Figure 1 trends in gdp growth in relation to cpi

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Figure 1 Trends in GDP Growth in Relation to CPI Inflation in Pakistan 0 5 10 15 20 25 30 35 1972-73 1975-76 1978-79 1981-82 1984-85 1987-88 1990-91 1993-94 1996-97 1999-00 2002-03 2005-06 2008-09 Years Percentages GDP Growth CPI Inflation
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Muhammad Ayyoub, Imran Sharif Chaudhry, Fatima Farooq 57 The trends presented in figure 1 show that GDP growth rate and CPI inflation are negatively correlated which each other. GDP growth rate went down as the inflation in economy crossed the double-digit figure. Maximum GDP growth rate 8.7 percent had been observed during the fiscal year 1984-85, when the corresponding CPI inflation rate was at of 5.7 percent level. It is also shown that the minimum GDP growth rate remained 1.2 percent during FY 2008-2009 with significantly high inflation rate of 20.8 percent. This situation depicts that inflation and GDP growth rates are having negative association with each other. In subsequent sections, we will develop a model with the help of econometric techniques, by using the data for this period to verify and to estimate this relation with some other important explanatory variables. V. Data and Methodology An adequate source of the data and construction of variables are necessary not only for empirical analysis but also for the validity of the research. A number of studies regarding inflation and growth have been undertaking during the last five decades to assess the impact of inflation on growth. OLS estimation technique has been used in most of the studies to analyze this relationship; whereas the sources of data were primarily based on secondary data. The methodology and variables for the present study have been selected keeping in view their relative importance on theoretical and empirical basis. It is also attempted to include the variables which mostly determine the level and rate of growth in the economy of Pakistan. The choice of variables is consistent with the choice made by other researchers ( Sarel 1996, Bruno and Easterly 1996, Ghosh and Phillips 1998, Khan and Senhadji, 2001, Mubarik 2005, Hussain 2005, Li 2006). The data for this study are taken from Pakistan Economic Survey (various issues), Ministry of Finance, Fifty Year Economy of Pakistan (SBP) and World Bank Quick Query selected from World Development Indicators. Data are ranging from 1972-73 to 2009-10 and consists of wide range of important variables which explain their relationship with CPI inflation to affect the growth of the economy. VI. Econometric Specification In order to examine the impact of inflation on GDP growth, we have specified following two econometric equations. These equations have been estimated by employing the method of Ordinary Least Squares (OLS). Regression errors in equations of these models have been tested for autocorrelation with the help of Durban Watson (DW) test statistic. All results have been arranged in Table 3. t t t t t t t LPOPM LFPR INVG OPNS CINF GDPG ε β β β β β β + + + + + + = 5 4 3 2 1 0 (Equation – 1) t t t t t t t t INF LPOPM LFPR INVG OPNS CINF GDPG µ γ γ γ γ γ γ γ + + + + + + + = 7 6 5 4 3 2 1 0 (Equation – 2) Where; GDPG = Gross Domestic Product Growth CINF = CPI Inflation OPNS = Trade Openness INVG = Investment Growth Rate
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58 Pakistan Journal of Social Sciences Vol. 31, No. 1
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