Complex Multiplier Pakistan


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Complex Multiplier Pakistan

  1. 1. Scope<br />There are four components determining the national income in an open economy, consumption, investment, government spending and net exports. Investment, government spending and exports are injections into the circular flow of income. While savings, imports, taxes are withdrawals. Complex multiplier shows the multiple effects of changes in investment, government spending and net exports on the national income. It can be calculated by the formula:Complex multiplier = 1 _______________ MPS+MPT+MPM<br />Consumption expenditure is the amount households plan to spend on goods and services out of their personal disposable income in order to satisfy their needs and wants. Like in all economies, in Pakistan consumption depends upon number of factors but primarily on the disposable income. This relationship of consumption and disposable income can be explained through the consumption function. In Pakistan the household are divided into five different consumption expenditure groups. Those who belong to low consumption expenditure group are the ones who have low incomes. These are the people who have high marginal propensity to consume and therefore any change in their incomes really affect their consumption expenditure. However apart from disposable income there are also other factors on which consumption depends. As during 2006-2007, due increase in the value of people’s assets their consumption grew. Also due to change in taste and attitudes of people, the consumption of households grew.<br />Investments and savings determine GDP in an economy. Investment and savings are majorly determined by the changes in disposable income, high income groups have higher MPS as compared to lower income groups. Investments include not only the private individuals investing into their businesses but also the government and foreign investing in different sectors. Investment and saving functions are fixed and any changes in them leads an upwards or downwards shift. Both investment and savings depends on the interest rate prevailing in the economy. Higher interest rates will lead to higher savings and lower investments in the economy and vice versa. In Pakistan investment has reached its record of 23% in 2006-2007. Saving has all the determinants which are opposite to consumption as those which lead to consumption reduces savings. Also changes in the government economic policies, interest rates, disposable incomes, people attitude towards future consumption effects investment and savings.<br />Taxes are taken as leakages from an economy, as it lower the disposable income, while government spending act as injections into the circular flow of income which helps it to grow. Usually government spending is autonomous of national income while taxes are related to income. As in Pakistan the tax rate system is progressive, which rises as income increases. Central Board of Revenue in 2007 reported that incidence of taxes from imports and investment has shifted to consumption (sales tax) and income (income tax). It has also reported that government is mostly spending in developmental programs. <br />Exports reflect the physical exit of goods out of the country’s custom boundaries while the imports refer to the physical entry of goods into the country’s custom boundaries. Imports increase with income. The relationship between imports and income is called the import function; its slope is the marginal propensity to import. Exports are determined by changes in economic activities in other countries, reduced multiplier is the result of expenditure on imported goods rather than domestically produced one. Both imports and exports depends on the exchange rate .A fall in the value of the rupee increases exports while a decrease in the value of rupee reduces imports; this increase in net exports shifts the aggregate expenditures schedule. Exports were targeted at 18.6 % higher in 2007 as compared to last year. After growing at an average rate of 29% per annum during 2003-2006 Pakistan’s import growth slowed to a moderate level in the current fiscal year. Petroleum, capital goods and telecom consisted of the major imports of Pakistan.<br />Complex multiplier is affected by the four components of aggregate demand as mentioned above. Changes in consumption of household or other types of goods have a multiplied effect on national income. Similarly government spending, investments and exports do contributes to the changes in real GDP of an economy. Complex multiplier is not calculated in the final reports or economic survey of Pakistan. Calculating it would help us understand the concept of multiplier with different aspects. There for we will be using Telecommunication sector as our main consideration in which in our final report we will be showing this effect through changes in investments in the economy.<br />Chapter 1<br />INTRODUCTION<br />The multiplier principle is that a change in the level of injection (or withdrawals) brings about a relatively greater change in the level of national income. Multiplier is reflector of importance of investment in an economy. It provides a guideline for government authorities to achieve full employment. The extent to which investment should be raised to reach full employment is explained through the value of multiplier. Without precise measure of multiplier government authorities might overheat an economy or might plan too little government spending or investment to reach full employment. Multiplier can help to control the fluctuations in the business cycle. With the knowledge of multiplier government will launch expansionary measures when the economy goes in recession and will dampen aggregate expenditure when it leads towards boom. <br />Complex Multiplier:<br /> K = 1/MPS + MPT +MPM<br />Aggregate expenditure and the injections are directly related while the withdrawals and aggregate expenditure are inversely related. An increase in injections that is investment, government spending, net exports will lead to higher aggregate expenditure while a decrease in injections will lead to a lower aggregate expenditure.<br />While, an increase in withdrawals will lead to a lower aggregate expenditure and a decrease in withdrawals that is saving, taxes and imports will lead to a decrease in aggregate expenditure.<br />In the report you will see the complex multiplier in greater detail as in it the components of aggregate expenditure are explained individually with a reference to the economy of Pakistan.<br />Chapter 2<br />CONSUMPTION<br />Consumption Expenditure<br />“It is the amount households plan to spend on goods and services out of their personal disposable income in order to satisfy their needs and wants. “<br />In Pakistan consumption depends upon a number of factors but primarily on disposable income. Therefore to understand the dependency of consumption expenditure on disposable income we will look at the consumption function of Pakistan. According to the consumption of Pakistan there is a positive relationship between the disposal income and the consumption expenditure which we can see during the time period of economic growth from the year 2000 to 2005 when a high economic growth led to an increase in the national income due to which the consumption expenditure increased. In Pakistan the consumption expenditure also depends on the income earners. Since the more the income earners are in each household, the greater the consumption expenditure of each household will be. From the economic survey of Pakistan we can see that due to fast economic growth of the country from the period 2002 to 2006 the number of income earners has grown in all employment status, which we can generalize from the given table:<br />Employment Status2001-022005-06UrbanRuralTotalUrbanRuralTotalEmployerSelf EmployedUnpaid helperPaid helperNot econ. Active1.6520.5211.4562.234.160.7329.0534.5533.262.410.9926.7528.3341.062.881.7821.8710.2862.223.850.7229.9729.5837.582.091.0627.3923.4745.432.65<br />TABLE 1: PERCENT DISTRIBUTION OF EARNERS BY EMPLOYMENT STATUS<br />(Source: Household Integrated Economic survey (HIES) 2005-06)<br />This increase in the number of income earners have led to an increase in the consumption expenditure of the people from 2002 to 2006.<br />In Pakistan the households are divided into five standardized per capita consumption expenditure quintiles. Each quintile contains 20% of the total sample households. The first quintile contains lowest twenty percents of the total households and in the second quintile the next better of twenty percent of the total households and so on, in the fifth quintile it contains the richest 20 % of the total households. By dividing the households in these five quintiles, we can actually generalize that how an economic growth in the country has affected different household’s consumption expenditure. This we can see from the table below that due to high economic growth of the country from 2004 to 2006 the average monthly consumption expenditure per household has increased:<br />TABLE 2: AVERAGE MONTHLY HOUSEHOLD CONSUMPTION EXPENDITURE BY QUINTILES AND AREAS<br />(Source: Household Integrated Economic survey (HIES) 2005-06)<br />From the table we can see that the pattern of consumption expenditure of households is explained among urban and rural areas and by quintiles. Through analyses by quintiles it reveals that average consumption expenditure of the richest class in urban areas is more than three times higher than the lowest income class and two and half times more than the same income class living in the rural areas. We can see that the consumption expenditure has increased by 16% in 2005-06 as compared to 2004-05.<br />This increase in the average monthly consumption expenditure per household is due to an increase in the average monthly income per household which we can see from the table below:<br />TABLE 3: AVERAGE MONTHLY HOUSEHOLD INCOME BY QUINTILES AND AREAS<br />(Source: Household Integrated Economic survey (HIES) 2005-06)<br />From the table we can see that the average monthly income has increased from 9685 Rs in 2004-05 to 12326 Rs in 2005-06. This increase in income basically shows that, why the consumption expenditure grew during this time period.<br />This type of increase in consumption expenditure due to increase in income is known as induced consumption. Induced consumption is the part of total desired consumption expenditure of households that rises with rise in income and falls with a fall in income. Thus the graph for such type of consumption is:<br />Graph 1<br />We can further analyze the consumption expenditure by looking at the percentage monthly household consumption expenditure on major food items.<br />TABLE 4: PERCENTAGE MONTHLY EXPENDITURE ON 17 MAJOR ITEMS 2005-06 (SOURCE: HIES 2005-06)<br />From the table we can see that overall from 2004 to 2006 the consumption expenditure on major food items has increased very slightly from 82.32% to 82.41%.<br />We can further see the increase in consumption expenditure by the household by looking at the household expenditure on fuel and lighting in percentage.<br />TABLE 5: HOUSEHOLD EXPENDITURE ON FUEL AND LIGHTING (PERCENTAGE)<br />(Source: Household Integrated Economic survey (HIES) 2005-06)<br />The household expenditure on fuel and lighting has also increased from 8.03 in 2004-05 to 9.17 in 2005-06. This overall increase in household consumption expenditure during the period from 2005-06 is due to high economic growth which increased the national income of the country.<br />The increase in consumption expenditure due to income can also be analyzed from the marginal propensity to consume concept which is the change in consumption due to change in income. During the time of economic growth from 2004 to 2006 in Pakistan the incomes of the rich class grew more than the income of the poor class as a result the MPC of poor class was greater than the MPC of rich class. This is because the incomes of lower class increased only such that they spend all of their increase in income on their consumption expenditure while the rich class since their income increased very large so they tend to save more than to spend. This increase in MPC also leads to an increase in consumption expenditure.<br />Thus the curve for consumption is as below: (GRAPH 2)<br />The increase in the consumption expenditure in 2005-06 is also increased due to other factors which include lowering of direct taxes and indirect taxes, this led to increase in real income of the people as a result their consumption expenditure got increased. Apart from this during the period of 2005-06 the value of people’s assets got increased as a result their ability for consumption expenditure got increased. It was also during this time period that the cost of credit got reduced due to which more and more people easily got credit at a low cost which increased their consumption. The range of goods and services also got increased during this time period as a result their was a boom in the consumption expenditure. <br />As we all know that consumption is a major component of aggregate demand therefore change in consumption expenditure directly affect the aggregate demand and aggregate expenditure which can bring a large change in the national income of the country. During the period of economic growth from 2004 to 2006 the consumption expenditure of Pakistan increased as according to EDIMAX USA PUBLICATION. This increase in consumption expenditure caused an upward shift in the aggregate expenditure as we can see from the graph below: <br />GRPAH 3<br />Due to this upward shift in the aggregate expenditure at an original equilibrium the aggregate expenditure was greater than the actual output which actually gave an indicator to the local producers to produce more and more as a result this resulted in an increase in income of the people. According to the multiplier principle the actual national income gets increased by multiple times however since all increase in income is not directly shifted to the people in the form of disposable income so their income got increased but not that much as the national income.<br />The increase in national income of Pakistan during 2004 to 2006 also helped Pakistan to come out from the recessionary gap which was in the economy for the past many years. The removal of recessionary gap helped in increase in the output which resulted in an increase in the actual national income to the potential level. This we can see from the graph below:<br />GRAPH 4<br />The shift in aggregate demand from AD0 to AD1 due to increase in consumption expenditure helped the economy to remove its recessionary gap and to achieve potential level of national income.<br />Chapter 3<br />INVESTMENT & SAVING<br />Investments are the expenditure on the production of those goods which are not produced for immediate consumption. At the macroeconomic level investment not only includes private individuals investing their resources (money) on productive activities but it also includes government spending and foreign direct investment. Saving on the other hand is that proportion of disposable income that people decide not to spend. National savings include private and public savings. Investment and saving trend over the last few years (2000-2007) have been increasing in Pakistan. These increasing trends have affected the complex multiplier greatly in Pakistan. The diagram below shows the investment schedule which is very unsteady; it means that a small change in investment shifts the whole curve.<br />Optimistic expectations of potential investors have contributed to an increased investment in Pakistan. Optimistic approach is when the potential or present investors feel that in future prices of goods and services will raise and thus they ca make greater profits. This attitude of people has increased investment in Pakistan not only domestic but foreign investors have also been attracted along with investment friendly policies of the government. One of the reasons can be raising inflation rates in Pakistan.<br />The government of Pakistan has attempted to reduce corporation taxes since last couple of years to encourage greater investments in the economy. Lowering the corporation taxes will increase post tax returns and thus increases the ability to reinvest in their businesses. They have done this by making some business activities free of taxes like different IT corporations have been given relief of corporation taxes for almost 10 years.<br />The government in Pakistan has also provided few incentives to businesses to encourage them to invest more and more in their business. Government incentives do affect the investment levels in the economy. Agricultural sector was provided with the subsidies so that the incomes of the farmers can be stabilized and they may invest more in order to improve their production.<br />Infrastructure is one of the major determinants of investment in the economy. If the infrastructure, which includes roads, transportation, communication system etc are effective then investment would be high. As in efficiency in these departments can slow down the economic activities and may result in unprofitable or lower returns for the investors.<br />Political stability is a great factor that can bring in or out the investment in the economy. In Pakistan there has been political instability since many years which had acted as a hurdle to foreign inflow of investment as well as investment with in the geographical boundaries. It derives potential investors as political instability means there would be fluctuations in economic policies more frequently and thus their returns would be affected greatly.<br />Terrorist activities in today’s world also determine the inflow and outflow of investments with in and outside the economy. Increased suicide bombings and terrorist attacks on different cities and regions have derived potential as well as present investors away from Pakistan. Specifically in developed regions, business activities are greatly affected by these attacks.<br />Foreign relations affect the investment trends in the economy. Countries with which the government has established a significant relationship like China and USA with which not only international trade has improved but it helps bring more investments into the country. Government providing strategic locations to the investors does increase the number of investors and investment into the economy. Appropriate regions for businesses help attract investors into that area. Similarly availability of skilled labour force affects the investment patterns in the economy. <br />Savings being an important component in the calculation of complex multiplier is also affected by the changes in the economic environment. People’s ability to save or the change in their social attitude towards thrift does affect the level of savings in the economy. The availability of the range of financial institutions offering different saving schemes does change the level of savings in the economy. Government policies which aim to achieve specific targets do act as determinants of saving. Monetary policy is one of those policies that make use of interest rates and money supply to correct inflation in the economy. This policy however helps in changing the trend of investments and savings in Pakistan. Lower interest rates on investment will attract more investors and thus investment. Similarly high returns on investment will attract more investors into the economy. The investment demand curve is sloped downwards from left to right which shows the negative relationship between interest rates and investments. Interest rate is the cost or price of investing into a project and thus lower costs give higher returns. This is the reason that at lower interest rate investment are high. The diagram on the next page shows the investment demand curve. <br /> <br />Corporate savings are allowances or reserves that are kept aside by the businesses for future use or to put in those financial institutions where they can earn high returns from their savings. More businesses deciding to save will increase the overall savings in the economy. Similarly households saving for a particular thing or target saving will effect the overall savings in the economy. For example if the prices oh property rises people will start saving to buy houses in future this will increase current saving levels and future consumption level.<br />There were many steps taken by the government over the last 7 years in order to increase the level of investments and savings in the economy so that the multiplier effect may help in increasing the national income. Majorly government policies were targeted on Foreign Direct Investments (FDI) which is a major of investments in the economy. FDI refers to the investment of foreign countries into Pakistan. It consists of two components that are FDI and Portfolio investment. FDI consists of 3 elements that are cash, equipments and reinvested earnings. The strategic movement from domestic to foreign direct investment was mainly due the growth of balance of payment difficulties and a decline in foreign aid. FDI is majorly from UAE, US, China, UK and Netherlands, with Netherlands on top of the list with 18.1%of the total FDI share. <br />In early 2000 the government attempted to improve the relationship with its investors through ensuring stability in political policies and improving telecommunication, oil/gas services and infrastructure. It is basically subject to same rules as domestic investment, with exception of certain sensitive areas such as defence production and banking and broadcasting. Pakistani government has loosened the restrictions on the ownership of agricultural, services, infrastructure and social sector along with manufacturing. The government by relaxing the foreign exchange control and permission to participate in local projects with maximum equity attracted more foreign investors. The government allowed foreign investors to register for trade and provided them full safeguard. The government abolished the payments of royalties and technical fee, eliminated the requirement of obtaining (NOC) No Objection Certificate to attract more potential investors in Pakistan. The requirements of approval for setting up an industry in any field, place and size except few industries were loosened (source: EDRC Report series no.66 by Ashfaq H. Khan and Yun-Hwan Kim). <br />Description2000-012001-022002-032003-042004-052005-062006-07Total investment17.216.816.916.919.121.723.0Changes in stock1. fixed investment15.815.515.315.017.520.121.4-public investment5. investment10.211.311.710.913.115.416.2Foreign savings0.7-1.9-3.8- savings16.512.6.20.817.917.517.218.0Domestic savings17.818.117.615.715.415.316.1<br />The table above shows the variations in overall investments and savings trends over the years as percentage of GDP (Pakistan survey 2007). In 2004-2005 GDP went up to 8.4% and this was a sound improvement in the nations output. National savings from 2000-2007 increased be 12.4% however it fell in 2003-2004 <br />. When the investment increased this affected the multiplier directly as increased investments increased spending and lead to a shift in aggregate expenditure schedule which then have the multiplier effect on national income. Assuming that the aggregate expenditure (AE) was before and AE’ is after the increases in overall investments in the economy, that is there is an increase in investments of 50. The nation income before was 1000. Assuming that Marginal propensity to consume (MPC) in the economy is 0.8and MPS is 0.2. Formula for calculating multiplier for the closed economy with no government is:<br />Multiplier = 1MPS =10.2 =5<br />This would give us a multiplier value that is 5. To see the new national income we would multiply 1000 with the multiplier value which would be equal to 5000.The diagram on the next page shows this multiplier effect on national income of increased investments in the economy.<br /> <br />The impact of the above mentioned policies on the FDI and domestic investment overall was considerably effective and FDI grew by almost 7% in the last five years despite of the earthquake of 2005. Services sector faced a slight fall in growth rate while real investments increased to 20.6%. Total investment reached a record level of 23% of GDP. Since 2002 investments increased by 6.1%. Foreign investment increased on average by 17.3% in real terms since 2004.Private investment increased by 18.7% along with an increase in domestic fixed investment from 64.2% to 76% in the last 7 years. In the current fiscal year FDI went more than $6 billion and overall FDI increased by 47.7%. The table below shows the fluctuation in FDI over the years. ___________JULY-APRIL_____________________ ________2005-2006____ _____2005-2006____ ____2006-2007_______<br />COUNTRYDIRECTPORTFOLIOTOTALDIRECTPORTFOLIOTOTALDIRECTPORTFOLIOTOTALUSA516.7303.8820.5419.1331.5750.7676.7669.41346.1UK244.0-19.5224.5151.4-16.1135.3724.4382.31106.7UAE1424.563.31487.51284.655.11339.6364.219.5383.8Germany28.6-3.525.127.0-4.222.730.06.936.9Kuwait21.02.923.915. Kong24. Arabia277.80.8278.5273.70.8274.591.70.191.8Canada4.<br /> The table above shows the inflows and outflows of FDIs in the economy (Pakistan survey 2007).<br />Investment being an injection is directly related to complex multiplier and saving being a withdrawal in indirectly related to complex multiplier and is used in its calculation. The government of Pakistan should make strong policies to attract FDIs but lesser on the non foreign-exchange-earnings sectors along with the policies to reduce fiscal deficit and increase foreign exchange reserves. Although the government has abolished many formalities that are to be fulfilled by foreign investors, still there are numerous permits and clearance from different government agencies that foreign investors need to invest in Pakistan. Unnecessary taxes along with cumbersome procedure of tax payments should be reformed. Taxes on imported goods (tariffs) should be reduced to reduce the cost of production of local industries. Policies should be reviewed about providing financial assistance to foreign investors. The government should reduce the overprotective labour laws which derive foreign investors away from Pakistan. The government should work hard to improve infrastructure like education. Government can also do this by engaging private sector in railways. Reduced cargo handling charges would attract more investments. Creating friendly environment and taking confidence building measurements within the public and private sector would help both the government and private sector to discuss and help each other in solving their business issues.(source: : EDRC Report series no.66 by Ashfaq H. Khan and Yun-Hwan Kim). <br />Chapter 4<br />GOVERNMENT SPENDING & TAXATION<br />Government spending is defined as expenditure done by the public sector i.e. central bank for the well being of the society. Government expenditure can be divided into four main categories: <br />1: Current Expenditure (Exhaustive Expenditure) <br />2: Capital Expenditure (Exhaustive Expenditure) <br />3: Transfer of Payments (Non Exhaustive Expenditure)<br />4: Debt Interest (Non Exhaustive Expenditure)<br />Current Expenditure is spending on day to day running of the public services e.g. paying the soldiers. Capital Expenditure is spending on the social infrastructure e.g. constructing new roads. Capital Expenditure adds to the country’s capital assets.<br />Transfers of payments are provided to those vulnerable people who are unable to afford the basic necessities like unemployment benefits or pensions. Debt Interest is payments made to holders of government debt, e.g. National Saving Certificates, government bonds.<br />Current and Capital Expenditures are considered as exhaustive expenditures as they make use of resources directly and are part of GDP. While transfer payments and debt interest are considered as non exhaustive expenditures as they involve the transfer of economic purchasing power from tax payers to recipients of welfare payments.<br />Determinants of Government Spending are:<br /><ul><li>Demand for government financed public goods and merit goods. As a society gets richer its inhabitants demand better and more extensive health and education provision.
  2. 2. Demand for private goods: As demand for private owned goods increases the demand for complementary government goods also increase like rise in ownership of cars would mean more roads required.
  3. 3. Changes in technology: As improvements in technology are taking place so the government expenditure is raising for example purchase of computers have raised expenditure on education.
  4. 4. Political Cycles: Government spending tend to rise before elections e.g. on health and education to prove popular.
  5. 5. Risk of conflicts: In a situation of world stability defense spending may fall.</li></ul>Government spending on goods and services are independent of level of national income and are autonomously determined according to political and social circumstances. Any change in demand for government financed goods will shift the government spending function either upward or downward. Government spending is financed by direct taxes, indirect taxes, sale of assets, borrowing, etc.<br />A tax can be defined as a compulsory levy on private individuals and organizations by the government to raise revenue to finance expenditure on public goods and services. Taxes are of two kinds direct and indirect. Direct taxes are those taxes which are based on income and wealth like income tax, property tax, corporate tax, payroll tax, etc. While indirect taxes are those taxes which cannot be directly related to the activity like GST, value added tax, custom duties, etc.<br />Taxes are withdrawal from the circular flow and are a function of national income. Taxes can be categorized in four types i.e. lump-sum tax, progressive tax, regressive tax and proportional tax. <br />Lump sum tax is a tax whose amount does not vary with the income or taxpayer actions like television license fee. <br />Progressive tax is that tax in which proportion paid in tax rises with the rise in income like the rate of tax is 10% on $1000 income and with the rise in income for example $2000 income the tax rate becomes 20%. It reduces the inequality between rich and the poor <br />Regressive tax is that tax in which proportion paid in tax falls with the rise in income like the rate of tax is 10% on $2000 income and with the fall in income for example $1000 income the tax rate becomes 20%. It redistributes income from poor to rich and the burden falls on poor.<br />Proportional tax is that tax whose proportion does not vary with the change in income i.e. tax rate remains same for any amount of income.<br />Government Budget is defined as the description of the plan of the government expenditures and government revenues. If government revenues exceeds the expenditures budget is said to be surplus. If expenditures exceed revenues the budget is a deficit one. Otherwise if expenditures equal revenues the budget is a balanced one. <br />Government spending multiplier shows that any change in spending or injections will have a multiple effect on national income. Like if government spending rises by $1000 it will make national income rise by more than $1000.<br />Formula multiplier = change in national income change in govt.spending or injections<br />Tax multiplier shows that any change in tax will have a multiple effect on national income and this process will be known as tax multiplier.<br />Tax multiplier = MPC x EXPENDITURE MULTIPLIER<br />The effect of multiplier can be shown with the help of the following table:<br />MPC = 0.6 MPT = 0.2 MPS= 0.2 GOVT SPENDING = 1000<br />ROUNDSΔ GOVT. SPENDINGΔ NATIONAL INCOMEΔ CONSUMPTIONΔ SAVINGΔ TAXES1100010006002002002-6003601201203-36021672724-216-------------TOTAL100025001500500500<br />MULTIPLIER = K = 11-MPC = 11-0.6= 2.5<br />ΔY = K * ΔG = 2.5 * 1000 = 2500<br />Marginal Propensity to Tax (MPT): It is the fraction of an extra pound increases in household income that government plan to collect in tax.<br />MPT = change in taxeschange in national income <br />Average Propensity to Tax (APT): It is the fraction of total households’ income that government plan to collect as tax.<br />APT = Total taxTotal income<br />TAX FUNCTION = autonomous tax + MPT (INCOME)<br />FISCAL POLICY: A prudent fiscal policy is essential for economic growth and poverty reduction. A good fiscal policy can induce savers to invest their money resulting in efficient allocation of resources. The government has increased its spending and reduced direct taxes during last seven years to achieve expansionary fiscal policy. Pakistan fiscal deficit which was 7% of GDP in 1990 declined to 3.4% in 2005-2006. This decline can be attributed to shifting of expenditure from current to capital expenditure and to improvement in tax collection. During the last 7 years the tax collection has increased by 81%. The reforms taken for the betterment of fiscal policy are reorganization of CBR, quick clearance of goods at Karachi port, etc. The structure of taxes has changed considerably from 1990 as compared to 2006. This can be seen from the following graphs.<br />304673050800<br />Development expenditure increased from 2.2% to 4.9% of GDP and total expenditure increased to 6.2% of GDP during last 7 years, and total revenues are budgeted at Rs. 1163.1 billion in 2006 compared to Rs 1087 billion in 2005 showing an increase of 7%. The fiscal deficit fell to 4.2% of GDP due to the rehabilitation work in earthquake affected areas in the last two years. In future Pakistan will have to apportion its resources to build physical and human resource to sustain the growth momentum. The government will have to broaden the tax base system which will ensure fair distribution of tax among various sectors of the economy. <br />The following table shows the decreasing trend of fiscal deficit and the growth of GDP.<br />YEARGDP GROWTHFISCAL DEFICITTOTAL EXPENDITURETOTAL REVENUES2000-011.84.317.213.32001-023.14.318.314.02002-034.83.718.514.82003-047.52.416.714.32004-059.03.317.213.82005-<br />MONETARY POLICY: The development of financial institution is quite prudent for economic growth. Since 2000 there have been revolutions of reforms like the privatization of financial institutions, improving banking structure and by promoting transparency in Government Sector Corporation. The State Bank of Pakistan has been using expansionary monetary policy to achieve economic growth by increasing money supply, decreasing interest rates and providing hire purchase or leasing facilities. The competitive market of banks, lower taxes and reduction in loans has resulted in lower interest rates. As a consequence of lower interest rate the policy was successful in reducing excess demand. Other reasons for the decrease in private lending were the availability of non-bank finance to private sector, banks followed more strict policy for lending credit, mergers of banks and State Bank of Pakistan’s emphasis on monitoring personal loans. Recently in Pakistan there were a number of mergers like Standard Chartered Bank merged with Union Bank, ABN Amro Bank acquired stakes of Prime Commercial Bank, etc.<br />This year the money supply increased sharply to Rs. 88.1 billion with a growth rate of 14%, due to the increase in net foreign assets. The disbursement of loans to agriculture sector rose to Rs. 111 billion as compared to Rs. 91 billion last year. Some international construction firms such as Emaar, Al-Ghurair and Meindhart have started their operations in Pakistan. In 2007, consumer loans fell to 11.9% because of deceleration of auto loans as bank increased interest rates, car prices rose, high insurance charges and the increased number of bad debts. <br />Loan Penetration should get a boost from electronic banking as it is widely acceptable. The number of ATM and credit card holders is increasing by 50% every year. <br />Microfinance Bank has been quite active in Pakistan over the past six years. Khushali Bank is the largest microfinance institution in Pakistan and operates with a worth of Rs. 10 billion loans. Small and Medium Enterprise Sector is also playing a vital role in achieving fair and equitable distribution of wealth. The Bank recorded an extending credit of Rs. 1.9 billion in 2006.<br />Conclusion: Thus, with the adoption of expansionary fiscal policy and expansionary monetary policy the government is getting close to achieve it desired goals of stable economic growth and increased aggregate expenditure, high GDP growth rate, low unemployment rate and a stable inflation rate.<br />Chapter 5<br />EXPORTS & IMPORTS<br />International Trade and Multiplier:<br />The importance of the role of international trade cannot be ignored. Almost every country in the world is engaged in international trade. Pakistan, like other industrialized countries is very much an open economy.<br />Aggregate Expenditure:<br /> AE = C + I + G + (X-M)<br />Goods that are domestically produced are added to the GDP which is the sum of the total output of the final goods and services produced in a country. Exports of Pakistani goods are added to the aggregate expenditure, like consumption , investment ,and government expenditure.We can get the total demand for domestically produced goods by subtracting the total value of imports from the total.The net effect of international trade is measured by exports less imports.<br />Imports:<br />Formulae: import multiplier = 1/mpm<br />Imports(Billion Rupee)Disposable Income (Billion Rupee)Slope=marginal propensity to importImport FunctionExplanation: There is a positive relationship between imports and disposable income. The slope of the import function is equal to the marginal propensity to import.<br />Imports are the goods that are produced abroad and bought by the people in Pakistan. Referring to the Economic Survey of Pakistan the imports were targeted to decline by 2.1% in 2006-07 to $ 28.0 billion from lasts year level of $28.6 billion. So generally there was a deceleration in the import growth. The Pakistani government planned to impose certain policies in order to further decelerate the import growth in Pakistan these included tight monetary policy, decrease in the international price of oil, decline in the purchase of imported cars and also a decrease in the import of steel as Pakistan is able to come back to the normal production of steel. In 2003 there was an increase in imports this was due to higher import quantities of food and live animals , manufactured goods and other manufactured items.<br />Table Monthly Imports <br />Month2005-06 ($ million)2006-07 ($ million)July 1996.32460.5August 2233.82525.1September2321.82443.0October2325.32131.7November2299.02773.6December2474.72564.2January2144.32330.1February2210.42572.3March2681.92622.6April2258.62573.4Total 22946.124996.4Monthly Average2294.62499.6<br /> <br /> Provisional * Source: Federal Bureau of StatisticsExplanation:The table shows the trends in the monthly imports.For the month July and August the average for imports was higher as compared to last year.On average the monthly imports have risen by $200 billion.<br />Exports:<br />Exports are goods that are produced domestically but are sold abroad. The exports of Pakistan for the year 2006-07 were targeted at $18.6 billion or 12.9% higher than the last year. There are some factors that contribute to less than satisfactory performance of the Pakistani exports in the international market. Most important of all the textile sector of Pakistan needs to bring about structural changes with the help of the government providing them financial assistance. The Pakistani goods are sold abroad at very cheap international prices because they are of poor quality and cannot compete with the goods in the international markets.The machinery that is used by the sector is old and out-dated, the efficiency and productivity level is quite low and there are high maintenance costs associated with production. The government needs to give financial assistance as well as training programmes should be introduced to improve the quality as well as the productivity level.Also , a lot of research and development needs to be done in order to fulfill the requirements of the international consumers. According to the Asian Economic News Pakistan has ‘ unveiled a $ 10 billion export drive and the Pakistani government has aimed at export trade drive of boosting the country’s by 18% to $10 billion in the coming fiscal year.’ Growth rate in Pakistan for the year 2006-07 has grown to 7% which has been recorded as the best in this decade. Pakistan has broken through the low growth rate in the year 2004-07.The good performance of Pakistan is due to the sound economic policies as well as structural reforms .The international economic enviorment has also been benign to the economic and political situation in Pakistan. The economic growth rate in 1999 was recorded to be 4.2% and this increased to 5.3% in 2003. So, because of effective policies Pakistan has been able to improve its growth rate over the years 1999 to 2007.<br />Table Monthly Exports<br />Month2005-06 ($ million)2006-07 ($ million)July1269.31220.5August1400.71507.5September1483.31416.1October1325.01282.1November1113.51380.0December1455.31517.4January1229.91197.3February1224.71229.0March 1512.81533.1April1443.21497.0Total13457.713780.0Monthly Average1345.81378.0<br /> Provisional * Source: Federal Bureau of Statistics<br />Explanation: The monthly exports were comparatively better as compared to that of last year with an average $ 1378 billion in 2006-07 to $1345.8 billion in 2005-06.<br />Trade Balance:<br />This shows the difference between exports and imports in a year. The balance of trade for he year 2006-07 deteriorated with a trade deficit of $ 11.1 billion as compared to $9.5 billion in 2005-06.This deficit was 9 % in 2006-07 as compared to 9.5% in 2005-06.Although there was a decrease in the amount of imports but the exports also decelerated in the year 2006-07 which led to an increase in the trade deficit. . There was a recorded surplus of about $5.1 billion from a deficit of $ 14 billion in the year 2002 .This was a great achievement and this surplus was due to an increase in tourism as well as grants inflows from other countries. Total value of international trade increased from $426.99 billion to $464.99 billion in the year 2003.<br />Terms of Trade :<br />This is the rate at which the two goods will be exchanged. It is the ratio of the prices of exports divided by ratio of the prices of imports. There was a deterioration in the terms of trade in the year 2006-07.The base year is 1990-01 for the terms of trade. It was 64.2 in 2006-07 as compared to 66.4 in 2005-06.It deteriorated by 3.4%.This was due to an increase in the international price of oil which is Pakistan’s major import. Other factor that contributed was the import of heavy machinery. The export import ratio decreased from 65.7% to 65% in 2003.<br />Monetary Policy:<br />The State Bank of Pakistan has tried to make considerable changes in the monetary policy. This involves changing the interest rate to influence aggregate demand and money supply to control price inflation. From the past 6 to 7 years an easy monetary policy was imposed but with changing conditions it has now decided to move to a more tight monetary policy.This means that the money supply in the economy has decreased and the interest rates have been risen to control the inflationary pressure as well as to control demand in the economy.The money supply in the economy has been reduced by taking the following additional measures that is the liquidity ratio is increased from 15% to 18%,cash reserve ratio increased from 5% to 7%,discount rate in commercial banks increased from 9% to 9.5%.Inflation in the economy makes the exports expensive in other countries and so the demand for exports fall as these goods become in competitive in the international market.<br />Fiscal Policy :<br />This involves the use of government spending as well as taxation and borrowing to influence the economic activity and aggregate demand in the economy.In Pakistan , there has been an high fiscal deficit and in order to reduce this the State Bank of Pakistion has used the discretionary fiscal policy to achieve economic stability and poverty reduction in the economy.The incidence of tax has been shifted from imports and investment to consumption and incomes.A high tax charge on personal income and consumption will lead to a decrease in consumer demand as less disposable income will lead to a decrease in demand and high prices will too lead to a decrease in the total demand for goods and services.There has been a cut in corporation tax which has led to an increase in the profits and has led to an increase in business capital spending.There has been some kind of flexibility in the collection of custom duties which used to account for 45% of total tax collection and 55% of indirect taxes in 1990-91 but has now been reduced to 18.6% and 32.3% respectively. Tax collection by the CBR during the last 6 years has increased by 112.8% which has helped to reduce the fiscal deficit.<br />Exchange Rate:<br />This is the rate at which currencies trade for one another in the international market.The exchange rate affects both the amount of imports and exports in the country.The imports of Pakistan depend on the relative cost of both foreign and domestically produced goods.An appreciation of rupee means that the rupee can now buy more Dollars , this will increase the prices of exports in Pakistan and reduce the prices of imports.While, a depreciation in the rupee means that exports have become less expensive and imports have become expensive there will be a greater demand for the Pakistani exports in the international market. The exchange rate of Paksitan has remained more or less stable.The currency has depreciated from Rs 60.2138 per US $ at the end of 2006 to Rs 60.6684 at the end of April 2007.<br />Effect of Net Exports of Pakistan on Aggregate Expenditure for the year 2006-07:<br />If national income or GDP of a country increases this means that there will be decrease in the net exports and this will lead to a downward shift in the Aggregate Expenditure curve.While there will be a increase in the consumption and investment and this will lead to an upward shift in the Aggreagate Expenditure curve.A small mpm means that the aggregate expenditure will reduce only slightly while a large mpm will reduce the Aggregate expenditure significantly. For the year 2006-07 the exports were targeted to be $18.6 billion while imports were targeted at $28 billion.The net exports were in negative for the year 2006-07 which amounted to $ 9.4 billion.So ,the aggregate expenditure of Pakistan shifted downward in year 2006-07.<br />45C + I + G + (X-M) (NEGATIVE)C + I +G +(X-M) (POSITIVE)Aggregate Expenditure(AE)Y1Y0Income=Output (Y)<br />Explanation: This graph shows a shift in Aggregate Expenditure caused by negative net exports.The income has shifted from Y0 to Y1.There is a downward shift in the aggregate expenditure curve due to negative net exports.<br />Trade Policy for 2006-07:<br />Salient Features<br /><ul><li>Increased market access through trade diplomacy.
  6. 6. Focus on trade with neglected regions of the world.
  7. 7. Strengthening of trade promotion Infrastructure including EPB/TDAP and trade mission board.
  8. 8. Emphasis on Trade Development in export oriented industry.
  9. 9. Fast track development of State of the Art Infrastructure by the government.</li></ul> (Economic Survey of Pakistan 2006-07)<br />Some of the implemented policies (exports and imports):<br />Facilitation for leather exportsIMPLEMENTEDR&D Support for Footwear SectorIMPLEMENTEDProvision of support for cool chain and cold storage for horticulture productsIMPLEMENTEDIn house/on-job skill development trainingIMPLEMENTEDModified Freight Subsidy SchemeIMPLEMENTED<br />Export Initiatives:<br />The government has planned to take export initiatives in order to increase the amount of exports and rectify the problem of the imbalance in trade. These initiatives include the facilitation of leather exports. A lot of research and development needs to be done in order to compete in the international global market arena and be updated. Many Expo centers have been setup in different cities so that delegations can come to attend the different exhibitions. <br />Import Initiatives:<br />The government has also taken import initiatives , these majorly include the import of medical instruments ,machinery by industrial areas so that the old machinery can be updated and to increase the efficiency and productivity level different sectors.<br />WTO and Pakistan :<br />WTO has played a positive role in promoting growth of trade in its member countries which include Pakistan. Following the liberization policy the country has been able to have a positive impact on the economy. Our GDP has grown and our international trade participation has increased by more than 15% per annum. The government is trying its level best to make export market access easier. <br />The Governor of the State Bank of Pakistan has introduced various policies regarding the macroeconomic stability of Pakistan. Structural reforms like tax reforms , tariff reforms , privatization, deregulation have been introduced which have helped Pakistan to overcome and rectify many problems that were prevalent in Pak<br />Chapter 6<br />COMPLEX MULTIPLIER<br />Complex Multiplier<br />ROUNDSΔINVESTMENTBILLION $ΔINCOMEBILLION $ΔCONSUMPTIONBILLION $ΔSAVINGBILLION $ΔTAXESBILLION $ΔIMPORTSBILLION$1884.<br />This process will come to a halt when the total withdrawals are equal to original change in investment.<br />K= 11-MPC<br />= 11-0.6<br />= 2.5<br />The table shows the complex multiplier calculation for the increase in telecom investment in Pakistan. For this calculation the MPC is 0.6, MPS is 0.2, MPT is 0.1 and MPM is 0.1.<br />According to the calculation the value of the multiplier is 2.5 which means that due to an increase in investment in telecom sector by 8 billion $ it has increased the national income of Pakistan by 20 billion $ which is actually a great change in the national income of Pakistan. Since at present except the service sector in Pakistan there is no other sector which is contributing so much to the national income of Pakistan. The major players which are involved in contributing to the national income are mobilink, ufone, warid, telenor, ptcl etc, whose inial increase in investment has contributed so much to the economy of Pakistan. According to an article in daily times the telecom industry has emerged as the largest recipient of FDI in Pakistan during the last few years. During 2005 to 2006 telecom sector received over 1.8 billion $ Foreign direct investment and emerged as the only sector of the economy to attract such huge investment where its share in total FDI crossed 54%. In the last 2-3 years the telecom sector has attracted record in flows of FDI.<br />The multiple increase in national income due to investment I telecom sector can be seen graphically. <br />From the figure we can see that due to an increase in investment by 8 bn $ the aggregate expenditure function has shifted upwards due to which there is a multiple increase in national income.<br /> <br />Chapter 7<br />ARTICLES & LITERATURE REVIEW<br />ARTICLE I<br />PAKISTAN'S CONSUMPTION CLIMATE BRIGHTENS.<br />by EDIMAX USA PUBLICATIONS <br />Market Asia Pacific • June 1, 2004 • <br />Private sector demand for goods and services is on the rise in Pakistan thanks to increased availability of financing and improved affordability of household goods. <br />During the early months of this year, private sector borrowing showed growth of over 100 percent as confidence firmed and more attractive financing packages emerged. The beneficiaries of this trend include agencies that sell new cars and residential real estate. <br />The construction sector should benefit this year and next from government incentives aimed at making it easier for Pakistanis to purchase their own home. At present, Pakistan has a housing shortage estimated at 4.3 million dwellings and there is a demand for about 570,000 additional homes per year. <br />The increasing pace of residential real estate construction this year and next will contribute to strong demand for construction materials, and cement in particular. Although most of the new homes in Pakistan will be low-cost units with repetitive floor plans, there will also be an increase in demand for custom homes in more affluent districts of major metropolitan areas. <br />Demographic factors weigh in favor of medium- to long-term growth in household consumption. Demand for food and beverages should rise steadily for the foreseeable future because Pakistan has one of the highest population growth rates in Asia. <br />The majority of Pakistani families have an unsatisfied appetite for household consumer goods. Living standards are slowly improving in rural areas and that bodes well for a gradual increase in sales of low-end durables over the next few years. In addition, sales of agricultural equipment and supplies will rise as agricultural incentive programs give farmers access to more capital to upgrade their operations. <br />Pakistan's ability to create new jobs and improve the lifestyle of the average consumer hinges on the government's ability to reverse the recent downturn in foreign direct investment. <br />DEMOGRAPHIC EXPANSION POSES A JOB CREATION CHALLENGE The population growth rate for Pakistan is higher than the regional average, due in part to a birth rate of 37 per thousand inhabitants, which is well above the average of 27 per thousand for South Central Asia. Job creation has not kept up with growth of the labor force in recent years, and it is unlikely that the situation will improve during 2004. Official unemployment is running about 8 percent, but high underemployment is putting downward pressure on consumer confidence. <br />PakistanAEs population reached 149 million people during 2003, which amounted to just over 9.5 percent of South Central AsiaAEs 1,563 million inhabitants. According to data released by the Population Reference Bureau (PRB), PakistanAEs population will reach 250 million people in 2025, or 68 percent more than the level in 2003. By the year 2050, Pakistan's population should reach 349 million. <br />The PRB revealed that a scant 34 percent of PakistanAEs population lived in urban areas during 2003, and that the countryAEs population density stands at 485 people per square mile. By the year 2050, PakistanAEs population density should reach 650 people per square mile. <br />Another source of demographic data, the CIAAEs World Factbook, indicates that 39 percent of PakistanAEs population was birthu14 years old in 2003, while 57 percent was 15u64 years old, and 4 percent of the populace was 65 years of age and over. <br />CIA statistics revealed that the countryAEs population growth rate was 2 percent in 2003 and the net migration rate was -0.75 migrants per 1,000 people. According to the United Nations Population Division, in the year 2050, 23 percent of PakistanAEs population will be birthu14 years old, while 65 percent will be aged 15u59, and 12 percent of the populace will be 60 years of age and over. <br />COPYRIGHT 2004 Media Contact Resources, Inc. Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.<br />Copyright 2004, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.<br />NOTE: All illustrations and photos have been removed from this article.<br />ARTICLE II<br />Daily Times - Site EditionSunday, November 25, 2007<br />Telecom investment grows to $8bn in 4 years<br />* Telecom sector has emerged as the largest recipient of FDI in Pakistan during the last few yearsBy Romail KennethKARACHI: Telecom companies have invested over $8 billion during the last four years in Pakistan particularly in the mobile sector whose investment share accounts for 73 percent official sources said here Saturday. In 2006-07, cellular mobile sector has invested over $2.7 billion, which becomes about 66 percent of total investment by the sector, sources at Pakistan Telecom Authority (PTA) said. Local loop segment of the industry is also taking off and in 2006-07 about $7.8 million were invested by this sector. LDI operators have invested about $603 million in 2006-7, which is about 15 percent of total investment by the sector.During 2005-06, telecom sector received over $1.8 billion foreign direct investment (FDI) and emerged as the only sector of the economy to attract such huge investment where its share in total FDI crossed 54 percent. During 2006-07, telecom sector has received above $1,824 million FDI, which was about 35 percent of total FDI in the country.Telecom sector has emerged as the largest recipient of FDI in Pakistan during the last few years. Liberalization and competition in the sector has compelled many companies to expand their infrastructure across the country, which requires more investment from foreign sources. In the last two to three years the telecom sector has attracted record inflows of FDI. PTA has created a conducive and investor-friendly environment in the telecom sector by awarding licenses in a fair and transparent manner. All operators are rolling out their networks rapidly all over the country, which requires huge investments. It is expected that the trend of investment may continue in the next five years because large potential market still exists in Pakistan and all operators intend to grab their share. China mobile has acquired Paktel, which has contracted out $500 million worth of project to renowned companies like Ericcson, ZTE and Alcatel to roll out their networks. Similarly, Mobilink also plans to invest $500 million in 2007-08 for improvement of quality of service and infrastructure expansion. Wateen Telecom, which has already laid out 5,400 km of optical fiber across the country, has announced to invest $600 million in next two years.During the last four years Pakistan’s telecom sector has experienced unprecedented changes with respect to technology, regulation and growth. The liberal FDI policy by the government of Pakistan and deregulation and privatization of the sector has triggered a wave of international acquisitions in the sector. During the last year about $2 billion worth of acquisitions were made in the telecom sector.It is viewed that stiff competition, squeezing profit margins and lack of investment resources have forced some players in the industry to rethink whether to go on their own thus convincing them to offer their shares to other players who can invest more and heavily and introduce innovation with their experience. Renowned companies from Gulf and East Asian region with in-depth experience in telecom sector are looking at Pakistan as a lucrative market to invest who have purchased shares in different telecom companies worth $1.7 billion. Orascom from Egypt, already owning the majority stake in the leading cellular mobile operator of Pakistan has purchased the remaining 11.31 percent shares of Mobilink from the local partners from $290 million. China Mobile, which is the largest cellular mobile operator in the world, has also made its first international venture by acquiring 100 percent shares of Paktel from Millicom and the local partner for $477 million. Similarly, Warid Telecom has sold about 30 percent shares to Singtel, a well-reputed company of Singapore. PTA has facilitated these developments and is taking steps for further growth of the sector. PTA is however, vigilant to ensure that no cartels or monopoly situation is created that can harm competition. Apart from international acquisitions, there are some local acquisitions where leading companies have taken over some small companies. Mobilink has purchased Zarco, which has Wireless Local Loop (WLL) license for Faisalabad and Lahore regions having frequency of 3.5 GHz. Similarly, it has also been purchased Dancom Online, which also has frequency of 3.5 GHz all over the country. Besides, a small ISP and WOL have also been purchased by the subsidiary of Mobilink.<br />LITERATURE REVIEW<br />Article I<br />The article “Pakistan Consumption Climate Brightens” by Edimax USA publications on June 1st 2004 talks about how the consumption expenditure grew over the years. According to the article the household consumption expenditure has increased for all the sectors due to which we can see that there was a boom in the construction sector which has led to a housing shortage of 4.3 million dwelling. The consumption expenditure also grew due to increase in population size as a result the household expenditure of each house got increased. The consumption expenditure also grew due to increase in availability of finances. This increase in consumption brought an inflationary pressure due to which the price of all household goods rose. Therefore government should take notice of this problem so that it can be corrected. <br />Article II<br />The article published in daily times on November 25th 2007 by Romail Kenneth talks about a boom in telecom sector. According to the article the telecom sector has now emerged as the major sector which is contributing a lot to the economy of Pakistan. The article talks about the major players who are playing an important role in the telecom sector. These players are from all around the world who have their stake in the telecom sector of Pakistan. According to the article the boom in the telecom sector is due to the business friendly policies of the PTA. It was due to these policies that the economy received such a huge inflow of cash in the form of FDI. Apart from these policies the PTA should introduce more consumer friendly policies so that from the success of telecom sector the consumer can also get benefitted. <br />Chapter 8<br />COMPLEX MULTIPLIER REGRESSION ANALYSIS<br />-----------------------------------------------------------------------------<br />CONSTANT -1.44462E11 2.54225E10 -5.68245 0.0000<br />CONSUMPTION 1.65241E9 2.6852E8 6.15376 0.0000<br />INVESTMENT 4.5849 0.762225 6.01515 0.0000<br />GOVERNMENT EXPEND 1.1643 0.826121 1.40935 0.1791<br />EXPORTS 4.78094 0.672373 7.11054 0.0000<br />IMPORTS -3.57051 0.794395 -4.49463 0.0004<br />-----------------------------------------------------------------------------<br /> Analysis of Variance<br />-----------------------------------------------------------------------------<br />Source Sum of Squares Df Mean Square F-Ratio P-Value<br />-----------------------------------------------------------------------------<br />Model 5.30559E21 5 1.06112E21 348.20 0.0000<br />Residual 4.57111E19 15 3.04741E18<br />-----------------------------------------------------------------------------<br />Total (Corr.) 5.3513E21 20<br />R-squared = 99.1458 percent<br />R-squared (adjusted for d.f.) = 98.8611 percent<br />Standard Error of Est. = 1.74568E9<br />Mean absolute error = 1.00264E9<br />Durbin-Watson statistic = 1.1138<br />The StatAdvisor<br />---------------<br /> The output shows the results of fitting a multiple linear<br />regression model to describe the relationship between GDP and 5<br />independent variables. The equation of the fitted model is<br />GDP = -1.44462E11 + 1.65241E9*CONSUMPTION + 4.5849*INVESTMENT +<br />1.1643*GOVERNMENT EXPENDITURE + 4.78094*EXPORTS - 3.57051*IMPORTS<br />99% confidence level.<br />To further sound our project we have run a multiple regression model. I our model the dependent variable is GDP and the independent variables are consumption, investment, government spending, exports and imports. From the analysis of variance we can see the P value and the F ratio. Both the P value and F ratio shows the level of significance of the model. The P-value should be lie between 0 to 0.05. If the P value is between this limit, it means it is the best fit model. The F ratio should be as high as possible. So from our analysis of variance we can see that the P value is 0 and the F ratio is 348.20. This shows that our model is a best fit model as our P value is 0 and the F ratio is very high. The R square which is the coefficient of determination is 99.1458% which means that 99.1458% variation in the dependent variable is due to independent variable and remaining due to other factors. Since our value of R square is very close to 100% so our model is a best fit model. Adjusted R square which is calculated by increasing the sample size is 98.8611%. As the value of adjusted R square is less than the value of R square it means that there is no chance of further improvement. The standard error of estimation which is the sum of all the error terms in the regression model is 1.74568. The mean absolute error in which we simply add the value of error terms is 1.0024. The Durbin Watson test whose value is 1.1138 shows that it is not a good model as the value of D test should be greater than 1.4. <br />From the further ANOVA table we can see that the most significant variable is the consumption as its P value is 0 and the F ratio is 883.38 which is better among all variables. This shows that consumption is more contributing more to the GDP.<br />Overall from the multiple regression model, our model of complex multiplier is a best fit model. <br />