Impact of Exports, Imports and Stock Exchange on Pakistan

Impact of Exports, Imports and Stock Exchange performance on GDP of Pakistan.

CHAPTER NO 1

INTRODUCTION

1.1 Background

The stock market plays an important role in the economy by mobilizing domestic resources and channeling them to productive investment. This implies that it must have a significant relationship with the economy. The relationship can be seen, in general, in two ways. The first relationship views the stock market as the leading indicator of the economic activity in the country, whereas the second focuses on the possible impact the stock market may have on aggregate demand, particularly through aggregate consumption and investment. In other words, whether changes in stock market cause fluctuations in macroeconomic variables, like Consumption Expenditures, Investment Spending, Gross Domestic Product (GDP), Index of Industrial Production (IIP), etc., or are caused by these variables is an interesting issue to be examined. The former case implies that stock market leads economic activity, whereas the latter suggests that it lags economic activity.

In addition to stock market another significant factors that are likely to effect on any economy around the world are imports and exports. As far as Pakistan is concerned its economy is highly reliant on the imports like industrial inputs, machinery, fuel and essential food stuffs. Pakistan major imports are petroleum, machinery, transport equipment, chemical, dyes, steel, iron, products, tea chemicals and many other products of goods and services which are not easily available in Pakistan. All the major transactions are in terms of million from the year of 2009 to 2011 having a percentage of GDP effect the economy of Pakistan.

The major exports of Pakistan are the agriculture products, industrial goods, hosiery products, garments, cloth, fabrics and many other items which are excess in Pakistan Shabbir, Mahmood, & Niazi, (1992). A country can avail numerous benefits from its exports. Firstly, trade expansion will bring about enhanced productivity through greater economies of scale in the export sector. Secondly, increased competition encountered in the international markets will undoubtedly provide greater incentives for technological advancement and better management, the effects of which will spill over into the non-export sectors, and thus raise the over-all productivity of the economy. Thirdly, increased export earnings will ease constraints on growth by enhancing the capacity to import essential goods, especially imports of intermediate and capital goods. In other words, export expansion promotes capital accumulation and, consequently, over-all economic growth. Fourthly, exports may have a positive impact on productivity owing to better allocation of resources through specialization based on comparative advantage. Lastly, an export-oriented approach in a labor-surplus economy permits rapid expansion of employment and real wages.

The importation and exportation of goods and services take a vigorous role in the progress of the economic development of Pakistan. It is observed that both factors import and exports help the economy to grow in the local and international market as well. Now due to energy crises the ratios of exports are very less as compared to imports. The rate of population of Pakistan is increasing day by day, which means a high increase of the demands and needs. The importation and exportation of goods and services play a dynamic role in the progress of the economy of Pakistan. It is observed that both factors import and exports help the economy to grow in the local and international market as well. Now due to energy crises the ratios of exports are very less as compared to imports. Therefore, the study will analyze the imports/exports and stock exchange growth with respect to Gross Domestic Product (GDP) of Pakistan.

1.2 Problem Statement

A country like Pakistan whose economy is dependent on taking loans from International Monetary Fund (IMF) has to increase it exports and decrease its imports in order to reduce its dependency on foreign aid and loans. Moreover, owing to economic and political un stability the stock exchange of Pakistan fluctuates all over the year. Both imports/exports and stock exchange is effecting the Gross Domestic Product (GDP) of Pakistan over the years. Therefore, the study wants to find the impact of Imports/Exports and Stock exchange growth on GDP of Pakistan.

1.3 Research question

What is the impact of imports, exports and stock exchange growth on GDP of Pakistan?

1.4 Research Objectives

• To analyze the impact of imports and exports on GDP of Pakistan.
• To investigate the impact of Stock exchange growth on GDP of Pakistan.

1.5 Rational of the study

The study is based on the time series data from year 2001 to 2015. Data has been collected from authentic sources such as World Bank, world development index and Pakistan stock exchange. On the contrary the stock exchange performance was gathered from Pakistan stock exchange. Imports, exports and stock exchange performance will be used as independent variables and GDP will be used as dependent variable. In order to find the impact of imports, exports and stock exchange performance on GDP of Pakistan the research will use and Regression analysis.

1.6 Significance of the Study

The study will be significant to the overall economic sector of Pakistan. Government can avail benefits from research findings in such a way that it can help the government while making their relevant policies for exportation and importation of goods. Furthermore, the government of Pakistan can see the fluctuations in the stock exchange growth over the years through which they can predict the stock exchange performance for years to come. All in all, the whole research will be beneficial to the relevant government sector if they want to increase the economic performance of our country.

CHAPTER NO 2

LITERATURE REVIEW

Following section contains viewpoints of various authors around the world and from Pakistan with respect to imports/exports and stock exchange growth on GDP of Pakistan. Literature review is an essential part of any research reason being it gives us the direct and indirect perspectives and establish a ground on which current research is taken place. It is inappropriate to conduct a new research before reviewing past research related to the topic on which we are going to conduct research.

2.1 Literature Review

The empirical literature on export, import and economic growth nexus are distinguished between two stands in the methodological point of view. The first stand uses the cross-country approach in order to test the economic theory about export and economic growth nexus by using rank correlation approach, OLS method, 2SLS and random effect estimation method. These studies are supported for a positive relationship between export and economic growth McNab and Moore, (1998).

The second stand uses the time series techniques. In the beginning of time series literature on export, import and growth nexus, the researchers have widely used causality methods to find out the results. Ahmad and Harnhirun, (1995) employed cointegration and error-correction modeling approach in case of five Asian countries, i.e. Indonesia, Malaysia, Philippines, Singapore and Thailand, annual data of 1966-1990 are employed. They found out bidirectional causal relationship between export and economic growth.

In case of China, Shan and Sun, (1998) investigated the ELG hypothesis by using the monthly data 1987-1996. They found bidirectional relationship between export and economic growth. Lie et al. (1997) examined the long-run relationship between trade openness (exports plus imports) by using the quarterly data from 1983 to 1995. They found bidirectional relationship between trade openness and economic growth and suggested higher degree of trade openness associated with the higher level of economic growth.

Narayan and Smyth, (2004) used Cointegration and error-correction method in order to check the link between real export, human capital accumulation and economic growth. They found long-run relationship only when real export is the dependent variable.

Mah, (2005) the ELG is tested using the ARDL model. The results are in favor of a long-run bidirectional relationship between real GDP and export growth. Conversely, Tang (2006) reviewed the ELG hypothesis in China with import as an additional variable in the model. He used two Cointegration methods, i.e. ARDL approach to Cointegration, and JJ cointegration methods. The results of two approaches indicate no cointegration between export, import and real GDP.

Herrerias and Orts, (2009) examined the relationship between the import, investment, output and productivity by using the data 1964-2004. They concluded in the long run both import and investment have promoted output and labor productivity but on the other hand neither investment causes import nor import causes investment.

Muhammad Adnan Hye, (2012) conducted a research in China the purpose of this paper is to investigate the export-led growth, growth-led export, import-led growth, growth-led import and foreign deficit sustainability hypothesis in the case of China, using annual time series data from 1978-2009. The results confirm the bidirectional long run relationship between the economic growth and exports, economic growth and imports, and exports and imports. These findings guided the authors to conclude that the exports-led growth, growth-led exports, imports-led growth and growth-led imports hypothesis is valid, and foreign deficit is sustainable for China. The long run elasticities are the elasticity of economic growth with respect to exports is 0.591, and elasticity of exports with respect to economic growth is 1.635. The elasticity of economic growth with respect to imports is 0.621, and elasticity of imports with respect to economic growth is 1.392. Furthermore, the elasticity of exports with respect to imports is 1.322, and imports elasticity with respect to exports is 0.975.

Using time-series and panel data from 1986 to 2004, Hsiao & Hsiao, (2006) examines the Granger causality relations between GDP, exports, and FDI among China, Korea, Taiwan, Hong Kong, Singapore, Malaysia, Philippines, and Thailand, the eight rapidly developing East and Southeast Asian economies. After reviewing the current literature and testing the properties of individual time-series data, we estimate the VAR of the three variables to find various Granger causal relations for each of the eight economies. We found each country has different causality relations and does not yield general rules. We then construct the panel data of the three variables for the eight economies as a group and then use the fixed effects and random effects approaches to estimate the panel data VAR equations for Granger causality tests. The panel data causality results reveal that FDI has unidirectional effects on GDP directly and also indirectly through exports, and there also exists bidirectional causality between exports and GDP for the group. Our results indicate that the panel data causality analysis has superior results over the time-series causality analysis.

Wacziarg (2001) analyzed the association between trade policy and economic growth by taking 57 countries over the period 1970-1989 by employing fully specified empirical model. He constructed openness index with the help of three trade policy variables, tariff barrier, non-tariff barriers and a dummy variable of liberalization. The results concluded that trade openness affects growth mainly by raising the ratio of domestic investment to GDP and by FDI.

Nath and Mamun (2006) investigated the causality between trade, investment and growth through Vector Auto regression (VAR) framework for the period 1971-2000 in Bangladesh. They presented that trade openness has promoted investment in Bangladesh. Although study suggested that growth causes trade but this study found little evidenced that trade affecting economic growth in Bangladesh.

By employing ARDL Approach to Co-integration on two Asian countries, India and Korea, Sarkar (2005) has found no meaningful relationship between the per capita real GDP and trade openness. Although India and Korea, opened trade and shares of trade in their GDPs also rose significantly. But none of the countries experienced a positive long-term relationship between opening up and economic growth.

Parikh and Stirbu (2004) used fixed effects, random effects, OLS and SURE models for panel of 42 developing countries i.e. Asia, Africa and Latin America over the period 1970-1999. They analyzed the relationship between liberalization, growth and trade balance or current account. Their results concluded that liberalization contributes significantly to economic growth, openness and investment rates.

The studies dealing with the causal relationship between stock market and macro variables focus on the relationship of stock prices with consumption expenditures, investment spending, and economic activity. In these studies, the economic activity is generally measured by Gross Domestic Product.

(A)  Stock Prices and Consumption Expenditures

The relationship between stock prices and consumption expenditures is based on the life cycle theory, developed by Ando and Modigliani (1963), which states that individuals base their consumption decision on their expected lifetime wealth. Part of their wealth may be held in the form of stocks linking stock price changes to changes in consumption expenditure. Thus, an increase in stock prices will increase the expected wealth, which, in turn, will increase the consumption expenditures, suggesting the direction of causality from stock prices to consumption expenditures. On the other hand, an increase in consumption expenditures may result in an increase in the corporate sector’s earnings, which will result in higher stock prices, implying causality from consumption expenditures to stock prices.

(B)  Stock Prices and Investment Spending

The relationship between stock prices and investment spending is based on the q theory of Tobin (1969), where q is the ratio of total market value of firms to the replacement cost of their existing capital stock at current prices. According to the theory, the firms would increase their capital stocks if q is greater than one, implying that the market value of firms is expected to rise by more than the cost of additional physical capital. Thus an increase in stock prices will result in an increase in the market value of firms, implying that firms would increase their capital stocks reflecting an increase in investment spending.

Another link, though less direct, between stock prices and investment spending is based on the neoclassical or cost-of-capital model. The model assumes that firms first determine the desired stock of real capital on the basis of prices of labor, capital, and expected sales and then determine the rate of investment depending on how fast they wish to reach the desired capital stock in the face of significant adjustment cost. Thus, the expected changes in sales and planned output are the major factors affecting investments. However, as noted by Bosworth (1975), if higher earnings are implied by higher expected output that increases stock prices, then the market valuation model implicitly accounts for the effect of expected output.

(C)  Stock Prices and Economic Activity

Finally, the relationship between stock prices and economic activity is investigated to examine the role of stock market, that is, whether it leads or lags economic activity. Moreover, the relationship of stock prices with the components of aggregate demand, consumption, and investment sometimes provide conflicting results, causing an ambiguity concerning the direction of causality between stock price changes and macro variables. As mentioned above, the economic activity is generally measured by GDP and/or IIP.

In addition to above in any study of the aggregate economy, one of the key elements is the aggregate amount of goods and services produced over a certain period of time.  The measure is called the nominal gross domestic product (the GDP).  This is the market value of the total quantity of final goods and services produced over the specified time period. The GDP is actually measured quarterly, but the number is then multiplied by four, so that the amount is in annual terms Mankiw, (2011).

The components of this measure of GDP are Consumption(C), Investment (I), Government Expenditure (G) and Net Exports (NX).  Net exports represents the money value of domestically produced goods that are sold outside the country (i.e., our exports) minus the purchase of goods and services produced in other countries (i.e., our imports).  Our exports are part of our domestic production, so obviously must be included.  Our imports are subtracted here, because they are goods and services produced by foreign countries, but they have already been included in our consumption, investment and government expenditures.  If imports increase, but all other parts of the GDP remain the same, the GDP will not change, because the imports are first included in the calculation of C + I + G, and then they are subtracted out.  Thus, Y = C + I + G + NX.

A large number of studies tested the Export Led Growth (ELG) hypothesis, using different econometric procedures, ranging from simple OLS to multivariate co-integration, but previous empirical studies have produced mixed and conflicting results on the nature and direction of the causal relationship between export growth and output growth.

Ghatak and Price (1997) test the ELG hypothesis for India for the period 1960-1992, using exports as regressors and measure of GDP that nets out exports, along with exports and imports as additional variables. Their Cointegration tests confirm the long-run nature of this relationship.  However, imports do not appear to be important for the case of India.

Asafu-Adjaye et al. (1999) consider three variables:  exports, real output and imports (for the period 1960-1994). They do not find any evidence of the existence of a causal relationship between these variables for the case of India and no support for the ELG hypothesis, which is not too surprising given India’s economic history and trade policies.

Ramos (2001) investigates the Granger-causality between exports, imports, and economic growth in Portugal over the period 1865-1998. His empirical results do not confirm a unidirectional causality between the variables considered.  There is a feedback effect between exports output growth and imports output growth.

Nidugala (2001) finds evidence in support of the ELG hypothesis for the case of India, particularly in the 1980s.  He finds that export growth had a significant impact on GDP growth.  Further, his study reveals that growth of manufactured exports had a significant positive relationship with GDP growth, while the growth of primary exports had no such influence.

Studies related to Pakistan

Mukhtar, & Rasheed, (2010) empirically examines the long run relationship between exports and imports for Pakistan using quarterly data for the period 1972-2006. The econometric framework used for analysis is the Johansen Maximum Likelihood Cointegration technique, which tests both the existence and the number of Cointegration vectors. Results show that there is a long run relationship between exports and imports and the country is not in violation of its international budget constraint. Furthermore, for testing the stability of long run equilibrium relationship and direction of causality, vector error correction model (VECM) technique has been applied. The findings confirm the stability of the long run equilibrium relationship between exports and imports. Under Granger causality tests, it has been found that there exists bidirectional causality between exports and imports.

Ullah and Asif (2009) investigated export-led-growth by time series econometric techniques (Unit root test, Co-integration and Granger causality through Vector Error Correction Model) over the period of 1970 to 2008 for Pakistan.  In this paper, the results reveal that export expansion leads to economic growth.  They also checked whether there is unidirectional or bidirectional causality between economic growth, real exports, real imports, real gross fixed capital formation and real per capita income.  The traditional Granger causality test suggests that there is unidirectional causality between economic growth, exports and imports.  On the other hand, Granger causality through vector error correction was checked with the help of F-value of the model and t-value of the error correction term, which partially reconciles the traditional Granger causality test.

After going through viewpoints of different authors it is evident that imports, exports relationship with economic development has been explained in Pakistan scenario and all over the world. However, the variables such as imports, exports and stock exchange performance are not being analyzed with respect to GDP specifically in Pakistan scenario which is the gap of the study.

2.2 Theoretical Framework

 Independent Variables                                                                Dependent Variables

Reference: Mukhtar, T., & Rasheed, S. (2010). Testing long run relationship between exports and imports: Evidence from Pakistan. Journal of Economic Cooperation and Development, 31(1), 41-58.

2.2.1 Operationalization of Variables

Imports and Exports are measured as merchandise imports and exports (US $) and GDP is measured as per capita growth in percentage form Whereas, stock exchange performance is measured by market capitalization of all domestic companies registered on Pakistan stock exchange formally known as Karachi stock exchange.

2.3 Hypothesis

H_1:Imports, Exports and Stock exchange performance has a significant impact on Gross domestic product of Pakistan.

H₂: Imports, Exports and Stock exchange performance have no significant impact on Gross domestic product of Pakistan.

CHAPTER NO 3

RESEARCH METHODOLOGY

3.1 Sample

The sample size for this research consists of time series data of 15 years starting from 2001 to 2015. Data has been collected from authentic sources such as World Bank, world development index and Pakistan stock exchange. The research is secondary in nature because market research that’s already compiled and organized for us are the examples of secondary information that includes reports and studies by government agencies, trade associations or other businesses within our industry.

3.2 Instrument and Measures

Regression analysis, Anova and Coefficients of regression were the instruments that were used to measure the impact of exports, imports and stock exchange performance on Gross domestic performance of Pakistan. Furthermore, to check the validity and appropriateness of data reliability analysis was done for dependent and independent variables.

3.3 Procedure

Statistical package for social sciences program SPSS version 20 was used to analyze the dependent and independent variables to see out the impact of exports, imports and stock exchange performance on GDP of Pakistan.

CHAPTER NO 4

RESULTS AND DISCUSSIONS

4.1 Regression Analysis

Table 4.1.1 Model Summary

Model Summary
Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	.830a	.689	.681	1.72691
a. Predictors: (Constant), SE_Per, Exports, Imports

Interpretation

The proportion of variation in dependent variable as a result of the independent variable is given by R square. Estimated 68% variation was found out in dependent variable as a result of the independent variable.

Following the adjustments made the data related to variation in dependent elements due to the independent ones is represented by R square.

Table 4.1.2

ANOVAa
Model		Sum of Squares	Df	Mean Square	F	Sig.
1	Regression	55.198	3	27.599	91.914	.000
	Residual	24.962	11	2.982
	Total	80.160	14
a. Dependent Variable: GDP
b. Predictors: (Constant), SE_Per, Exports, Imports

Interpretation

A perfect fit of the model is indicated by the ANOVA table. Furthermore, the p value of 0.000 indicates a perfect position regarding the independent and dependent variables.

Table 4.1.3 Coefficients 

Coefficientsa
Model		Unstandardized Coefficients		Standardized Coefficients	t	Sig.
		B	Std. Error	Beta
1	(Constant)	-.082	.220	-.876	.400
	Exports	.437	.073	.506	5.972	.018
	Imports	-.472	.103	-.390	-4.598	.027
	SE_Per	.094	.043	.762	2.213	.023
a. Dependent Variable: GDP

Interpretation

The coefficient stresses the influence of the independent variable on the dependent one.  The direction in which the dependent variable is led towards by the independent one is ascertained from the Beta value. The p value is significant at less than 0.05. In our scenario all the variables that are exports, imports and stock exchange performance are significantly impacted the dependent variable that is Gross Domestic Product (GDP). But, the noteworthy thing in the results is that exports and stock exchange performance is positively impacted the GDP whereas, imports are negatively impacting the GDP of Pakistan but it is statistically significant. Hence our Hypothesis (H1) is accepted whereas H2 is rejected.

CHAPTER NO 5

CONCLUSION AND RECOMMENDATIONS

5.1 Conclusion

After above empirical results it has been proved that all the independent variables that are exports, imports and stock exchange performance are significantly impacted the dependent variable that is Gross Domestic Product (GDP). Hence our Hypothesis (H1) is accepted whereas H2 is rejected.

In addition to our results previous studies conducted in Pakistan and outside Pakistan found out similar results such as Ullah and Asif, (2009) investigated export-led-growth by time series econometric techniques over the period of 1970 to 2008 for Pakistan. Their results reveal that export expansion leads to economic growth. However, outside Pakistan in case of our neighbor country India Asafu-Adjaye et al. (1999) consider three variables:  exports, real output and imports (for the period 1960-1994). They do not find any evidence of the existence of a causal relationship between these variables for the case of India.

5.2 Recommendations

Government should take strong measures to increase exports and decrease our imports. Interest free loan should be provided to the minor scale organizations to make rise in their productivity. Taxes should be cuts for the exporter country and taxes should be improved for importer companies to decrease the import.

If we want to make a rapid growth in Pakistan economy, then it is necessary to reduce its imports and increase in exports. But in Pakistan the situation is reversed. The relationship between exports and economic growth is positively correlated but the relationship of imports and economic growth is negatively interrelated. If net exports are of positive value, the nation has a positive balance of trade. If they are having negative value, the nation has a negative trade balance.

Lastly, our government should ensure political stability in our country as we see that whenever there is a political chaos in our country the stock market goes down and vice versa which is severely hurting Pakistan’s economy.