Oil Price Volatility and its Impact on Economic

Growth in Pakistan
Abstract
The main objective of this research is to analyze the impact of oil price volatility on the
economic growth of Pakistan. Secondary data from 197 to !"11 were #sed to estimate
the coefficients. $inear %egression analysis is #sed to analyze the dependency among
the dependant and independent variables. &ll variable 'il price( 'il s#pply( oil demand(
)ross *omestic prod#ction( P#blic sector investment( private sector investment and
Trade balance is stationary at 1
st
*ifference thro#gh &*+ test. Trade ,alance( Private
sector investments have a significant effect on )ross domestic prod#ction and P#blic
sector investment( 'il price volatility has insignificant impact on )ross domestic
prod#ction. )overnment sho#ld make a proper plan and proced#re according to
Pakistan-s economic growth and re.#irement which wo#ld help to maintain the
e.#ilibri#m of oil demand and s#pply and decreased the impact of oil price volatility on
the economic growth. /eanwhile( the government of Pakistan also foc#sed on its trade
balance and also tries to increase private sector investment to increase its economic
growth.
Keywords: oil price volatility( linear regression( macroeconomic variables( economic
growth of Pakistan
Journal of Finance and Economics( !"1 1 012( pp 3!435.
*'67 1".1!3918jfe41414!
%eceived &#g#st !1( !"19 %evised September "5( !"19 &ccepted September 11( !"1
Copyright : !"11 Science and ;d#cation P#blishing. &ll %ights %eserved.
Cite this article:
/$& Style
&P& Style
<hicago Style
=awad( /#hammad. >'il Price ?olatility and its 6mpact on ;conomic )rowth in
Pakistan.> Journal of Finance and Economics 1.1 0!"127 3!435.
6mport into ,ibTe@ 6mport into ;ndAote 6mport into %ef/an 6mport into %efBorks
1 Introd!ction
6ncreased in oil price ca#ses different impacts together on net oil importers and net oil
eCporters 0combining both cr#de and prod#cts2.<onse.#ently( the oil price shock has an
important effect on growth of the world economies d#e to limited p#rchasing power by
oil importers. ,#t( higher oil import costs will not f#lfill its demand and that-s also
effects eCports. 'n the other hand( as an oil eCporter( oil price shocks will slow down
its development of trade and eCports 0&fia( !""52
D!E
.
$atife )halayini 0!"112
D!FE
worked on oil price volatility and mentioned that oil price
shocks wo#ld #s#ally infl#ence macro economic performance thro#gh a n#mber of
channels. 'il prices transfer financial reserves from oil importing co#ntries to oil4
eCporting co#ntries thro#gh its trade. 6ncreased oil prices decrease ind#stry prod#ctivity
thro#gh higher costs of man#fact#re and raised inflation.
'ne more factor which is contrib#ting to raise the oil demand( is the limited level of
reserves in developed economies and their s#pply phase for reconstr#ction is very
#ncertain. There is an important factor contrib#ting highly( to elevate the oil prices is
the #nanticipated and high premi#m of risk on oil and its prod#cts. 6t is contin#ing
beca#se of #nbalanced or #nstable oil s#pply by its core prod#cers. )eopolitical
s#spicions and stretched market sit#ations have enco#raged the spec#lative reso#rces to
come into the market( which additionaly increases the prices in the short term period
0&*, !""12
D1E
.
" #iterat!re $e%iew
Gamilton( ,r#no and Sachs 0195! and 1952
D9( 1FE
st#died on the period of 19F" to 1979
that oil prices have special effects on growth( financial growth instability and inflation
in Hnited Iingdom. The o#tcome discovered that there is major association between
the variables.
'il prices volatility has #nconstr#ctive impact on the large economies in very large
scale. &n increase in oil prices shifts the aggregate oil s#pply increasing( res#lting to
increase in price altit#de and a decline in economic prod#ctivity and employment
0*ornb#sch et al.( !""12. 'n the other hand( aggregate oil demand increases prod#ct
prices and after that it slowly decreases the oil demand. The macro4economic
possessions of oil volatility are transmit thro#gh oil s#pply and oil demand channels
and are minimized it potential by economic strategy responses.
I.,alas#bramanian 0!""12
D3E
eCplained that oil demand often increases very high then
its o#tp#t capacity. ,#t normally oil prices increase when oil reserves red#ce beca#se
'P;< brings limitations on demand. Ge also described that oil s#pply can be red#ced
d#e to shipping infrastr#ct#re( accessibility of pipes( climate( terrorist assa#lt(
promotion( etc. The local government laws also take part an important role on oil price
volatility like taC rates( policies( proced#res.
Siddi.#i 0!""F2
DFE
eCplained that it is very diffic#lt for the governments to increase oil
prices every time. The increase in oil prices has also increase the inflation( red#ce the
profit on prod#ct and services( and red#ce the economic growth. The government
sho#ld enco#nter these iss#es before taking any decision for increase in oil prices.
Aooreen et al.( 0!""72
D"E
defined in st#dy that Pakistani economy is heavily depend on
its oil imports to r#n its economic mechanism. <onse.#ence( oil price volatility may
have threatened the special effects on domestic and local financial markets and also
create volatility in stock prices. The prices of oil effect on the earnings or the inflows of
companies and also companies operation directly and indirectly. 'il being highlighted
as one of the mainly significant macro economic factors( which have main and strong
association with the economy and the financial markets in Pakistan.
Iilian 0!""9b2
D!1E
describing that f#ndamentally oil demand is increases d#e to do#bts
abo#t f#t#re oil s#pply deficits. Ge described that the recent oil price volatility is d#e
the increase in oil demand and #ncertain oil s#pply. S#pply distress also constrains
inflation and increase in man#fact#ring costs and in t#rn central banks increase their
interest rates which also effect the economic growth. 6f oil price volatility is d#e to
demand( it is beca#se of s#pply stretch( very limited in time( inflation increases only for
the short term( and there is no #neCpected decline in economic growth.
'il price volatility and its shock wo#ld visibly have a most important impact on the
economies of the world. This aspect sho#ld drive significance to the policymakers
aro#nd the whole world to make policies for the oil demand. They have to enhance
their energy efficiency( to diminish the s#sceptibility of their world economies from oil
price volatility. 'il price wo#ld #s#ally infl#ence macro4economic performance and
economic growth from beginning to end thro#gh different n#mber of channels. +irst(
increases oil prices shift income from oil importing economies to oil eCporting
economies( d#ring transfer in the conditions of trade. This aspect res#lting as decrease
in real income of the oil importing economies. Second( increases of oil prices decrease
ind#stry o#tcome thro#gho#t the mean of higher eCpendit#re of prod#ction. Third main
aspect is that( they straight away raise inflation thro#gh increases prices of imported
commodities and the petrole#m prod#cts. 6f increase in inflation g#ided to an
increasing trend in income( then the central banks wo#ld be comp#lsory to lift #p
interest rates 0/#hammad et al.( !"112
D!5E
.
"1 &acroeconomic %ariables
"11 Gross 'omestic Prod!ction
)*P 0gross domestic prod#ct2 is most important and one of the primary indicators
#tilized to meas#re the condition of any co#ntryJs economy. The monetary worth of all
the services and finished goods prod#ced s#rro#nded by a co#ntryJs borders in a precise
time period is called )*P. 6t is normally meas#red in ann#ally basis.
"1" Pri%ate (ector and P!blic (ector In%estment
The investment play an important role in economic development. The investment
which came from taC collection( foreign aids etc and government #se for the betterment
of the people is called p#blic sector investment and the investment which came from
individ#als and #sed for earning point of view is called private sector investment. The
p#blic sector investment normally fo#nd for b#ilding infrastr#ct#re like dams( roads(
colleges and #niversities etc. /eanwhile( the private sector investments foc#s on goods
and service sector like ind#stries etc. These both investments jointly help to increase
the efficiency of the economy.
"1) *rade +alance
The Trade ,alance 0balance of trade2( also called net eCports( is the disparity among the
monetary val#es of co#ntry-s eCports and co#ntry-s imports of o#tp#t over a certain
period in an economy. Trade balance 0,alance of trade2 is the major factor of balance of
payments in a co#ntryJs. & co#ntry has a condition of trade deficit when its imports is
more than it eCports9 the reverse scenario is called trade s#rpl#s.
"" &acroeconomic Per,ormance and Oil Prices o, Pakistan
""1 &acroeconomic Per,ormance o, Pakistan
Pakistan has to need a contin#ed long term economic growth of 7 percent to increase its
general living standards and meaning f#ll economic development. ,#t it is observed
that Pakistan-s economy hardly ever grow more then F percent since its independence.
The economic growth of Pakistan has declined since !""5 and viewed at !.3 percent.
The eCpected growth in !"1! is aro#nd percent which is low then the targeted growth
1.! percent and meanwhile the continental &sia is eCpected to grow more then 7.F
percent in that year. $ow economic growth is main h#rdle to decreased poverty in the
co#ntry. 6t is viewed that from !""5 to !"1" Pakistan-s poverty is increased from !!.
percent to 7 percent. Slow macro4economic f#ndamentals have been the main factors
of low economic growth. Pakistan-s also decreased its international competitiveness by
declining from 9!
nd
position from 11! co#ntries to 115
th
position reported by Borld
;conomic +or#m 0&mjad ,ashir( !"1!2
DE
.
Pakistan total liabilities incl#ding debts are over %s. 1! Trillion which maCim#m
consist of p#blic debts. )overnment of Pakistan also borrowed %s. 31F billion from
private sector investment. Pakistan-s eCternal debts and liabilities increased and
estimated that if that trend contin#ed it reached at HS K 7 billion in !"1F. The average
interest rate in Pakistan is aro#nd 1!.7F percent b#t at the same time the inflation is
standing at 11 percent which also effect the economic growth of Pakistan. The national
saving trend is decreasing 1F.1 percent to 1.5 percent d#e to inflation and other
macro4economic factors and that saving rate is the lowest rate in the &sia 06nayat Hllah
/angla( !"112
D17E
.
%estoration of its economic growth and getting back its competitive position( is highly
depend that how Pakistan #ndertake its chronic macro4economic volatility d#e to fiscal
slippages( energy crises and low trade. ;conomic growth hinges on the fiscal
constancy. The fiscal deficit of Pakistan increased by 3.3 percent in !"11 which
enlarged inflation and debt b#rden. TaC recovery remains low in the last twenty years.
Pakistan is known as the lowest taC to )*P ratios among all other developing
economies and standing at 1F
rd
from total 1F1 co#ntries 0Pakistan ;conomic o#tlook(
!"1"2
D!E
.
"""Oil prices *rend in Pakistan
Pakistan have more than 19" million pop#lation( has been on the way of growing )*P
escalation in the previo#s co#ple of decades b#t in view of the fact that the preceding
fiscal year the circ#mstances is not very good. The everlasting increase in the oil prices
in the previo#s few years is considered as one of the ca#sative reasons. ;nergy division
has a straight association with the economic advancement of a economy. 6n contrast(
with the increasing growth velocity of )*P( demand for oil and energy has also
developed .#ickly. The eCtent thro#gh which economies are harm as a conse.#ence of
price #pset relays on the contrib#tion of price of the oil in national income of any
economy( the eCtent of reliance on oil 0imported for #sage2 and the potential of end4
#sers 0cons#mer2 to decrease their #tilization and change on other s#bstit#te from oil.
6n view of energy miC for the !""F4"3 year( oil accommodate for ! percent of the
entirety energy cons#med in Pakistan. ;ven tho#gh the concentration thro#gh which oil
is cons#med in entire energy #tilization has diminished in the previo#s few years b#t
even tho#gh still it is the s#bse.#ent major reso#rce of energy cons#mption following
by the nat#ral gas( which accommodate for 9 percent. &s far as the energy
concentration is concerned it has viewed almost stable since 199"491 0i.e.( 1L2.
*iminish in energy concentration is meas#red as the mainly capable way for dropping
s#sceptibility to oil volatility 0,acon !""F2
D1E
.
The oil being the second major reso#rce of power #tilized along by means of
approCimately a stable velocity of its prod#ction. Pakistan is serio#sly reliant on the oil
imports from the /iddle ;ast eCporters 0Sa#di &rab have a significant role2.
&pproCimately 5! percent of the oil and petrole#m prod#cts demand in the co#ntry is
cater thro#gh imports. Pakistan eCpendit#re almost 11 percent of its eCport income on
oil imports in the year !""3 to !""7. This proportion was barely !7 percent in the year
!""1 to !""F. +or that reason( the global oil price fl#ct#ations and volatility have a
straight effect on the macro4economy of the co#ntry( partic#larly on the oil price )*P
association 0/alik !""72
D!7E
.
"") Comparati%e oil Prices in Pakistan and -orld
6t is observed that oil prices in its market place went down b#t meanwhile( in the
conteCt of Sa#di its income went #pward d#e to oil eCtraction and domestic low price.
'P;< had set a oil price at 15 dollar per container in *ecember( 1953 b#t that price
was not contin#ed for a long period and decreased in the start of 1957. &fter that 6ra.i
and I#wait war pay an important role to increased oil prices d#e to instability of oil
s#pply in 199". ,#t after )#lf war 0I#wait and 6ra.i war2 the oil price was noticed a
considerable decreased till 1991 and reached at the same price which was in 197.
$ater then in 1995( the price increased and goes toward revival d#e to red#ced oil
s#pply by 'P;< and maintained at the level of 1.7! million containers in &pril( 1999.
This policy made oil price at !F dollar per container 0;dward /orse and=ames %ichard(
!""!2
D1E
.
6n 195! to 195F( 'il prod#cing and eCporting co#ntries 0'P;<2 has try to allocate a
.#ota among its member co#ntries to maintained the oil s#pply in the world b#t they
are failed d#e to not serio#s action by its members and specially Sa#di &rabia( which
decreased its oil s#pply beca#se of decline in oil prices. 6n the mid 1953( they tried to
correlate the oil prices with blemish oil market to maintain the oil prices less the 1"
dollar per container 0&fia( !""72
D!7E
.
Pakistan-s )*P growth has increased in year !""1 to !""F and reached at the level of 5
percent approCimately. ,#t this increasing effect does not s#stain for long r#n and the
)*P decline and reached at 3.F percent in !""3 to !""7 and that the decreasing trend
contin#ed. The demand of oil is increased d#e to the )*P growth. 6t is observed that
increased in oil demand in Pakistan by 1.1 percent d#e to economic growth from 199"4
1991 to !""34!""7. 0&fia( !""52
D!E
.
Pakistan-s energy formation is approCimately 19F"" /ega watts. There are two main
sectors( government and private( jointly prod#ced the energy. The A#clear and Gydro
power generation positions are in the c#stody of government. /eanwhile( thermal
power stations are jointly owned by government and private sector. /ore the 7"
percent of the energy is prod#ced by the thermal power generation which is the main
so#rce of energy in Pakistan. Thermal energy is prod#ced thro#gh oil and gas which is
the eCpensive of energy prod#ction. $eft behind " percent of the energy is prod#ced
by hydro power generation which is the cheapest way of energy prod#ction. 6t is
observed that Pakistan is prod#ced the eCpensive energy which increased the
prod#ction cost and also have a great impact on macro economic variables and
economic growth. 6t is main re.#irement of energy generation to shift from eCpensive
Thermal power generation to cheapest Gydral power generation and for that prospects(
have to b#ild more dams 0Aoor #l ha. and Ihalid G#ssain( !""52
D!9E
.
Pakistan pop#lation is ro#nd abo#t 19" million and it is the world 3
th
largest co#ntry
described in !""54"9 +inancial s#rvey of Pakistan. ,#t at the same time( Pakistan is the
minim#m #ser of energy( ".F T'; per capita approCimately. There was not m#ch
eCploration by Pakistan( so its heavily relay on imports. The oil cons#mption in
different sectors are( ind#strial sector #sed approCimately 1.1 percent of the total oil(
transportation sector #tilized !1.1 percent of the total oil( ho#se hold and domestic
sector #sed only .5 percent of the total oil( commercial sector cons#med !.1 percent of
the total oil #sed( !.1 percent is #tilized by the agric#lt#re sector from the whole oil
cons#med and the remaining contin#ed cons#mption by the government sectors. 6t is
also viewed that Pakistan only f#lfilled !" percent oil re.#irement from the local oil
eCtraction and remaining 5" percent from the imported oil. Pakistan imports ro#nd
abo#t 13.F /etric ton of oil 0petrole#m and petrole#m goods2 in !""3 to !""7 0Pakistan
;conomic S#rvey !"1"4!"112
D1E
.
/any geologists and policy makers have a common point of view that c#rrent assets
are finished after some time. The described that if technology does not improve( it
decrease oil s#pply and increase oil demand which may ca#se to increase the oil prices
very sharply. 6n the start of 197" decade( it is viewed that the oil s#pply demand is
increased d#e to economic growth b#t there was no advancement of technology fo#nd
which increased the oil prices. &t this movement( oil eCtraction and eCploration is
fo#nd every where in the world b#t the demand of oil always more then the oil of
s#pply. The world is now #sed ro#nd abo#t 51 million containers per day to meet the
oil re.#irement. That thing indicate that there is a high risk in oil s#pply and demand
which also effect the macro4economic variables 0=imMnez et. al.( !"1!2
D!!E
.
"". Increases in International Oil 'emand
6ncreasing and decreasing oil demand is being f#eled by to#gh economic eCpansion(
mainly in non4';<* nations. The H.S. ;nergy 6nformation &dministration plans that
total world #tilization of marketed energy is anticipated to increase by 11 percent from
!""3 to !"". *etermined spare oil prod#ction capability leaves very small room to
compensate for #neCpected oil s#pply disr#ptions or fl#ct#ation in oil demand.
Hnstable balance among oil s#pply and oil demand is creating more anCiety. S#pply
interr#ption( whether act#al( can have spectac#lar effects on the price of oil.
)lobal economic development is driving what the H.S. 6nternational ;nergy &gency
06;&2 says is the major raised in oil demand in !1 years. 6n eCacting( energy #tilization
in the emerging economies of non4';<* co#ntries is anticipated to increase by 7
percent among !""3 and !"". The increase in oil demand is d#e to development in
energy sector and also increasing of economic growth.
Tets#ya Aakanishi N %yoichi Iomiyama 0!""32
D3E
The oil demands in the co#ntries of
&sia Pacific carry on increasing( mainly in the great people rep#blic of <hina 0P%<2 by
means of its considerable economic progress 8development and in Pakistan and 6ndia
where a demo4graphic aspect is also at work. 6n the conse.#ences( the world oil
0petrole#m2 s#pply and demand e.#ilibri#m is becoming grad#ally tighter day by day(
and being refer as one of the aspects which are main reason of the c#rrent elevated oil
prices.
The global oil demand is predictable to enhance by 7.77 million barrel per day or by
means of an average yearly rate of 1.1L over the period of !"" to!"1"( while the oil
demand in &sia 0together with Pakistan( 6ndia( =apan2 is projected to increase by 1.1
million barrel per day 0!.7L yearly2 and in the ;ast &sia 0eCcl#sive of =apan2 by .5"
million barrel per day. That-s why( &sia is anticipate to the acco#nt for almost F7L of
the .#antity of enhance in the world oil demand( in the company of ;ast &sia
0eCcl#sive of =apan2 claiming 19L described in above fig#re. This movement wo#ld
carry on as #naffected over the period of !"1" to !"1F period( along &sia acco#nting
the fig#re of 1FL of the world4wide oil demand enhance( or else FL in the scenario of
;ast &sia( which wo#ld determined &sia into the h#b stage of the global oil demand
0Tets#ya Aakanishi N %yoichi Iomiyama( !""32
D3E
.
<.4O. <ynthia $in 0!"112
D1"E
define the oil on top of the list in most significant
worldwide reso#rces. Ge described that is not only powerf#l d#e to importance is
reso#rces b#t d#e to the oil reserves possession itself is a basis of geo4political power.
*etermined from the o#tcome( global demand of oil is inelastic with respect to price.
<onse.#ently( in the f#rther scenarios( the abridge ass#mptions of a stagnant and
entirely aggressive oil market are impracticable. The a#thor concl#sion is that the
theoretical statement of a stagnant and entirely competitive market possibly will be #n4
realistic( principally in representation the s#pply of oil. 6n reality( the constant b#t
incompetent !S$S approCimation for the monthly oil demand all demonstrate the
s#itable negative indication9 the indication for 'P;< 0'rganization of the Petrole#m
;Cporting <o#ntries2 oil demand barely t#rn over when 'P;< oil demand was
predictable together with 'P;< oil s#pply in attempt to gain estimations that were not
barely constant b#t also competent. The s#pply part been eCtra pragmatically
represented and then combined eval#ation of oil demand and oil s#pply may not barely
have enlarged the effectiveness and significance of the previo#sly negative and constant
price coefficients for the demand( b#t in addition yielded considerable positive price
coefficients for s#pply at the same time. 6n conse.#ence( attempting to consistently and
efficiently approCimation of comprehensive oil s#pply and oil demand market in the
sit#ation of a stagnant and entirely competitive oil market possibly will( definitely( be
the dry hole. The dry hole not d#e to the non4eCistence of either the econometric
methods 8 models or tools to facilitate consistent and efficient estimation b#t to a
certain eCtent beca#se of the no pla#sibility of the stagnant ideal competition statement
in the initial place. The econometric model which integrates either the vibrant or oligo4
polistic feat#res of the oil market( or else together( become visible to be a eCtra capable
prospect for investigation and eCpansion( and from which more affl#ent and more
reasonable o#tcomes are probably to be take o#t 0<.4O. <ynthia $in( !"112
D1"E
.
""/ (!pply (ide Channel
Gamilton 019932
D11E
contrib#te the similar point of view and press#re that oil prices
volatility and the oil s#pply dist#rbance co#ld be a reason of resched#ling of
investment opinion in the economies which also effect the economic growth.
Specified a ind#stry-s so#rce limitations( the enhance in the oil prices as an major and
important inp#t of prod#ction diminishing the magnit#de which it can easily prod#ce.
0G#nt( 6sard and $aCton( !""12
D13E
incl#de that an enhance in oil inp#t eCpendit#re can
constrain down by non4oil probable prod#ctivity s#pplied in the short r#n period
specified obtainable capital collection and economies. +#rthermore( h#man reso#rces
and ind#stries will contradict and oppose to decline their real earnings and reven#e
margins( enhancing #pward press#re on increase #nit labor costs and also increases in
the prices of finished goods and services.
'il is sophisticated to prod#ce petrol and diesel and the price of oil is conventionally
the greatest solitary factor distressing f#el prices over time. S#pply remains
#npredictable. & n#mber of additional factors also enhance #ncertainty of s#pply and
with increasing demand9 as a res#lt of increasing oil pricing. Political instability in oil
prod#cing regions has impacted on oil cost that-s why the political condition in the
/iddle ;ast is of worldwide anCiety. 6n view of the fact that oil is an important aspect
of prod#ction in the majority divisions and ind#stries( a increase in oil prices enhance
the corporations prod#ction eCpendit#res and accordingly( aro#ses red#ction in
prod#ctivity 0=imenez4%odrig#ez and Sanchez !""F2
D1E
.
6n acc#m#lation( the oil price volatility minimize investment behavior in oil and gas
prod#ction 0?erleger 1991 as cited from %ag#indin N %eyes( !""F0. They also
described that a Ppermanent increase in volatility might lead to a sit#ation where f#t#re
capacity will always be a little lower than in a world of zero price volatility and prices a
little higherQ.
""1 'emand (ide Channel
6t is already described that oil price enhancement interpret to increases prod#ction
costs( leading toward the prod#cts price enhances at which ind#stries trade their
merchandizes in the market. 6ncreases prod#ct prices then interpret to inferior demand
for services and goods( which are the reason of red#ction aggregate prod#ctivity. 6n
addition( increases the oil prices infl#ence aggregate cons#mption and demand in the
economies. The transmit of ret#rns and reso#rces from the oil importing economies to
oil eCporting economies is predictable to diminish international demand as demand in
the previo#s is probable to t#rn down more than it will increase in the latter 0G#nt(
6sard and $aCton !""12
D13E
. The conse.#ential inferior ac.#isition power of the oil
importing economies interprets to a inferior demand. /oreover( oil price volatility
pretense economic ambig#ities on eCpectations performance of the macro economies.
People may resched#le their #tilization and investment decisions in anticipation of they
predict a progress and improvement in the economic conditions. 6n concl#sion( an
enhance in the oil prices have an impact a left side transfer in both demand c#rve and
s#pply c#rve( conse.#ential to increases prices and inferior the prod#ctivity.
") (tatement o, the Problem
'il price volatility has become a massive problem for the developed and developing
economies. 6t has a significant impact on balance of payment and economist pays
special attention in f#t#re anticipation to minimize the loss d#e to oil price volatility.
The aim of the present st#dy is to analyze the oil Price volatility and macroeconomic
variables impact on )*P of Pakistan.
) 'ata Collection Proced!re
&nn#al data are collected from 6;&( 6+S and Borld ,ank from 197 to !"11 for
estimation of coefficient.
)1 #inear $egression &odel
The $inear %egression is an econometric techni.#e which correlates the changes in the
variable 0the series data that reappear again at permanent intervals2 to other variable or
variables. The demonstration of the association is described as linear regression model.
6t is identify linear beca#se the association is linearly preservative. The following
$inear %egression model is #sed for analysis7
R 'P? S 'il Price ?olatility
R P%S S Private Sector 6nvestment
R PS S P#blic sector 6nvestment
R T, S Trade ,alance
. $es!lts and 'isc!ssion
.1 2nit $oots $es!lts
Hnit root test is #sed to check the stationary of the data. The seven variables of time
series data is stationary on the levels( at first difference and at second difference. The
econometrics test &#gmented *ickey4+#ller 0&*+2 #nit root test is #sed for analysis of
stationary The &*+ test contains three type of sit#ation for every time series. +irst(
random selection process incl#des intercept 0c2 and trend 0t2. Second( random selection
process incl#des intercept 0c2 b#t no trend 0"2. Third( random selection process incl#des
lag length.
There is a trend in oil demand( oil s#pply and oil price. /eanwhile( it is also anticipate
a trend in trade balance( p#blic sector investment( private sector investment and )*P of
Pakistan.
*able 1 A!gmented 'ickey34!ller *est $es!lts
*ownload as
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$arger image0png format2
Tables indeC
?eiw fig#re
?iew c#rrent table in a new window
?iew neCt table
The test res#lt indicates that the all variables 'il demand( 'il s#pply( 'il price( Trade
,alance( P#blic sector investment( and Private sector investment have a #nit root in
their levels and are stationary in their first differences as Table 1 demonstrate the
res#lts.
." #inear $egression
The linear %egression analysis is r#n on the dependent variable )ross *omestic
Prod#ction and the independent variables Trade ,alance( P#blic sector investment(
Private sector investment and the 'il price volatility 0defined thro#gh standard
deviation2 to find o#t the impact of oil price volatility and other macro economic
variables on the economic growth of Pakistan. The res#lts are described by the
following e.#ation
*able " #inear $egression &odel $es!lt
*ownload as
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$arger image0png format2
Tables indeC
?eiw fig#re
?iew c#rrent table in a new window
?iew previo#s table
The e.#ation ill#strates the constant val#e of 1".1 #nits which mean witho#t any
change in other independent variables( the constant independently change the )*P by
1".1 #nits. &fter that the oil price volatility have the coefficient val#e of ".13 which is
positively impacted and also depict that one positive change in oil price volatility have
positively change )*P of Pakistan by ".13 #nit. The regression e.#ation also
denominate that private sector investment 0which is represented thro#gh P%S2 has also
a positive impact on )*P of Pakistan and one #nit change in private sector investment
wo#ld change )*P of Pakistan by ".!"3 #nit. <onse.#ently( the analysis abo#t p#blic
sector investment( it has positive impact on )*P of Pakistan and one #nit change in
p#blic sector investment may change the )*P of Pakistan by ".13F #nits. 6n contrast
with other independent variable Trade balance have a negative impact on )*P of
Pakistan and if one #nit change in Trade ,alance wo#ld change )*P of Pakistan by
negatively ".""""!3 #nits. The regression table describes that oil price val#e and p#blic
sector investment val#e is not even significant at 1" L level of significance b#t at the
same time private sector investment val#e is significance at 1" L level of significant.
The table ill#strates that trade balance val#e is significant at F L level of significance.
The % s.#are val#e in the $inear %egression e.#ation described that the independent
variables Trade ,alance( private sector investment( p#blic sector investment and oil
price volatility describe the dependent variable )ross *omestic Prod#ction of Pakistan
by almost 9" L. The remaining portion of )*P of Pakistan is impact thro#gh other
macro4economic variables which is only 1" L.
/ Concl!sion
6t is observed that the time series data of independent variable and dependant variable
0'il price( 'il s#pply( oil demand( )ross *omestic prod#ction of Pakistan( P#blic
sector investment( private sector investment and Trade balance2 have a trend and also
not stationary. &fter #sing #nit root test 0&*+2 it is fo#nd that all variables are
stationary at first difference and no variable is fo#nd stationary at level.
The linear regression model is #sed to find o#t the effect of oil price volatility and the
other macro economic variables on the )*P. Trade ,alance has significant effect on
)ross domestic prod#ction at FL level of significance. /eanwhile( the private sector
investment has a minor effect on )ross domestic prod#ction of at 1"L level of
significance b#t oil price volatility and p#blic investment is not significant effect on the
)ross domestic prod#ction. The $inear %egression /odel describe that these
independent variable define 9"L abo#t the dependent variable.
$e,erences
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