A STUDY OF THE EFFECT OF INFLATION ON GDP PER CAPITA IN PAKISTAN

Abstract

This research examines the complex link between inflation and GDP per capita in Pakistan from 1964 to 2022. The study employs a robust methodology to analyze the historical trends, short-term implications, and long-term consequences of inflation on GDP per capita, utilizing secondary time series data sourced from the World Bank data repository. In alignment with the tenets of the Phillips curve hypothesis, our findings indicate a positive impact of inflation on GDP per capita. However, the influences of exchange rates and government spending are intricate, and over the long term, their impact on GDP per capita appears to be minimal. The relationship between inflation and GDP per capita is characterized by a negative correlation, with the exchange rate demonstrating a noteworthy negative effect, as revealed by the Error Correction Model (ECM) in the short-term analysis. The results of the diagnostic tests confirm that the model is resilient. To keep the economy stable, policymakers should think about targeted interventions for the exchange rate and government spending after carefully weighing the short-term costs and benefits of inflation and real GDP growth. More variables impacting these dynamics across different locations might be the subject of future investigation.