Definitions ;

GDP

Economic growth is an increase in the capacity of an economy to produce goods and services,
compared from one period of time to another. It can be measured in nominal or real terms,
the latter of which is adjusted for inflation. Gross domestic product is the best way to
measure economic growth. It takes into account the country's entire economic output.

Foreign Direct Investment (FDI)

Foreign direct investment (FDI) is an investment in a business by depositor from other

country for which the overseas investor has control over the corporation acquired. The
Organization of Economic Cooperation and Development (OECD) defines control as owning
10% or more of the business. Commerce that make foreign direct investments are frequently
called Multinational Corporations (MNCs) or Multinational Enterprises (MNEs).

Investment (Gross Capital Formation GCF)

An investment is an asset or thing ensued with the goal of making income or gratitude. In an
economic view, an investment is the buying of goods that are not spent today but are used in
the future to make wealth.

Gross Capital formation is a term used to describe the net capital accretion during
an accounting period for a particular country. The term states to add-ons of capital goods,
such as gear, tools, transportation moneys, and electricity. Countries need capital goods to
swap the older ones that are used to yield goods and services. Gross capital formation
in national financial records is measured by the total value of the gross fixed capital
formation , changes in inventories and purchases less disposals of valuables for a unit, an
established sector or the whole economy.

Employment

Employment rates are distinct as a degree of the range to which available labor resources
(people available to work) are being used. They are estimated as the ratio of the employed to
the working age population. Employed people are those aged 15 or over who account that
they have worked in useful employment for at least one hour in the prior week or who had a
job but were absent from work during the orientation week. 

Human Capital
Human Capital is a measure of the skills, education, capacity and attributes of labour which
influence their productive capacity and earning potential.

Human capital is a measure of the skills, education, capacity and attributes of labors which
influence their productive capacity and earning potential. According to the OECD, human
capital is stated as:

“the knowledge, skills, competencies and other attributes embodied in individuals or groups
of individuals acquired during their life and used to produce goods, services or ideas in
market circumstances”.

Since human capital is created on the investment of employee skills and knowledge through
education, these investments in human capital can be easily calculated. HR managers can
calculate the total profits before and after any investments are made. Any return on
investment (ROI) of human capital can be calculated by dividing the company’s total profits
by its overall investments in human capital.

Trade Openness

Trade openness refers to the direction of a country’s economy in the context of

international trade. The mark of openness is restrained by the real size of listed imports and
exports of an economy. European Chamber describes the Trade Openness Index classifying
the economic performance of each country linked to international trade. By taking the sum of
import and export separated by the total GDP, the Index shows the percentage of trade
compare with GDP.

Relationship between GDP and FDI

Exogenous and Endogenous Growth Models; The neoclassical and endogenous growth
theories underline that FDI promotes economic growth in a capital scarce economy by
increasing volume as well as efficiency of physical investment (Romer 1986, Lucas 1988,
Grosman & Helpman 1991, Baro & Salai-I-Martin 1995). In other words, FDI supplies
long-term capital with new technologies, managerial know-how and marketing capabilities
which, in turn, augment economic growth by creating employments, increasing managerial
skills, diffusing technologies and fostering innovations (Asiedu 2002). FDI can also facilitate
‘agglomeration economies’ through industry clustering and networking, and lowering costs
for all producers in the market (Krugman 1991). Pugel (2007) reports that FDI increases
technological spillover benefits, widens the scope of international competition and
strengthens the supply side capabilities of a host country for producing and selling goods and
services, which lead to higher economic growth.

Using both the neoclassical (or exogenous) growth models and the new endogenous growth
models, scholars have examined the relationship between FDI and growth. The two growth
theories and the FDI-economic growth illustration reveal that FDI can contribute to economic
growth through both direct impact and indirect impact. In theory, FDI can boost the host
country’s economy via capital accumulation, the introduction of new goods and foreign
technology (according to the exogenous-growth theory view), and also by enhancing the
stock of knowledge in the host country by way of the transfer of skills according to the
endogenous growth theory (Elboiashi, 2011). The mechanisms by which FDI can cause
positive effects on economic growth can be divided into five major groups: the transfer of
new technologies and know-how, formation of the human resources, integration into the
global economy, increased competition in the host country, and firms development and
restructuring (OECD, 2002). Also new innovation and technology, new managerial skills,
skills development, the creation of job opportunities, and an improvement in the working
conditions of employees and the development of the industrial sector in the host country.
However, some of the mechanisms identified, namely the first four, also can act in a negative
way on economic growth. Additionally, FDI can cause difficulties in implementing economic
policies.

FDI by Multinational Corporations (MNCs) is assumed to bring research and development

(R&D), in addition to human capital accumulation, which creates positive or negative
externalities (growth spill-overs), which would affect the host country’s firms and the
economy (Barro and Sala-I-Martin, 1995). These growth factors, or FDI spill-overs, are
assumed to arise from tangible capital, human capital, or R&D development expenditures.

Balasubramanyam et al. (1997, 1999); Borensztein et al. (1998); De Mello (1997, 1999)
examine the role, or channel through which FDI affects economic growth, this literature
supports the view that FDI has a significant positive impact on growth. However, there are
other theoretical studies, such as Body and Smith (1992), Aitken and Harrison (1999),
Carkovic and Levine (2002), Alfaro (2003), and Alfaro et al. (2004), which have shown
conflicting results and sheds some light on the contradictory relationship between FDI and
economic growth. Liu (2008) explained that the level and rate of effects of spill-overs or
externalities can go in opposite directions.
It was also observed that FDI affects economic growth through two broad channels; (i) FDI
can encourage the adoption of new technologies in the production process through
technological spillovers; and (ii) FDI may stimulate knowledge transfer, both in terms of
labor training and skill acquisition, and additionally by introducing alternative management
practices. The study also found that the overall impact of FDI on economic growth is
dependent on the socio-economic conditions of the host country.

Relationship between GDP and GCF

According to Adhikary (2011) capital accumulation aids to increase investment, investment

makes employment by expanding production bases, extra employment produces higher
savings which provide sureness in undertaking larger investment, and this chain effect finally
influences economic returns positively. Levine and Renalt (1992) exposed that capital
formation effects the rate of economic growth in country. Similarly, Kendrick (1993) pointed
out that the formation of investment and capital alone does not lead to economic prosperity,
rather the efficiency in allocating capital from less productive to more productive sectors
influences economic growth. Blomstorm et al. (1996) also note a one-way causal relationship
between investment and economic growth. They achieve that fluctuations in capital formation
rates do not have any significant influence on future growth rates.

There are records of theoretical issues and empirical studies that reputable the relationship
between investment and economic growth. The Neo-classical fusion, established that for an
economic agent, saving plus borrowing most equal asset attainment. It follows that in a
closed economy national saving and domestic investment will always be equal. Thus, a high
rate of capital central to a high rate of productivity which takes about growth. In
meanness of the contending theoretical intentions, the role of capital formation and
economic growth cannot be ignored. Thus, higher size growth requires policies that
favors investment and saving. A extensive increase in economic output can also be attain
in the short run by more efficient and full use of existing resources, economic growth
in the long run needs an increase in productive capacity overtime. Theoretical arguments
about the link between investment and economic growth, suggest that economic growth is
capital formation constrained that is, non-availability of capital formation (saving and
investment) restraints economic growth. For the attainment of wanted level of economic
growth, development economists have stressed the need for sizeable capital formation,
(Ogun and Obembe 2006).
Neo-classical growth model postulates that developing economies that have a lower initial
level of capital stock tend to have higher marginal rate of returns (productivity) and growth
rates if adequate capital stock is injected. In other words, in a capital shortage economy, the
marginal productivity of investment is increased in the short-run when additional capital is
injected in the form of long-term investment like FDI, and this increased productivity
influences economic growth in the long-run. The new endogenous growth theories further
postulate that the increased efficiency of investment brought by FDI provides a comparative
advantage to the capital scarce economies to catch-up or to converge with the richer
economies in the long-run (Romer 1986). Finally, FDI channels much needed capital for
investment and provides support to capital formation; trade openness facilitates the flows of
international capital and redirects factor endowments to more productive sectors; a high level
of capital formation ensures needed finance for the industries growth and development; and
all of them jointly promote economic growth at large. From this perspective, the linkage
between FDI, trade openness, and economic growth ought to be positive. Not only this, this
nexus should be co-integrated in the long-run.

Relationship between GDP and Human Capital:

Human capital has been an ingenious and significant factor of economic growth and
development. This study has finished an attempt to study the impact of human capital on the
real GDP or growth of Pakistan. The Neoclassical Growth Theory proposes that the human
capital is the input factor of production but they study it like physical capital which has
diminishing yields. Except there is no technological innovation, economic growth cannot be
attained. The Endogenous Growth Theory holds that the human capital is the distinct strong
factor of production and education, however, knowledge-based economy has its spillover and
multiplier outcome, which leads to economic development. The results of these study show
that the involvement of human capital in economic growth is greater than the physical capital
(Romer, 1996, Chen and Hiau, 2005, Fleisher et al, 2010, and Pelinescu, 2014). Mankiw et al.
(1992) argue that an Augmented Solow model that includes accretion of human as well as
physical capital provides an outstanding narrative of the cross-country data. During an in-
depth analysis they also witness a significant role of human capital that can also be measured
by the secondary school enrolment rates.

Relationship between GDP and Employment :

The initial point of relationship between economic growth and employment is the collective
production function developed originally by Robert Solow (Blanchard, 2000). The model
institutes the relation between aggregate output and the inputs in production. This model
assumes that aggregate output (Y) is produced using two inputs, capital (K) and labor (L). In
other words, how much output formed for a given amounts of capital and labor. The
production function can be viewed in two sides, supply and demand. On the Supply, output
produced depends on how much labor used. On demand side, it says that how much labor
needed for a given output. The spirit of relationship between economic growth and
employment is based the so-called Okun’s law. Okun's law stated that on supply side for
every one percentage point of the actual unemployment rate exceeds the natural rate of
unemployment; real gross domestic product is reduced by 2% to 3%. Dollar and Kraay
(2002) found that increase and drop of average incomes of the poorest fifth are the same as
average income. They also examine that raise average income with little effect on circulation
of income affected by macroeconomic policies. This result supports basic policy package of
private property right, fiscal discipline, macroeconomic stability, trade openness. On demand
side, some empirical studies attempt to forecast employment elasticity (relationship between
employment and economic growth) for diversity of nations. Seyfried (2005) instituted that
using pooled regression, the elasticity of employment with respect to real GDP in US was
projected to be 0.47 while in state-specific regression ranging from 0.31 to 0.61. Effects of
economic growth may take a few periods of time on employment growth. It means that
economic growth has an direct impact and continues for a few quarters to employment.

Relationship between GDP and Trade Openness

the mark of trade openness is possible to stimulus the flows of international capital in terms
of risk-return relationship. In fact, no one is interested in obliging long-term investment in a
country that levies tariff and non-tariff barriers on investment and makes problem in
deporting capitals as well as profits. The level of trade openness also shows the degree of
comparative advantage of a country in task investment. This view is based upon the
“Transaction cost theory” (Coase 1937, Williamson 1975) that assumes a low transaction cost
environment generates financial spurs (higher return on investment) for both the domestic
and foreign players in supplying large permanent investment like FDI. Moreover, the
Endogenous Growth Theories stress that a more open trade policy framework promotes
allocative efficiency of investment by reorienting factors of production to sectors that have
comparative advantages in trade; thereby Augmenting economic growth (Solow 1956,
Balasubramanyam et al. 1996). Edwards (1992) also points out that a country with a higher
degree of economic openness can grow faster by absorbing new technologies at a faster rate
than a country with a lower degree of openness.

The relationship between openness and economic growth has long been a topic of much
interest and argument in international trade literature. With affection to a theoretical
relationship between openness and growth most of the studies deliver backing for the
intention that openness effects growth positively (Gries, and Redlin, 2012). Researchers have
exposed a positive relationship between openness and economic growth (Romer, 1993),
Grossman and Helpman, 1991 and Barro and Sala-i-Martin, 1995). In his study Kaltani,
Loayza (2005) lectured out that openness helps the efficient allocation of resources by
comparative advantage, allows the diffusion of knowledge and technological progress, and
inspires competition in domestic and international markets. On the contrary Rodrik and
Rodríguez (2001) argue that the effect of openness on growth is unsure. In developing
countries only, the long-run openness-led growth hypothesis grips, while growth seems to
slow down openness in the long run (T. Gries and Redlin, 2012). Rodrik argument was
maintained by Levine & Renelt (1992) results that hat a high degree of trade openness may
upsurge inflation and lower the real exchange rates which may generate negative impact on
domestic investment. Thus, a opened trade regime may lead to a larger exchange rate
depreciation which may reduce aggregate supply of inputs by growing prices of the imported
inputs used in the production. As a result, the size of domestic output lead to be reduced
(Adhikary, 2011).