The objective of the study is to measure the impact of changing oil prices, and other macro economic variables like consumption, government expenditures and average exchange rates on Gross Domestic Product-GDP in the context of Pakistan’s economy. The study is secondary data based and the observation is 150 with five variables and 30 years of data. The data is taken from World Bank, Inflationdata.com, State Bank of Pakistan, Economic Survey of Pakistan, Federal Reserve Bank of America, Federal Bureau of Statistics Pakistan, Pakistan Development Review, Federal Board of Revenue, OPEC and Euro Journal. First the stationary of the variables were checked by augmented dickey fuller-unit root test and data. All variables were stationary except the average exchange rate which was non stationary. By ordinary least square method and Johansen Cointegration test both short rum and long run relationship is found. The major finding of the study are these that changing oil prices have negative relationship with GDP, while changing government expenditures and average exchange rates have positive relationship or impact on GDP. Since oil is the major import of Pakistan and every year we spend a lot of foreign exchange to purchase this basic necessity so that for government there are two policy recommendations. First that the government must either try to find out cheap and better substitutes for oil like CNG or LPG but must also try to involve foreign Multi-National Companies MNCs to do oil exploration specially in Attock region, Balochistan and Sindh to exploit these available resources to over come this deficiency. Secondly if government gives subsidy to encourage common man to raise his purchasing power, this puts additional pressure on the government expenditure and exchequer. Government has to finance this subsidy by borrowing from financial institutions may be local or foreign. From both points of view this puts additional burden on the next generation who has to return this borrowed money in the future period of time. This is against the principal of sustainable development. So for sustained development-developing today’s world without compromising the needs of the future generations’ government to gradually remove this subsidy to decrease allocative and productive inefficiency.
Economics is the managnment of scarce resources. We live in the world of scarcity and. Where from basic necessity to luxury even the human being is a scarce commodity. So in order to uncertainity use at the optimum level, we have to use the scarce resources as efficient as possible. Crude oil is a scarce commodity in the world. Its Elasticity of demand and supply both are less elastic.Because of demand and supply factors and also because of other intervening variables like cartel, hoarding, supply shocks etc., day by day prices are increasing and causing demand pull as well as cost push inflation.
In a country like Pakistan international...