IMPACT OF MACRO ECONOMIC VARIABLES ON GROSS

DOMESTIC PRODUCT (GDP) OF PAKISTAN

ABSTRACT
The study examined the impact of macroeconomic variables including inflation, exchange rate,
foreign direct investment, government spending and capital investment on gross domestic
product of Pakistan. In this research, secondary data is used. Data for the period 2004-2014 for
10 years has been used in this study. The figures of all variables were taken in billions of US
dollar. The statistical software, like SPSS and E-views were used to predict the results.
Regression analysis is used for analyzing the data. The entire formulated hypotheses are
supportive as evidenced by the results of regression indicate that. Results indicate that
macroeconomic variables strongly impact on gross domestic product in Pakistan. Present study
on the relationship between macroeconomic variables and GDP is significant from the
perspective policy makers as they can devise optimal policies regarding macroeconomic
variables and GDP after having a good understanding of their dynamics.
Key words: Inflation, Exchange rate, FDI, Capital investment, Government spending, GDP.

LIST OF TABLES
Table 4.1: Descriptive Statistics ......................16
Table 4.2: Correlation Matrix...........................18
Table 4.3: Results of Regression Analysis...............................................................19
Table 4.4: Summary of Results................................................20

LIST OF FIGURES
Figure 3.1: Impact of Macro Economic Variables on Gross Domestic Product (GDP) of Pakistan
.15
Fig: 4.1. Graphical representation of descriptive statistic..17

CHAPTER 1
INTRODUCTION
Background
The incomes of society are enhanced by stable economic growth. Economic growth help the
nation to reduce unemployment and also supportive in the deliveries of public services (Afzal,
2007). The economic growth of Pakistan is not satisfactory. Over the few decades the
macroeconomic variables and economic growth relationship became the hot issue amongst the
researcher. Inflation is one of main macroeconomic problem which hurt both economic and
social indicator. The growth of GDP in any country is affected by inflation. An increase in prices
significantly impact economic growth. The reduction in growth of GDP is made with increasing
levels of inflation (Ayyoub, Chaudhry & Farooq, 2011).

Exchange rate is helpful for doing business internationally especially in the case of an emerging
economy like Pakistan. Exchange rate volatility ultimately affects economic growth of a country.
Stabilization of exchange rate and terms of trade are clearly related especially in a small open
economy because it affects the prices of imported (exported) goods (Gal and Monacelli, 2005).
According to Kibria et al (2014), exchange rate fluctuations significantly impact economic
growth. So it is recommended to efficiently manage exchange rate in order to take advantage of
it in order to boost economic growth.
Many researchers analyzed that foreign direct investment is positively and significantly related to
GDP (Ahmad et al, 2012; Ullah and Rauf, 2013). The increase in GDP of a country and
economic progress is based on foreign investors because foreign investments increase GDP of a
country. Countries need to focus on how they can attract foreign investors in order to boost their
economic growth. Investment in education and training of a country is made possible with the
help of foreign direct investment which stimulate human resource development. So the
productivity of labor is increased and other factors of production as well with the help of
increasing human capital. The economic growth of a country certainly depends on its ability to
attract foreign direct investment. The promotion of foreign direct investment in any country is
made with help of incentives provided to foreign investors. A stable political environment is also
needed to promote foreign direct investment (Ahmad et al, 2012).
In determining the economic health of a country, capital investment is the key element. Thus
capital investment is a vital component of economic growth. Capital investment and economic
growth are positively related. High returns on investment can be obtained by redirecting the
investments and ultimately increasing the economic growth of a country. However, a stable
political environment, better infrastructure and economic certainty will promote the investments

at national level and in different sectors of economy as well which in turn enhance economic
growth (Sial, Hashmi & Anwar, 2010). GDP growth is higher for those countries who have
higher capital investments. Many researchers results indicate GDP and capital investment are
significantly and positively related but few researchers results analyzed that there are no cointegrated between GDP and investment and show negative relationship in long run relation
(Anwer and Sampth, 1999).
The impact of government spending on GDP is a debatable topic for long years. According to
Wagner, public sector development is determined by economic growth and he has emphasized on
government expenditure to impact economic growth. However, according to Maynard Keynes,
government need to create jobs and use resources that is underutilized when it feels that there is
fall in economy due high rate of unemployment and under utilization of resources. His theory is
one of the significant contributions in stimulating government spending needed to boost
economic growth. Government spending leads to valuable goods which will in turn enhance
economic growth (Mitchell, 2005).

Research Questions
This study has following research questions to address:

What is the impact of macroeconomic variables (inflation, exchange rate, foreign direct
investment, capital investment and government spending) on GDP in Pakistan?

Research Objectives
The objectives of study are:

To observe the effect of macroeconomic variables on GDP.

To study how different macroeconomic variables (inflation, exchange rate, foreign direct
investment, capital investment and government spending) affects Gross domestic product
in an emerging economy like Pakistan.

Significance of the study

The economic growth (GDP) of a country grows with domestic economic performance. GDP
growth is not in sufficient condition for economic development. This paper relay on both theories
and observation, however, is not just to explain economic event but also to improve economic
policy. The present study examined the effect of macroeconomic variables on GDP exists or not
and if so, then in what direction. The growth of GDP is affected by inflation. Exchange rates
fluctuations affect the profitability of international organizations which in turn economic growth
of a country. In developing countries, foreign direct investments play a major role in enhancing
economic growth. Countries need to focus on how they can attract foreign investors in order to
boost their economic growth. Capital investment is the key element in determining the economic
performance of a country. Thus capital investment is a vital component of economic growth.
Finally this paper also tells how governments spending leads to valuable goods which will in
turn enhance economic growth.
Present study on the relationship between macroeconomic variables and GDP is s
significant from the perspective of researchers and policy makers.

Researchers will be able to further extend the model in broader perspective by including
other firm specific characteristics in association with GDP.

Policy makers can devise optimal policies regarding macroeconomic variables

and GDP after having a good understanding of their dynamics.

CHAPTER 2
LITERATURE REVIEW
Macroeconomic variables affect economic growth of a country. A number of studies have
conducted to study this relationship. Different macroeconomic variables selected for this study
includes inflation, exchange rate, FDI, government spending and capital investment.

2.1. Inflation and Gross Domestic Product

Researcher has critically reviewed important research papers and empirical studies for analyzing
the relationship between inflation and gross domestic product. Ayyoub et al (2011) found that

inflation is related to gross domestic product. They used OLS (Ordinary Least Square) to analyze
the results. The study results indicate that economic growth of a country is affected by consistent
increase in prices. The growth of GDP is decreased by high level of inflation.
Boyd, Levine & Smith (2001) also suggested that economic growth and inflation are
significantly related. Inflation impacts negatively on financial sector performance which in turn
has negative effects on economic growth. Inflation rate is needed to be stabilized in order to
reduce its negative effects on economy. Inflation is related to economic growth as tested by
Granger causality test. Inflation is harmful for economy. There is a need to set an optimal
inflation target by policy makers to keep economy strong (Mubarik & Riazuddin, 2005)
Rousseau & Wachtel (2002) also studied that inflation has a significant impact economic growth
using regression analysis. Inflation is negatively related to economic growth. Iqbal and Nawaz
(2009) also investigated the relationship between inflation and economic growth. They used
annual data from 1961 to 2008 in their study to check the impact of inflation on economic
growth of a country. Inflation rate is needed to be reduced in order to make economic growth
better because high inflation impacts economy negatively. According to Khan and
Schimmeipfenning (2006), high inflation is harmful to economic growth. It is evidenced that in
periods of high inflation, low growth is found while high growth is related with a low inflation
environment. So inflation rate should need to be kept low. Through price stability, inflation can
be controlled. In the light of above discussion, it is hypothesize that:
H1=Inflation has a significant and negative impact on GDP.

2.2. Exchange Rate and Gross Domestic Product

During the last decade a large number of studies focused on exchange rate volatility and
economic growth. Here researchers present a brief review related to economic factor. Ahmad et
al (2013) studied the relationship between exchange rate and gross domestic product. They used
yearly data for the period 1975-2011. Ordinary least square (multiple regression) analysis is
applied to study the impact of exchange rate on economic growth. Results indicated that
exchange rate significantly impact economic growth. However, exchange rate is negatively
related to economic growth. In a developing country like Pakistan, the level of imports is
relatively high needed for its development. Consequently, its demand for foreign exchange
increases and exchange rate fluctuates which in turn affects economic growth.
Javed & Farooq (2009) also examined the relationship between economic growth and exchange
rate fluctuations. He used quarterly data from 1982-2007. They found a positive and insignificant
relationship between economic growth and exchange rate. The performance of any country
economy depends on exchange rate changes especially in the long run. Therefore, good
economic performance can be realized with help of a sound exchange rate policy. According to
Chen (2012), economic growth is positively influenced by exchange rate. He conducted his
research on 28 Chinese provinces. With the help of increase in exchange rate, resources can be
allocated to different sectors. In this way, firms strive to improve their efficiency and also
stimulate the economic growth. Different sectors can also be enriched with the help of exchange
rate.
On the basis of above literature, it is hypothesize that:
H2=Exchange rate has a significant impact on GDP.

2.3. Foreign Direct Investment and Gross Domestic Product

Foreign direct investment impact gross domestic product of a country. Yousaf et al (2008)
studied the relationship between foreign direct investment and economic growth. Error
correction model was also used for the purpose of further analyzing data. The data for study
purpose was for a time period of 1973 - 2002. The results of data analysis show that FDI
influences economy in long run as well as short run.

Aziz, Khan and Aziz (2008) also

investigated the relationship between FDI and economic growth. Ordinary least square
regression is used for estimation of current study. This study fulfilled in the period from 19722008. The conclusion of this study is that the FDI affect positively the economic growth of
Pakistan.
Sohail, Sohail and Azeem (2014) also examined the relationship between FDI and economic
growth. Two stages least squares method of simultaneous equation has been used for the
estimation of this study. The quarterly data has been used for 2000 Q1-2010 Q4 for regression
analysis. The main findings of this study show that foreign direct investment impacts positively
on economic growth. This is because that FDI funds are invested in Pakistan, which enhance the
economic growth of Pakistan positively. A significant relation is found between FDI and
economic growth. International trade and economic growth is increasing with the passage of
time. To test the association between FDI, trade and economic growth, VECM framework is
used. Economic growth is enhanced by FDI attracted by a country. So it is an important factor to
boost economic growth (Iqbal, Shaikh & Shar, 2010)
Bashir et al (2014) also did a comparison between South Asian states and China during the time
period from 1976-2011 to study the relationship between FDI and economic growth. Foreign
funds and exchange can be made possible with the help of foreign investments especially in
developing countries. The FDI is very important in developing nations. The results found that

FDI impacts positively on economic growth. Steps are need to be taken to create an environment
for FDI. By providing more incentives to foreign investors, FDI can be encouraged. Creating a
friendly environment also attracts FDI in the economy. Policies are also need to be formulated
regarding FDI.
FDI impacts on economic growth of China and India. By using ordinary least square method, it
is found that FDI promotes economic growth. In China, economic growth is increased by
increase in FDI. However, more growth is found in China as compared to India. Foreign
investors prefer China for investments as compared to India due to market size of China.
Government incentives and infrastructure promotes FDI in China (Agrawal & Khan, 2011).
In the light of above discussion, it is hypothesize that:
H3= Foreign Direct Investment (FDI) has a significant and positive impact on GDP.

2.4 Capital Investment and Gross Domestic Product

Anwer and Sampth (1999) studied the relationship between capital investments and gross
domestic product. He conducted research on 90 countries and obtained data from World Bank for
the period 1960-1992. The result of analysis varied from country to country. Granger causality
test is applied to find the impact of capital investments on gross domestic product. The results
showed that capital investment is significantly and positively related to gross domestic product.
Khan and Kumar (1997) also examined how investments impact economic growth in under
developed nations. They used a sample of 95 developing countries over the period 1970-1990.
They concluded that private investments have more effect on economic growth as compared to
public investments. Due to high returns realized from private investments, so it is increased over
time. Through effective policies for investments especially by increasing competition, it will

impact positively on growth. The productivity of investments is need to be improved on order to

support economy.
Ghani and Din (2006) also studied the capital investments in relation to economic growth.
Private sector productivity is stimulated by public investments which in turn enhance economic
growth. The results showed that private sector investments impact more on GDP as compared to
public investments. Resources are efficiently allocated with the help of investments thereby
increasing economic growth. Capital investments significantly and positively impact economic
growth. High returns on investment can be obtained by redirecting the investments and
ultimately increasing the economic growth of a country. However, a stable political environment,
better infrastructure and economic certainty will promote the investments at national level and in
different sectors of economy as well which in turn enhance economic growth (Sial, Hashmi &
Anwar, 2010).
In the light of above discussion, it is hypothesize that:
H4= Capital investment has a significant and positive impact on GDP.

2.5 Government Spending and Gross Domestic Product

Alshahrani & Alsadiq (2014) studied different government expenditures in relation to economic
growth in Saudi Arabia by using data for the period 1969-2010. The results found that
government spending and economic growth are significantly related. Al-Jarrah (2005) also
investigated that government spending is related to economic growth by applying time series
methodology for the period of 1970-2003.They found that increased government spending
enhance gross domestic product of a country.
Joharji and Starr (2010) also studied the impact of government expenditures on gross domestic
product of a country in case of Saudi Arabia. Although the current expenditure has larger impact

on economic growth in the non-oil sector than the capital expenditure. Existing infrastructure can
improved by allocating government spending which in turn enhance economic growth. To
encourage the economy, government should need to improve its spending. Stratmann and
Okolski (2010) also investigated the effect of government spending on economic growth. They
found that government spending is significantly related with economic growth.
Government spending has a significant impact on economic growth. The findings of the study
showed that there exists a negative and significant relationship between government spending
and economic growth in Israel and Syria and also in Egypt. However, to foster economic growth,
government should need to allocate resources properly (Abu Bader and Abu Qarn, 2003).
Mehmood (2012) examined the effect of different factors on GDP including government
spending. He used multiple regression analysis to check the results. Government spending is
found to have a significant impact on economic growth.
In the light of above discussion, it is hypothesize that:
H5 = Government spending has a significant impact on GDP

CHAPTER 3
Data and Methodology
This section contains the details about the methodology used throughout the study. Following are
the focusing points of this section.

List of variables

Description of the study

Experimental or sampling design

Data collection

Data analysis

3.1. Data

To investigate the effect of selected macroeconomic variables on the GDP of Pakistan, the data
were taken from World Bank Development Indicator and global economy of Pakistan. In this
research, secondary data is used. Data for the period 2004-2014 for 10 years has been used in
this study. The figures of all variables were taken in billions of US dollar. The statistical
software, like SPSS and E-views were used to predict the results.

3.2 Model specification

In this study quantitative approach are used. This research technique is most commonly used in
social science. Co-relational research design is used to see the relationship between variables.
The effect of independent variables on dependent variable is monitored by applying ordinary
least square method. The equation with the intercept is to be found as:
GDP
Where
=Constant
INF = Inflation
ER =Exchange Rate
FDI =Foreign Direct Investment
GSP =Government Spending
CI =Capital Investment

3.3 Variables of the study

Macroeconomic variables play a vital role in the economy of Pakistan. We have explored
different dimensions of the economy that are directly or indirectly linked with Pakistan GDP
growth rate. We analyzed different behaviors of Pakistan economic growth which were linked
with subject variables of the study.

3.3.1. Dependent variable

Gross Domestic Product is taken as dependent variable. Gross Domestic Product has been
calculated by subtracting previous Gross domestic product from current domestic product, then
dividing it by previous Gross domestic product after multiplying it with 100.
GDP = (Current GDP-previous GDP / Previous GDP) *100
3.3.2. Independent variables

Inflation

The Inflation has become a severe dilemma in Pakistan. The general rise in the price of goods
and services with the passage of time is inflation. It reflects the reduction in overall purchasing
power of an individual per each unit of money. In short, when the currency values increases and
the price of goods and services increases simultaneously, then situation of inflation rises. The fix
value of inflation rate has been taken.

Exchange Rate

Exchange rate is explained as the value of the nations currency obtained from another currency.
The fix value of exchange rate has been selected from the financial reports issued by State bank
of Pakistan.

Foreign Direct Investment

Investor from some other country invests in a venture of a different economy is Foreign Direct
Investment (FDI). Annual foreign direct investments in dollars are used.

Capital Investment

Investment refers to all economic activities which involve the use of resources to produce goods
and services. In predicting the economic health of a country Capital investment plays a major
role. Thus a fundamental component of economic growth is capital investment. Capital

investment refers to investment in infrastructure, investment in education, investment in

agriculture, investment in human capital etc.

Government Spending

Government spending refers to government expenditure on education, infrastructure, health care

etc would fosters economic growth in different ways but on the other hand, higher government
spending may hinder overall economic performance if the spending comes at a cost of increased
tax and borrowing to finance the government expenditure.

Hypotheses
H1= Inflation has a significant and negative impact on GDP
H2=Exchange rate has a significant impact on GDP
H3=Foreign Direct Investment (FDI) has a significant and positive impact on GDP
H4=Capital investment has a significant and positive impact on GDP
H5=Government spending has a significant impact on GDP

3.4. Theoretical Framework

The theoretical framework of this study will facilitate the model having relationship between
dependent and independent variables.
Independent variables

Dependent variable
Inflation Rate

Exchange Rate

FDI
GDP

Government Spending

Capital Investment

Fig 3.1: Impact of Macro Economic Variables on Gross Domestic Product (GDP) of
Pakistan

3.5. Data Analysis

Proposed hypothesis has been checked using statistical software Eviews and applying statistical
methods including descriptive statistics, correlations analysis and multiple regression under
ordinary least square method.

CHAPTER 4
RESULTS AND DISCUSSION
4.1 Descriptive Statistics

Sampled data was subjected to summary statistics to see the basic features of data and also to
check whether its statistics are applicable for further analysis or not.
Table 4.1
Descriptive Statistics
Mean
Median
Maximum
Minimum
Std.Dev
Variance
Skewness
Kurtosis
Sum
Observations

GDP
2.7932
2.7017
3.11
2.56
.18052
.033
.576
-1.250
67.04
24

INF
.9136
.9684
1.31
.46
.22296
.050
-.722
-.133
21.93
24

ER
1.2024
1.0974
1.53
.88
.21925
.048
.374
-1.525
28.86
24

FDI
.9803
.8677
1.41
.75
.21859
.048
.816
-1.012
23.53
24

CAP
1.7014
1.7635
2.01
1.34
.19685
.039
-.372
-.879
40.83
24

Fig: 4.1. Graphical representation of descriptive statistic

GSP
-.0550
-.1144
.75
-.60
.40657
.165
.614
-.533
-1.32
24

The table of descriptive statistics describes mean, median, maximum, minimum, standard
deviation, variance, range, skewness and kurtosis. This analysis shows that the mean of CAP
(capital investment) has the highest value of 1.7014 whereas the mean of GSP has lowest value
of -.0550. The maximum value of standard deviation of is GSP .40657. The minimum value of
standard deviation is CAP (0.19685).

4.2. Correlation Analysis

To check relationship between dependent and independent variables, correlation analysis has
been performed whose results are reported in table 4.2. Moreover, purpose of correlations matrix
was also to confirm if there is multicollinearity problem in the data or not.

Table 4.2
Correlation Matrix
GDP

1. GDP
2. INF
3. ER

1.000
-.302**
*
-.588**
.670**
.570***
.461***

INF

ER

FDI

CAP

GSP

1.000

-.303**
1.000
.425*
.644*
1.000
5. CAP
.102*
.563***
.467***
1.000
6. GSP
.343*
.529**
.313**
.638***
1.000
Correlation significant at 5% (**)
Correlation significant at 1% (***)
The given table high lights that GDP is positively correlated with most of the variable but less
4. FDI

correlated with exchange rate as compared to other variables and highly correlated with capital
investment. Inflation is negatively correlated with exchange rate and less correlated with FDI,
capital investment and government spending. Capital investment is highly correlated with GSP,

FDI and exchange rate. GSP is positively correlated with ER and FDI. The last one, ER is
positively correlated with FDI.

4.3 Results and Estimation of Regression Analysis

4.3.1. Ordinary Least Square Method
Finally to find empirical results for the proposed hypotheses and after investigating summary
statistics and correlations coefficients, multiple regression analysis has been performed under
ordinary least square method which is considered best for determining causal relationships.
Results of the statistical analysis are reported in table 4.3.

Table 4.3
Results of Regression Analysis
C
INF

1.697542
-0.273489

Std.Error
0.055692
0.077750

T
30.48108
-3.196329

Significance
0.0000'
0.0040

ER
FDI
CAP
GSP

0.111908
-0.036447
0.520026
0.276629

0.045336
0.015338
0.051992
0.085563

2.468388
-2.376203
6.688439
5.320589

0.0238
0.0288
0.0000
0.0000

R-Squared
Adjusted
squared

0.995378
R- 0.994094

F-statistic
Prob(F-statistic)

4.3.2 Interpreting the results of regression analysis

775.2114
0.000000

The estimated results suggest that there is significant relationship among the dependent variables
with independent variables. If there is one unit change in Inflation (INF), there is (0.27348) unit
change in GDP. Similarly the other explanatory variables have significantly explained the
dependent variables. Whereas there is one unit change in Exchange rate (ER), then (0.1119) or
11% change in dependent variable GDP. Similarly, if there is one unit change in foreign direct
investment (FDI), then negative change in dependent variable. The capital investment explains
52 of the GDP. If there is one unit change in government spending (GSP) then (0.2766) or 28%
change in GDP.
t-statistic is used to check significance of different variables. For inflation (INF), t-value was
found -3.1963 and has probability 0.0040, which shows that inflation and GDP are significantly
and negatively related, so H1is accepted. For the exchange rate (ER), t-stat was 2.468 and has
probability limit 0.023, which show ER has significant impact on GDP, so H 2 is also accepted.
For FDI, t-value was found -2.37 and has probability 0.028, which shows that FDI has
significant but negative impact on GDP, so H3 is rejected. For the capital investment (cap), tvalue was found 6.68 and has probability limit of 0.000, which show capital investment has
significant impact on GDP, so H4 is also accepted. For government spending (GSP), t-value was
found 5.32 and has probability 0.000, which shows that GSP has significant impact on GDP, so
H5 is also accepted.
The observed R-squared is 0.995378 and has the probability limit of 0.000. So our R 2 =0.9953
suggest that 99% variation in dependent variable (GDP) by variation due to independent
variable. The value of Durbin Watson is 2.16 which is > 1.This shows that there is very volatility
in GDP. It also demonstrates that the past volatility is explaining the current volatility because it
is very high as above it is greater than one. The value o

f F-Statistic for the model is 775.2114 which show that the research model is statistically
significant.

4.4. Summary of Results

Table 4.4
Summary of Results
Hypothese
s
H1
H2
H3
H4
H5

Statements

Results

Inflation has a significant and negative impact on GDP

Exchange rate has a significant impact on GDP
Foreign Direct Investment (FDI) has a significant and
positive impact on GDP
Capital investment has a significant and positive impact on
GDP
Government spending has a significant impact on GDP

Accepted
Accepted
Rejected
Accepted
Accepted

CHAPTER 5
Conclusion, Limitations, Recommendations and Future Research Directions
5.1 Conclusion
The purpose behind this empirical analysis was to study the macroeconomic variables in relation
to gross domestic product in an emerging economy like Pakistan. For this purposed, study
employed secondary data for a period of ten years from 2004 to 2014. Regression analysis is
used for analyzing and testing the data. The results of regression indicate that the entire
formulated hypotheses are supportive. Results indicate that macroeconomic variables strongly
impact on gross domestic product in Pakistan. According to this research, inflation is found to

have a negative and significant impact on GDP. The result is supported by previous studies for
example, Boyd, Levine & Smith (2001) and Iqbal & Nawaz (2009) found same results in their
studies.

The results of the study show that exchange rate and GDP are significantly and

positively related. The result is supported by previous studies for example, Gal & Monacelli,
2005 and Kibria et al (2014) found same results in their studies.
According to this research, FDI and economic growth are positively and significantly related but
the results shows negative relationship between GDP and FDI which are opposite to literature
review study. Reason is that Pakistan makes investment in foreign countries and foreigners make
investment in Pakistan but due to amount unlike in the valuation of currencies results in amount
short outflows and inflows balance as outflows and inflows are added in their own respected
currencies. So outflows are more than inflows which cause negative relationship. Capital
investment is the key element in determining the economic performance of a country. Our
empirical results indicate that growth is largely driven by investment. The result is supported by
previous studies (Sial, Hashmi & Anwar, 2010; Ghani & Din, 2006). Government spending also
impacts economic growth. Government expenditure namely housing, education, defense, health
care, thus can boost the economic growth, and our results also indicate government spending is
significantly related to GDP in Pakistan. The result is supported by previous studies (Stratmann
and Okolski, 2010; Mehmood, 2012).

5.2. Limitations
Following are the limitations of the study:

Sample size is small due to shortage of time and availability of data.

Beside these variables, other factors like tax, sales can control the model but are not
included.

5.3. Recommendations
This study has following recommendations:

According to this research, a negative relationship is found between economic growth

and inflation. Government should take necessary steps to reduce inflation in Pakistan in
order to enhance economic growth.

Government should adopt such type of policy implications so that revenue of the
government spending should be maximized on economic growth.

Government of Pakistan and State Bank of Pakistan should make policies to enhance the
FDI or capital inflow because FDI is the main sources to increasing the GDP in Pakistan.

5.4. Future Research Directions

The sample size can be increased for future research.

The more variables like tax may also be considered for future research.

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