ECONOMICS II

B.B.A, LL. B (Hons) / SEMESTER II

A PAPER ON:
“Impact of GDP and Inflation on Unemployment Rate: A Study of Pakistan
Economy in 2000-2010”

SUBMITTED BY:
Varnika Sahu
Division - E
Roll No.- 19
SAP ID – 81022019209

SUBMITTED TO:
Prof. Parinaaz Mehta
School Of Law, NMIMS
(Deemed to be University)
Table of Contents

INTRODUCTION....................................................................................................................................................3
RESEARCH OBJECTIVES....................................................................................................................................4
RESEARCH HYPOTHESIS...................................................................................................................................4
REVIEW OF LITERATURE..................................................................................................................................5
VARIABLES.............................................................................................................................................................9
ANALYSIS..............................................................................................................................................................11
CONCLUSION.......................................................................................................................................................15
REFERENCES.......................................................................................................................................................16
 INTRODUCTION

For successive governments in Pakistan poverty stands as a single main challenge like other
developing and underdeveloped countries. Presently, governmental and certain non-governmental
organization have estimated more than quarter of Pakistani population living under poverty line.
According to Human Development Index (HDI) 2009 report, Pakistan, Bangladesh, and India
stand at 0.572, 0.543 and 0.612 respectively. This report also shows an uneven distribution of
wealth in Pakistan where top 10% of the population earning 27.6% and bottom 10% earning only
4.1% of the income. There are many factors responsible for poverty in Pakistan; although in this
study relation between inflation, unemployment and poverty has been studied.

Inflation and unemployment both vary from economy to economy. [ CITATION Bru96 \l 1033 ] .
Some economies have found high inflations related to higher unemployment. Some economies
have found high inflation moderately related to unemployment and others high inflation with low
unemployment.[ CITATION Ang97 \l 1033 ]. Similarly, some countries are in the situation where the
economy is in moderate to low inflation and moderate to lower unemployment and others are
moderate to low inflation but moderate to high unemployment. Therefore, inflation exists in
different economies differently. [ CITATION Bar95 \l 1033 ]

Therefore, inflation in economy exists everywhere and it would be a proper research objective for
investigation. The impact of inflation on unemployment would also be critically investigated in
the current study. As research student of higher studies, the identification of these two variables
will provide something insights into the economic problems with a critical look on the issues of
inflation and unemployment and their relationship. The research study would be contributed to
lay down the main reasons for the stated phenomena and critically draw some imperative
statements for the improvement of the current status.
 RESEARCH OBJECTIVES

 To examine the role of inflation in the economy of Pakistan

 To examine the role of GDP in the economy of Pakistan
 To examine the role of unemployment in the economy of Pakistan
 To examine the influencing role of inflation in relationship to GDP
 To examine the influencing role of inflation in relationship to unemployment

RESEARCH HYPOTHESIS

HYPOTHESIS 1

Null Hypothesis (H10): Inflation does not influence the GDP rate of the Pakistani economy.
Alternative Hypothesis (H1A): Inflation significantly influences the GDP rate of the Pakistani
economy

HYPOTHESIS 2

Null Hypothesis (H20): Inflation does not influence the GDP rate of the Pakistani economy on
the unemployment of Pakistan economy.
Alternative Hypothesis (H2A): Inflation significantly influences the GDP rate of the Pakistani
economy on the unemployment of Pakistan economy.
 REVIEW OF LITERATURE

 [ CITATION Cha95 \l 1033 ] , in their study stated that changes in the unemployment rate are
important to explain variation in the conventional earnings or income as the rate of
unemployment determines the basis of consumptions. There can be differences over the fixed
ratio of unemployment but it is widely believed that the problem of unemployment in
Pakistan has increased during the decade of 1990s. According to [ CITATION Cut96 \l 1033 ] , the
caloric-based unemployment has, in fact, doubled from 17.4% in 1987-88 to 32.6% in 1998-
99. Similar outcome have been observed on approach based about central needs and
unemployment and opportunity trends. Social indicators such as literacy rate, infant mortality
rate, population growth rate, access to water, nutritional items etc., all verify the above results
that Unemployment weak social and human development are not only at a high level in the
country but also have deteriorated over the last decade of the century. The findings also claim
that there is little effect of inflation on the income and the relationship between inflation and
the unemployment while the relationship with consumption was found positive. The
conclusive statement about this phenomenon relationship is found was that inflation and
unemployment are positively associated to each other and, therefore, both need to be realized
for the remedial measure of economic disruptions.

 [ CITATION Far01 \l 1033 ], in her Research studies documented significant facts about the
phenomenal relationships between inflation and unemployment. The quantitative results
about these variables were found that inflations and unemployment are positively associated
to each other. The association between inflation rates was found to have an increasingly
steady state in relation to unemployment rate. It has been calculated that one seventh
magnitude of the inflation rate raises the unemployment rate and the economy. The results of
the study were based on time tested aspects for the period of 1959 to 1983. The experiential
results concluded important considerations for the inflation, unemployment in this regard. It
was found that both inflation and unemployment lead the GDP. The constructive solutions in
these studies were built as an important initiative for these economic issues. It was found
significantly helpful to develop supportive policies for the solutions of the inflationary
periods and overcome the unemployment in the different periods of economic cycles.
 According to [ CITATION Mal01 \l 1033 ], inflation is the continuous raise in the price level of
the economy that contribute significantly to the GDP. The unemployment level rises due to
continues raise the in the production cost, selling costs, manufacturing and promotional costs,
and others. Therefore, the organizations that are providing opportunities to the employed and
unemployed people are moving towards such conditions where it becomes difficult for them
to survive with the employed workforce. To settle such kind of problems they go for
retrenchment and downsizing strategies.

 [ CITATION Bla00 \l 1033 ] , finds a negative relationship between inflation and economic
growth. He considers variables like fertility rate, education, etc. constant. He studied a large
data sample of more than 100economies for the period of 1960 to 1990 to assess the effects of
inflation on growth. A system of regression equations was used in which many other
determinants of growth were held constant. This framework is based on an expanded view of
the neoclassical growth model as stated by the author mentioned above. The study indicates
that there exists a statistically negative relationship between inflation and economic growth.
More specifically, an increase in the average annual inflation by 10 percentage points per year
lowers the real GDP growth by 0.2 to 0.3 percentage points per year. The issue of inflation
and growth and find no evidence of any consistent relationship between these variables up to
a certain level of inflation. They assess that the growth falls sharply during discrete high
inflation crisis, above 40 percent, and recovers after inflation falls. Their experiential analysis
shows that there exists a temporal negative relationship between these two variables beyond
40 percent threshold level. They conclude that there is no permanent damage to economic
growth due to discrete high inflation crisis.

 [ CITATION Dan03 \l 1033 ], estimate the key determinants of inflation in Pakistan by using the
annual time series data for the period 1971-1995. They divide inflation into food and non-
food inflation and suggest a strong role of money supply in accelerating inflation in Pakistan.
Other factors causing inflation, investigated by the researchers, are currency devaluation,
value addition in agriculture sector, support price of wheat, import prices and the price of
electricity. The effect of fiscal deficit is found in association with high inflation rate while
deficit to GDP ratio and the economic growth. This phenomenon is associated with
unemployment and deficit economic spheres. The economic growth, with the help of
economic resource mobilization, supports corrective steps for the development and control of
inflation and unemployment. The same is the case in the opposite side when economic factors
 are improperly managed; this stimulates inflation and unemployment which influences certain
economic problems.

 [ CITATION Zaf98 \l 1033 ] , examined and proved that inflation and employment level are
negatively correlated to each other. The influencing impact levels are also proved to be
positive and significant in relation to each other. Therefore, there are other factors that affect
the unemployment level, but inflation is one of the most influencing factors for the growth of
unemployment level at the national level. The inflation levels from walking to running from
high to higher inflation promotes step wise, in case, there are no or slow responsive
initiatives. Therefore, if inflation exists with control mechanism, then controlled phenomenon
towards the unemployment level would be recorded. The research study revealed very
interested findings. It is observed that inflation happens continuously where the flexible wage
rates are planned the unemployment and employment levels are controlled with it. Therefore,
the inflation level happens, but with this strategy the unemployment is found in situation that
produces limited effect on the economy. If inflation happens then immediate pre-planned
strategies are required to establish long lasting solutions and financial wellbeing

 [ CITATION Key99 \l 1033 ], finds that unemployment is an influential phenomenon found in the
economies that is negatively influenced by inflation. The research study proved important
facts with the help of multivariate co integration analysis. The scale budget deficit is also seen
to significantly affect the inflation. Inflation also influences unemployment in the economic
spheres. The economic prospect regarding unemployment can be measured as the product of
the unemployment risk in the population and the amount to which people are protected from
the income unemployment risk. We have taken alternative for the unemployment risk changes
in the employment rate. There is a strong relationship between fiscal deficit and changing
inflation. The results were reached at experiential and provided quantitative responses in the
form of positive relationship between fiscal deficit and inflation. The inflation is seen to
influence economic problems in the form of unemployment and economic disruptions.

 [ CITATION Gra87 \l 1033 ], says that Pakistan has overcome unemployment problems due to
increasing economic development. This control was due high remittances, and activeness of
the public sector organization in that period of time. The unemployment examined by IMF
investigatory programs known as structural adjustment programs that highlighted the
initiatives for the reduction of unemployment and control of inflation. The inflation in the
stipulated period of time showed less impact on the unemployment level and made a positive
contribution to the economic welfare of Pakistan. t has been proved that unemployment level
 and inflation levels are associated with each other positively. Inflation levels develop
financial crunch condition and thus unemployment levels rise. Inflation has a central role
here. The conclusive thoughts of these influencing phenomena have been found to control the
unemployment in the economy; therefore, one must control the inflation from higher position
to lower. A strategy would help the economic experts to prove an opportunistic environment
to the general public in the form of small changes in the price level that represents the
inflation and provide job opportunities that represent the unemployment level and the control
of both these represent the control of inflation factor. The research study documented and
found these conditions in the places where the people were facing cost factor associated to all
general and special commodities. By using existing phenomenon of the inflation, there is the
correlating association found between unemployment level and inflation rates. The
Unemployment level rise creates rise in the production costs, selling and purchasing,
searching and consuming costs and inflation rates raises all kinds of costs and decreases the
value of money. Therefore, a solution is strongly required to control the influencing
phenomenon of the inflation that influences all the major variables and factors as an economic
cycle It is analysed the supply of money as source of inflation in Pakistan. According to them
the source of inflation produces negative impact on unemployment. The investigation for this
study proved inflation an important factor affecting unemployment. The research study
further examined the phenomenal relationship as inflation is found to be a source of
correlation between inflation and unemployment is found positive. Therefore, if inflation
declined as a response the unemployment will be controlled or overcome.

 [ CITATION Has98 \l 1033 ] , prove a statistically positive relationship between macro factors for
the economic growth of the Pakistani economy. They find that budget deficit negatively
affects the GDP of the economy and at the same time it influences positively the inflation of
the economy. The research study examines the private and public investments raises control
on the inflations and employment opportunities that aid values as a control mechanism for
unemployment. Therefore, it is found that economic prosperity rises with proper guidelines,
supporting strategies, and effective initiatives for the development and control of inflation and
for the control of unemployment investigates the economy of Nigeria. He finds that
unemployment alleviation influences economic factors such inflation, deficit economy,
unemployment low GDP growth rate. The same study examines role of fiscal policy in
alleviating unemployment. Angelo and Sousa (2009) documents role of high inflation
associated with economic problems for deficit GDP ratio, and financial instability. These
variables influence the impact as response on the economic problems for community as it
raises unemployment.
 VARIABLES

1. INFLATION: Inflation is the continuous rise in the price with the passage of time and
declination in the value of money. Historically, inflation rate in Pakistan is reported by the
Pakistan Bureau of Statistics from 1957 to 2010.In Pakistan, the average inflation rate is 8.04
percent, reaching the ultimate height of 37.81 percent in December of 1973 and a record low
of -10.32 percent in February of 1959. In Pakistan, the most important categories in the
consumer price index are food and non-alcoholic beverages (35 percent of total weight);
housing, water, electricity, gas and fuels (29 percent); clothing and footwear (8 percent) and
transport (7 percent). The index also includes furnishings and household equipment (4
percent), education (4 percent), communication (3 percent) and health (2 percent). The
remaining 8 percent is consisting of; recreation and culture, restaurants and hotels, alcoholic
beverages and tobacco and other goods and services.

2. UNEMPLOYMENT: The situation of economy where the labour class, professional, served
and serving workforce face problems for career prospects which raise the number of
employed workforce towards unemployment due to uncertainty and economic issues.
Unemployment rate in Pakistan decreased to 5.70 percent in the second quarter of 2010 from
 6.10 percent in the first quarter of 2010. This unemployment rate in Pakistan is reported by
the Pakistan Bureau of Statistics. Historically, from 1985 until 2010, Pakistan’s
unemployment rate averaged 5.31 Percent reaching an all-time high rate of 7.80 percent in
June 2002 and a record low of 3.10 percent in December 1987. In Pakistan, the
unemployment rate measures the number of people actively looking for a job as a percentage
of the labour force.

3. GROSS DOMESTIC PRODUCT: GDP is the sum of the value of all the products produced
in a country during fiscal year. It is found one of the indicators of the production and growth
rate of the economy and play a strategic role in development, employment and the balance of
payment. The Gross Domestic Product (GDP) in Pakistan expanded 3.67 percent in the fiscal
year 2008-10 from the previous year. The GDP growth rate in Pakistan is reported by the
Pakistan Bureau of Statistics. Historically, from 1952 to 2010, Pakistan’s GDP growth rate
averaged 5.0 percent reaching an all-time high rate of 10.2 percent in the fiscal year of 1953-
54 and a record low of -1.8 percent in the fiscal year of 1951-52. Pakistan is one of the
poorest and least developed countries in Asia. Pakistan has a growing semi-industrialized
economy that relies on manufacturing, agriculture and remittances. Although since 2005 the
GDP has been growing with an average of 5 percent a year, it is not enough to keep up with
fast growing population. To make things even worst, political instability, widespread
corruption and lack of law enforcement hamper private investment and foreign aid.
 ANALYSIS

This study is focused on the experiential relationship between inflation, GDP and unemployment
rates of the Pakistani economy. For this purpose, the data is taken from the national statistic
website of the Pakistan. The period that has been chosen for the present study is from 2000-2010.
For the research study data has been gathered from the financial reports of the national statistic
website of the Pakistan of the last ten years from 2000-2010. Ten years are taken because it will
provide us a sound analytical position for observing inflation, GDP and unemployment rates at
the national level of the Pakistani economy. The research study would be carried out on the basis
of correlation, regression analysis, t-test and ANOVA model. The findings of the research study
would provide statistical facts for examining the stated phenomena numerically.

Year Unemployment rate in percentage Inflation rate

2000 31.1 5.7
2001 34.5 3.54
2002 34.5 3.1
2003 30.58 4.57
2004 23.99 9.28
2005 23.9 7.92
2006 22.3 7.77
2007 36.22 12
On the basis of the quantitative data processed, analysis of the results from secondary data
provided is important insight information for the sake of realizing the influential impact on
unemployment. The findings are discussed along with critical explanation for the stated
hypothesis.

Variables Minimu Maximum Mean Std. Deviation

m
Inflation 3.90 20.30 8.9800 5.31743
GDP 2.70 6.60 5.000 1.30894
Unemployment 6.00 15.00 8.5600 3.22394
rate

This explains the descriptive statistics about inflation, GDP and unemployment. It can be seen
that minimum and maximum values of inflation have large gap in the ten years period. The gap
indicates that Pakistan’s inflation is inconsistent and highly volatile. While the variation and gap
between maximum and minimum values can be found comparatively low, but still inconsistent in
some years. The value of the GDP can be found low while in some cases it is found higher.
Therefore, it is also found vibrant.

The following table explains the descriptive statistics about inflation, GDP and unemployment. It
can be seen that minimum and maximum values of inflation have large gap in the ten years
period. The gap indicates that Pakistan’s inflation is inconsistent and highly volatile. While the
variation and gap between maximum and minimum values can be found comparatively low, but
still inconsistent in some years. The value of the GDP can be found low while in some cases it is
found higher. Therefore, it is also found vibrant.
This table explains correlation between inflation and GDP and Inflation and unemployment rate.
The findings are showing that only 0.7 percent variability has been recorded in the dependent
variable GDP due to inflation. The value of F-test is found as below the standard value of rule of
thumb 4.00 and significance level is just 0.8321. All these findings are disclosing that model is
not satisfactory. The other part of the table 4 explains the model fitness between inflation and
unemployment rate. Here it is found that 22.8 percent variability in unemployment rate is due the
inflation during the time series data from 2000 to 2010. The research findings are providing
information about F-test 2.062 and which is below the standard 4.00 i.e. the level of significance
is just above the lower level of the significance, therefore, it can be concluded that the model is
unsatisfactory between inflation and GDP and inflation unemployment rate.

This table shows the statistical results for regression tests. The regression results between the two
variables inflation and GDP shows a negative unit change from inflation. The findings are
proving the phenomenon in such way that one unit change in inflation brings negative 0.019-unit
change in GDP. But the value of t-test is found below the tabulated or standard value of the rule
of thumb. Finally for the significance level, it can also be observed to be highly above the
required level that is 0.831, therefore, the findings are providing statistical grounds for the
rejection of proposed hypothesis H1: Inflation significantly influences GDP rate of the Pakistan
economy. On the other hand, the regression between inflation and unemployment is found to
show a positive unit change from inflation. The findings are proving the phenomenon in such
way that one unit change in inflation brings positive 0.213-unit change in unemployment. But the
value of t-test is still below the tabulated or standard value of the rule of thumb. Finally for the
significance level is also highly above the required level that is 1.436, therefore, the findings are
providing statistical grounds for the rejection of proposed hypothesis H2: Inflation significantly
influences GDP rate of the Pakistan economy on the unemployment of Pakistan.

Experiential results as evidence proved the relationship between inflation GDP and
unemployment as influencing each other at insignificant level. The results of the quantitative
outcome proved that inflation is one of vibrant and influential phenomenon in the economy of
Pakistan. The inflation needs to be considered as one of the important factor5s for the economies
to consider it towards strategic economic decisions. The quantitative factors of the economies are
mainly to be considered for the strategic decision to lead the rational approaches in the economic
decisions.
 CONCLUSION

The research outcomes proved the effect orientation of the inflation for the GDP and
unemployment at insignificant level. The findings proved the negative effect of the inflation for
the GDP and positive effect on unemployment. The findings of the previous different researchers
have also proved the role of inflation influential phenomenon towards unemployment but in
contradiction with insignificance levels. The inflation is a continuously occurring phenomenon in
all economies where in some economies it has a strong impact where it is affecting highly the
level of employment; price level, daily usage items, discount rates and expenditure costs. The
findings proved the influential relationship between inflation and unemployment conditions, but
in our economic condition it is proved as insignificant. It could be concluded that in our
economic spheres, inflation should be examined in more detail with some other variable to
examine its inside condition more in details. The present research also proved as compatibility
with the research studies point of view of its impact or effects on influence but from significance
level is in contradiction in our economic conditions. The conclusive outcome of the research
study is that inflation is found as insignificantly influential for GDP and unemployment with
negative correlation.
Therefore, it can be concluded that inflation possess a role which is influential but for GDP and
unemployment with insignificance levels in macro-economic factors of the Pakistan.
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