Chapter1 Introduction

GDP; Gross domestic product (GDP) refers to the market value of all officially recognized final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living;[2][3] GDP per capita is not a measure of personal income. See Standard of living and GDP. Under economic theory, GDP per capita exactly equals the gross domestic income (GDI) per capita. The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year. Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total. The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports. As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.

IMPORTS The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Thus an import is any good (e.g. a commodity) or service brought in from one country to another country in a legitimate fashion, typically for use in trade. It is a good that is brought in from another country for sale.[2] Import goods or services are provided to domestic consumers by foreign producers. An import in the receiving country is an export to the sending country.

Balance of trade Balance of trade represents a difference in value for import and export for a country. A country has demand for an import when domestic quantity demanded exceeds domestic quantity supplied, or when the price of the good (or service) on the world market is less than the price on the domestic market. The balance of trade, usually denoted , is the difference between the value of the goods (and services) a country exports and the value of the goods the country imports: , or equivalently A trade deficit occurs when imports are large relative to exports. Imports are impacted principally by a country's income and its productive resources. For example, the US imports oil from Canada even though the US has oil and Canada uses oil. However, consumers in the US are willing to pay more for the marginal barrel of oil than Canadian consumers are, because there is more oil demanded in the US than there is oil produced. Objectives of the Study The main objective of this paper is to analyze the relationship between imports and real GDP growth. The study on imports rests on the basis of the fact that it contributes to the national economy and on the view that it is essential to study the development of pakistani imports The specific objectives are 1. To assess empirically the effect of GDP growth on Imports. 2. To identify the effects of imported intermediate and capital goods on economic. Organization of Study

In this project we will study the impact of impots on GDP of Pakistan from the years 1997 to 20o7. First we will present a literature review about the affect of imports on the GDP Then we will present a model upon which I will calculate the relationship between the imports andand the GDP. Then we will collect data for the imports and GDP of Pakistan from 1992 to 2011. Then we will use regression analysis to find the relationship between the imports and the GDP and interpret those results.

Chapter 2: Literature Review Ann Harrison (1996) used a general production function to analyze the relationship
between openness and GDP growth. He specified GDP as a function of capital stock, years of primary and secondary education, population, labour force, arable land and technological changes. Ahmed, Yusuf and Anoruo, Emmanuel (2000) investigated long run relationship between GDP growth and imprts for South East Asian countries, The Philippines, Indonesia, Malaysia, Singapore and Thailand, for the period 1960 to 1997. They used export plus import growth rate as proxy of openness. The Johansan estimation results rejected the hypothesis that there is no cointegration between economic (GDP) growth and openness while the hypothesis that error correction term is significant could not be rejected. This Vector Error Correction estimates showed bi-direction causality. Iscan, Talan (1998) analyzed the effect of trade openness on total factor productivity growth for Mexican manufacturing industries for the period 1970 to 1990. To identify the differential productivity effects of openness to foreign trade and trade liberalization Edwards (1998) used comparative data for 93 countries to analyze the robustness of the relationship between openness and total factor productivity ( TFP ) growth.

Chapter 3: Model, Methodology and Data Source

3.1 Model I will use the equation y = a + bx to model the relationship between the imports and the GDP. The y variable is the GDP (the dependent variable) and the x variable is the imports rate (the independent variable). 3.2 Methodology I will use regression analysis using the software Eviews to find the relationship between the imports and the GDP. 3.3 Data Source:The source of data I used is the economic survey of Pakistan for the imports and GDP figures from 1997 to 2007.

Chapter 4: Estimation and results

Following is the data for the GDP and imports of Pakistan from the years 1997 to 2007. Dependent y(GDP) 19.1 16.3 16.1 14.1 15.1 14.4 14.8 15.9 18.6 22.5 21.3 Independent x(Imports) -11241 -10301 -9613 -9602 -10202 -9434 -11333 -13604 -18753 -24624 -26652

Years 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Using Eviews, the following information was calculated: Dependent Variable: Y Method: Least Squares Date: 05/21/12 Time: 15:33 Sample: 1997 2007 Included observations: 11 Variable Coefficien t C 11.45739 X -0.000400 R-squared 0.779571 Adjusted R-squared 0.755079 S.E. of regression 1.414646 Sum squared resid 18.01101 Log likelihood -18.32031 Durbin-Watson stat 0.978328 C = A = 11.46

Std. Error

t-Statistic

Prob. 0.0000 0.0003 17.10909 2.858480 3.694602 3.766946 31.82956 0.000317

1.088785 10.52309 7.09E-05 -5.641769 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

coefficient of X = B = -0.0004 Y is the GDP and X is the inflation rate. C is the Y-axis intercept. The equation thus formed is: Y = 11.46 - 0.0004X If X increases by 1% then Y will increase by -0.0004%, meaning decrease of 0.0004% Since value of C is greater than 2, it is statistically significant. CHAPTER 5 Conclusions and Policy Implications Conclusions This paper has examined the relationship between imports and real GDP growth in Pakistan. The model specification used in this study relates import with real GDP, relative prices, foreign exchange receipts and international reserves during the period 1997-2007. The models are estimated using the co integration and vector error correction methodology. Quantitative evidence indicates that short run coefficient of real GDP is higher than the long run coefficient, reflecting that import substitution is lower in the short run. The possible reason for this result is that as income increases most people spend their income on domestic goods. The regression result also indicates that imports do not depend on real income in the long run, but on international reserve. In the short run, import depends positively on real GDP and foreign receipts, and negatively on relative price. This study has also examined the effect of imported intermediate and capital goods on real GDP growth. The regression result indicates that imported intermediate goods positively and significantly influences real GDP growth in the long run. In the short run, the change in imported intermediate goods before one year has a positive and significant effect on the change in 80 current real GDP growth. The impact of drought measured by dummy variable has a negative and significant effect on real GDP growth in the short run. Policy Implications The results of this study have the following policy implications. The short run high-income elasticity of import is indicating that economic growth is likely to worsen Pakistans balance of payments difficulties, under ceteris paribus assumptions. This is because increased growth will likely result in a substantial increase in imports. This shows that a certain proportion of an increase in income will be spent on purchases of imports and given the low level of consumption and investment goods produced domestically, the higher demand may lead to higher imports. In the short run, the price elasticity of import is less than one (inelastic) suggests that policies to solve balance of payment problem such as devaluation of the local currency may not work when there is low level of industrialization and import substitutes. The price inelasticity of import demand can be explained by the fact that the majority of Pakistanss imports are essential goods such as capital and intermediate goods, for which there exists few domestic substitutes. Another important policy implication from the result is that reduction of foreign exchange receipts may reduce import demand keeping the other factor constant. From the results, it can, therefore, be inferred that the availability of sufficient amount of importation of intermediate goods is important for economic growth.

References
Ahmed, Yusuf and Anoruo, Emmanuel (1999-2000), Openness and Economic Growth: Evidence from Selected ASEANCountries. The Indian Economic Journal 47, No. 3, page 110-117. Dicky, D.A. and Fuller, W.A. (1979). Distribution of the estimatorts for autoregressive time series with a unit root. Journal of American Statistical Association 74, 427-433 Dicky, D.A. and Fuller, W.A. (1979). Liklihood Ratio Statistics for autoregressive time series with a unit root. Econometrica 49, 1057-1072 Edwards, S., (1992). Trade orientation, distortions and growth in developing countries. Journal of Development Economics 39, 31 57. Edwards, S., (1998). Openness, productivity and growth: what do we really know? Economic Journal 108, pp 383 398. Engle, R.F and Granger C.W.J. (1987). Co-integration and error correction: epresentation, estimation and testing. Econometrica 55, 251-276 Harrison, A., (1996). Openness and growth: a time series, cross-country analysis for developing countries. Journal of Development Economics 48, 419 447. , Iqbal J., Tahir M., Baig M. A. (2001), Agregate Import Demand Functions for Pakistan: A co-integration approach, Proceedings 8th Statistics Seminar, University of Karachi pp.217-224 Iqbal J., Baig M. A. And Tahir M., (2002), Exchang Rate Volatility, Imports and Real Output Determination for Pakistan, Pakistan Business Review Vol.4, No.1 pp.31-39