Exchange rate
L. Fiscal and Monetary policy
M. Stock exchange
N. World Trade Organization

GDP (Gross domestic product):

Gross domestic product (GDP) is the monetary value of all the
finished goods and services produced within a country's borders
in a specific time period. Though GDP is usually calculated on an
annual basis, it can be calculated on a quarterly basis as well.
GDP includes all private and public consumption, government
outlays, investments and exports minus imports that occur within
a defined territory. Put simply, GDP is a broad measurement of a
nations overall economic activity.
1972 to 2015 our GDP grew at an average rate is about 4.9
percent. Our growth policy has been based on public sectors
projects. GDP growth, spurred by gains in the industrial and
service sectors, remained in the 6-8% range in 2004-2006.In 1971
Pakistan lost its east wing became Bangladesh. It greatly affects
our economy because East Pakistan was the major producer of
Jute. In 1972 GDP fell to just 1.2%. This occurred mainly because
of war with India also because Pakistan lost revenue which is used
to earn from Bangladesh. The Bhutto devalued the Rupee by
131% which boasted our exports by 153%. He introduced several
reforms and public development projects because of which
Pakistan was able to achieve the average growth rate of 7.5 till
1974. All these factors cause Pakistans GDP to fall significantly
and from 1974-1977 the average GDP was just 3.6%. The inflow
of foreign aid from US and other countries because role of war
against USSR. The increased the income of local peoples and
demand for goods and services also increased. This aid also help
Zia regime in industrial sectors. This all caused by Pakistan GDP
to grow Pakistan average 6.5% during 1980-1988 exceeded by
that of Korea. Heavy development projects are launched and
ignited for growth rate. The current GDP (Gross Domestic Product)
of Pakistan is $270 billion (nominal, 2015) according to economic

survey of Pakistan (2014-2015). The GDP growth is 4.24% in

2014-15 against the growth of 4.03 percent recorded in the same
period last year.

Chart Title
140.0000
120.0000
100.0000
80.0000
60.0000
40.0000
20.0000
-

Balance of Trade:
The difference between a country's imports and its exports.
Balance of trade is the largest component of a country's balance
of payments. Debit items include imports, foreign aid, domestic
spending abroad and domestic investments abroad. Credit items
include exports, foreign spending in the domestic economy and
foreign investments in the domestic economy. A country has a
trade deficit if it imports more than it exports; the opposite
scenario is a trade surplus.

Pakistan had a deficit on its balance of trade each year from FY

1973 through FY 1992. In FY 1991, exports were US$5.9 billion,
compared with imports of US$8.4 billion, which resulted in a
deficit of US$2.5 billion. In FY 1992, exports rose to an
estimated .US$6.9 billion, but imports reached an estimated
US$9.3 billion, resulting in a trade deficit of US$2.4 billion.
Economists forecast a trade deficit of around US$2.5 billion for FY
1993. Pakistan's terms of trade , expressed in an index set at 100
in FY 1981, were 78.0 in FY 1991 and 82.7 in FY 19.

BOT
5,000.0
0.0
-5,000.0
-10,000.0
-15,000.0
-20,000.0
-25,000.0

Inflation:
Inflation means a sustained rise in prices. Inflation can creeping,
walking , hyper, cost push, demand pull, stag inflation, markup ,
according to velocity and nature. Inflation is increased by some
demand side factors (Increase in nominal income, Increase in
disposable income, Expansion of private sectors) and increased
by supply side (Industrial disputes, Natural Calamities, Increase in

exports). Inflation rates from 1992 to 1995 ranged between (19.5

to 12.9) percent. The high rates of monetary expansion, low rate
of economic growth in three out of the five years and adjustment
administered prices contributed to the relatively high rates of
inflation. The pressure on the exchange rate and reserves was
caused because of the fiscal and monetary indiscipline during
1991-1993. The period also marked a major thrust in economic
liberalization of the economy. The rate of economic growth, which
had flattered in 1989 and 1990 recovery strongly next two years.
Inflation Among the most appreciated developments, during fiscal
year 2005-06, was the significant abatement of price pressure
over the course of the year. For the first ten months of the fiscal
year JulyApril 2005-06, all important barometers of price
pressure in the economy. Food inflation was 3.6% in 2006.
Inflation rate was 14.1% in 2012-13. The inflation rate measured
by the changes in CPI, averaged at 4.8 percent during July-April,
2014-15 against 8.7% in the comparable period last year, which is
lowest since 2003. The food inflation on average basis in JulyApril, 2014-15, is estimated at 3.6% and non- food 5.7%, as
against 9.3% and 8.2% in the consistent period last year. Core
inflation on average basis during July-April, 2014-15, stood at
6.9% against 8.3% last year.

inflation

Unemployment:
Unemployment occurs when person which is actively searching
employment unable to find work. Pakistan, unemployment is
increasing with a rapid pace because of various reasons. The
most important reason behind this problem is the bad policies of
the government that has no plan to place the young people who
have completed their education and are getting frustrated
because of not finding any job. This part deals with the causes of
unemployment and its impact on the economy of Pakistan. Some
of the major causes of unemployment in Pakistan are following;
Agriculture sector engages directly or indirectly 45% of the labor
force and it also contributes 23% to the GDP. The main causes of
unemployment in Pakistan are : The first cause is unpleasant as
well as unacceptable condition of law and order and because of
this serious situation foreign direct investment is sliding down, In
survey of Pakistan economically, in last year current decade FDI

was minimum, According to the international institute of Finance

Direct Investment, FDI which fell 32%. In December 2009, the
unemployment rate reported in Pakistan was 5.05 from 1990 until
2009, unemployment rate in Pakistan was arranged 5.88 percent
reaching at the tremendous height of 8.27 in December 2002, and
recorded low at 3.13 percentage in December 1990.
Unemployment is becoming the most important and critical issue
in Pakistan. Dramatic increase in growth of high level of
unemployment is big headache for less-developed as well as
developed countries. High level of unemployment can create
number of social problems. There are various studies that
investigated the determinants of unemployment. In these studies
the determinants were investigated form micro as well as from
macro perspectives in both less developed and developed
countries. Different theoretical models are used in studies. In all
the five-year plan starting from 1955, policies were included at
the reduction of unemployment, however due to inadequate
efforts on the part of the government most of them proved wane.
There are a number of reasons for unemployment in Pakistan,
firstly, there is a serious mismatch between the jobs demanded
by the emerging needs of the economy and the supply of skills
and trained manpower in the country. While the economy is
moving towards sophisticated sector such as telecommunications,
information technology, oil and gas, financial services,
engineering. Goods the universities and colleges are turning out
hundreds of thousands of graduates in Arts, Humanities and
languages. This mismatch has created waste and misallocation of
resources, and on other hand and the shortage of essentials
resources. Unemployment rate has decreased from 6.24 percent
in 2012-13 to 6.0 percent in 2013-14. Due to rise in
unemployment our economy effect very badly.

Chart Title

FDI (Foreign Direct Investment):

A foreign direct investment (FDI) is a controlling ownership in a
business enterprise in one country by an entity based in another
country. FDI plays an important role in the economic growth of the
host country, especially if it is accompanied by sound economic
policies and greater openness (hec.gov). It also tends to crow din
local investment and it promotes growth, increases
competitiveness and exports. Pakistan was an agricultural
economy upon its independence in 1947. It lacked the industrial
capacity to process locally produced agricultural raw material, as
well as the funds to create new capital. So the was a need on the
part of the government to obtain funds from abroad to invest it in
the local industries, and improve the countrys manufacturing
capacity. Different types of industrial policies have been
implemented in different times with a changing focus on either
the private sector or the public sector. The private sector was the
main vehicle for industrial investment during the 1950s and the
1960sand the involvement of the public sector was restricted to

very few industries. It was set that in the event of private capital
not forthcoming for the development of any particular industry of
national importance, the public sector might set up a limited
number of standard units. Foreign investment was not allowed in
the field of banking, insurance, and commerce.

Chart Title

Balance of payment:
The balance of payments, also known as balance of international
payments and abbreviated Bop or BP, of a country is the record of
all economic transactions between the residents of the and the
rest of the world in a particular country.
Domestic demand remained the major factors behind the decline i
n imports during the period under review. The import bill of the co
untry decreased by 2.8 percent during JulyApril 2009 to 10 over
the comparable period of last year . Pakistan faced severe
economic conditions such as energy crisis and large costs to
exports but even though its external sector experienced an

overall improvement in 2009 to 10 the external current account

deficits contracted to around 2.8% of GDP, the reasons were
deficit which more than offset the declining financial account
surplus during the period.2) macroeconomic stabilization
measures taken by the government3) back of a steep decline in
imports for much of the year, improving exports as world demand
is gradually restored, and a continued increase in
workerRemittances4) Worker remittance shave increased from
US$ 6.4 billion in JulyApril 200809 to US$ 7.3billion in ten
months5) recent increase in remittances, which appears to be
secular in nature, has emanated from a policy initiative called
Pakistan Remittance Initiative (PRI).6) the collapse in global
commodity prices induced by the Eurozonewide contagion from
the ongoing Greek debt crisis. Exports amounted to $ 15.9 billion
in JulyApril 200910 showing a growth rate of 8.0 percent. Higher
quantum export of items like rice, fruits and raw cotton due to
their improved production in country along with recovery of
international demand and exchange rate depreciation were major
reasons for the increase in exports during the period under
review. Textiles which is a major driver of the exports of Pakistan
captured 53.3 percent share in total exports. Nontextile exports
grew 7.5 percent by 9.2 percent during JulyApril200910. Food
Group export increased by 7.1 percent during JulyApril 200910.
With a 66 percent share in food group and11.4 percent in overall
exports of this year, rice exports witnessed a growth rate of
during the JulyApril200910. The overall increase in export of rice
came from onbasmati rice as quantity export of nonbasmati rice
increased by 100.5 percent. Quantity export of rice increased by
66.0 percent on the back of improved. Domestic production and
higher import demand from countries Kenya, Iran and Saudi
Arabia.

BOP

Exchange rate:
The value of one currency for the purpose of conversion to other.
Before the 1970s, Pakistan linked its currency, rupee, to the
Pound Sterling. With the economic influence of the USA getting
more apparent, in 1971, Pakistan linked rupee to the U.S. Dollar.
In 1972 Bhutto devalued Pakistani rupee by 131%. The exchange
rate at that time was $1= PKR 11.This act significantly increased
our export revenue. Despite the loss of East Pakistans exportable
produce, West Pakistan doubled its foreign exchange earnings.
However, in 1973, OPEC increased the price of oil and Pakistan
had to pay higher price to import oil. During that year there was a
worldwide recession and the demand for goods and services
decreased throughout the world which also caused Pakistans
export to decline. All these factors greatly damaged Pakistans
economy. Pakistan fell into a budget deficit in 1982, when the
strengthening U.S. Dollar made remittances abroad through
official channels slumped. In this view, Pakistan put the rupee on
a controlled floating basis. Foreign exchange reserves developed

significantly and reached US $ 17.8 billion by end of April 2015,

from US $ 14.2 billion at end June 2014.

Fiscal policy and Monetary

policy:
Monetary policy:
Monetary policy is the macroeconomic policy laid down by the
central bank. It involves management of money supply and
interest rate and is the demand side economic policy used by the
government of a country to achieve macroeconomic objectives
like inflation, consumption, growth and liquidity.
The effects of stochastic shocks of each of the endogenous
variables are explored using Error Correction Model. The study
shows that Long run relationship exists among the variables. Also,
the core finding of this study shows that inflation rate, exchange
rate and external reserve are significant monetary policy
instruments that drive growth in Pakistan. It is therefore
recommended that the establishment of primary and secondary
government bond markets that can also increase the efficiency of
monetary policy and reduce the governments need to rely on the
central bank for direct financing. Monetary policy has nominal as
well as real effects on economic growth of Pakistan. The
implementation of monetary policy in a developing country like
Pakistan has supplementary experiments which are not present in
the developed countries like treat of currency substitution and
fiscal dominance. The inability of monetary policies to effectively
maximize its policy objective most times is as a result of the
shortcomings of the policy instruments used in Nigeria as such

limits its contribution to growth even though monetary policies

had brought impressive contribution over the years.

Fiscal policy:
Fiscal policy is the means by which a government adjusts its
spending levels and tax rates to monitor and influence a nation's
economy. It is the sister strategy to monetary policy through
which a central bank influences a nation's money supply.
The dynamic effects of fiscal policy on macroeconomic activities
over the period 19722014. The fact that in the short run rising
fiscal deficit creates excess demand, which encourages firms to
use more of their existing capacity and people to spend more, and
hence economic situation in the short run improves, but in the
long run rising fiscal deficit has some serious implication for
economic growth. The feed back coefficient is negative and
significant suggesting that about 0.43 percent disequilibrium in
the previous period is corrected in current year.
The government should keep its budget deficit in the narrow band
of 3% to 4% of GDP. Outside this limit the unsustainable budget
deficit could have undesirable macroeconomic costs and the
government's macroeconomic objectives such as low inflation and
high economic growth might be in jeopardy. If the government is
able to reduce its budget deficit, eventually she would get rid of
the vicious circle of debt overhanging problem, because the debtGDP ratio would increase only if the fiscal deficit as a percentage
of GDP exceeds the real GDP growth rate. However, the reduction
in fiscal deficit must be due to reduction in the public expenditure
rather than an increase in resource mobilization. The government
should curtail non productive expenditures; high attention should
also be given to the Public Sector Development Plan (PSDP), as it
has a long term impact on economic growth.

POVERTY:

Poverty is a basically a circumstance where a basic necessities

are not available to a peoples. Where they are deprived from
basic needs like cloth, education, food, money. The definition of
poverty varies from country to country.Varies from country to
country. For poverty estimation, in Pakistan, the 1963-2008 period
can be divided into two broad groups; 1963-1992, for which
poverty estimates are usually based on secondary or published,
grouped data, using generally the calorific norm of 2550 calories
per day per person. For the 1992-2006 period, poverty has
commonly been in rural or urban areas. It is important to
understand the effects of poverty on people since as many as 1.7
billion people live in absolute poverty. Poverty is characterized by
lack of basic human needs, which range from drinking water and
shelter to basic healthcare and education. The common causes of
poverty in Pakistan over are overpopulation, unequal distribution
of resources, unemployment, etc. And some of its obvious effects
include health problems, homelessness, etc. Many people in our
country go to sleep without taking food almost every day. Poverty
also affects health. Poverty Gap Ratio also reveals the depth and
severity of poverty. Fluctuations in the Poverty Gap of Pakistan
occurred in last few years. For example; in the year 1992, the
overall Poverty Gap Ratio was 4.27%, 5.22% in 1993, 4.38% in
1996 and 6.58 % in 1997. The Poverty Gap Ratio was high in rural
areas of Pakistan as compared to the urban areas. For example,
in 1992 and 1993 the Poverty Gap Ratio in rural areas was 4.60%
and 6.25% respectively. In urban areas of Pakistan, the Poverty
Gap Ratio during 1993 remained 3.43% and in 1994 the Poverty
Gap Ratio decreased to 2.74% (Economic Survey of Pakistan,
2005-06). Two different kinds of strategies may be adopted to
cope with the problem of poverty. The first strategy is to directly
target the poor segment of population. That Provide prospects
which would be helpful in breaking the vicious cycle of poverty.
The other strategy to achieve the same goal is to devise such
types of policies which would enhance the economic growth as

economic growth is assumed to be helpful in reducing poverty. It

is evident from Pakistans recent growth experience that growth
has caused a significant change in poverty levels. Between 199697 and 2001-02 low growth in per capita GDP resulted in an
increase in poverty, which started to decline sharply as per capita
income grew during the period 2004-05 to 2005-06.

Conclusion:
The impact of macroeconomic variable on FDI in Pakistan. In
above data 1971 to 2015 related to core economic indicators.
Various other economic variables along with other non economic
variables like political, legal and social factors could also affect
the FDI inflows in Pakistan. It is restricted to identify the impact of
only three selected core economic indicators that have been
mostly found in the earlier literature. The findings suggested that
macroeconomic variables like GDP, inflation, exchange rate have
significant positive impact on FDI inflows in Pakistan. Hence to
improve the rate of FDI inflow in the country for augmenting the
overall economic growth, the government must pay more
emphasis to the stability and monitoring of the explanatory
variables cautiously.
GDP of Pakistan has significant effect on FDI therefore there
should be more effort to maintain and increase the growth rate of
GDP consistently. It will help the government in order to attract
foreign investors in Pakistan for the growth of economy as a
result. Moreover government should also monitor and control the
rate of inflation, as it also affects the overall FDI inflows in the
country. Similarly there is a need of stable exchange rate in
Pakistan which may augment FDI inflow in Pakistan. There is a
need of consistent financial policies followed by the succeeding
governments, to encourage and enhance the confidence of
foreign investors. Likewise trade policy should be framed out to
create a lucrative environment for the prospective investors.

Moreover proper provision of communication networks, logistics

support, energy supply, law and order prevalence and security
assurance should be ensured to attract foreign investors.