Contents

Introduction.................................................................................................................................................1
Research objective..................................................................................................................................2
Rearch Hypothesis...................................................................................................................................2
Literature review.........................................................................................................................................2
Macroeconomics.....................................................................................................................................2
Gross Domestic Product..........................................................................................................................2
Inflation...................................................................................................................................................3
Real interest rate.....................................................................................................................................3
Unemployment........................................................................................................................................3
Balance of trade......................................................................................................................................4
GDP and inflation.....................................................................................................................................4
GDP and Real Interest Rate.....................................................................................................................5
GDP and Unemployment.........................................................................................................................5
GDP and Balance of trade........................................................................................................................6
Chapter 3 Methodology..............................................................................................................................7
Data source..............................................................................................................................................7
Varibles....................................................................................................................................................8
Independent variable..........................................................................................................................8
Dependent variable.............................................................................................................................9
Description of variable.............................................................................................................................9
Gross domestic product (GDP)............................................................................................................9
Inflation...............................................................................................................................................9
Real interest rate.................................................................................................................................9
Unemployment....................................................................................................................................9
Balance of trade...................................................................................................................................9
Model specification.................................................................................................................................9
Results.........................................................................................................................................................9
Discussion..............................................................................................................................................10
 Abstract
Macroeconomic variable such as Inflation, Real interest rate, Unemployment and trade of
balance have a very crucial role in the economy of country. This study aim to find impact of
inflation, real rate, unemployment and trade of balance on the GDP combine in the south Asian
country over a period of 11 years for each country Pakistan, India, Sri lanka and Bangladesh
(total 44 observation) from 2010-2020. Secondary data was used. Data was collected from
website macrotrend.com and world bank. Regression analysis in the study was used to find
impact of macroeconomic factors on GDP. The study did not find effect of inflation and GDP.
Similarly, no effect of Real rate was found on GDP. The study further confirms that there is
effect of unemployment and Balance of Trade on GDP.
Introduction
GDP (Gross Domestic Product) is the value of goods and services sales after production within
certain period of time mainly one year. It provides overall economic health of a country and used
to estimates the growth rate and economy. Inflation term mean overall rise in prices of
commodities and services in a country. Interest rate is the amount charged on principal from
borrower by lender for the use of his asset. Whereas real rate is rate without the effect of
inflation. Unemployment is when a human searching for work for four weeks and he did not find
work in a country. Trade balance is when we subtract exports from imports of country in certain
period of time. In this study we will examine the impact of macro factor such as inflation rate,
real interest, unemployment and balance of trade taken as independent variable on the GDP
taken as dependent of Asian countries such as Pakistan, India, Sri lanka and Bangladesh from the
year 2010 to 2020. After examining the impact of macroeconomic variables discussed above on
GDP we will do cross comparison of impact of these variables on GDP within these countries
from the year 2010 to 2020.
Many researchers found different relationship between inflation and GDP. Lupu D.V, (2007)
found a positive relationship between the GDP and inflation rate in Romania in short run. This
means that with the increase in inflation GDP will be increases and vice versa. Drukker in 2005
establish that if the inflation is below 19.16% increase inflation do not have enough or positive
effect on GDP this endorse the findings of Lupu D.V. (2005) but when the inflation rate is above
19 precent, then rise in inflation will retard the GDP of a country this is opposite to the Lupu
D.V. (2005) findings. However, Kasim et al (2009) found that there is negative relation between
inflation and GDP. He analyzed the relationship between inflation and GDP in Malaysia between
the years 1970 and 2005 and found that there is a threshold of 3.89%. Above this threshold the
increase in inflation will retard the GDP. Now we are going to investigate the relationship of
inflation on GDP in Pakistan, India, Sri Lanka and Bangladesh.
Fry (2005) and Galbis (2005) found that positive impact of real rate and GDP. The world bank in
1993 also concluded that positive effect exists real rate and GDP without inflation.
The dependence of GDP on unemployment is well explained in the literature. Unemployment is
macro problem which effect the living standards of people. A researcher Levinson in 2008 told
in his study that when employment is not enough it can cause many problems for the society as
well. Ernst and berg in 2009 found in their study that for better GDP employment is must which
is unavoidable for raising standard of life. In 2011 Meidani and Zabihi conducted a study the
relationship of between lack of employment and gross domestic product in Iran. They take the
data from 1970 to 2006 and found that in long run and in short run there is positive relationship
between unemployment and GDP. Rigas, Theodosius, Rigas and Blanas (2011) conducted a
research to show that is the Okum law valid today or not. Foer this they took unemployment and
GDP and concluded Okum’s coefficient differ substantially. Malley and Molana in 2004
conducted a research and found inverse impact of lack of employment and GDP.
Net exports the export minus imports. The relation with GDP can be seen from trade balance.
Where imports have inverse relationship with GDP while exports have direct relationship with
GDP. Several studies have been conducted to show the impact of Balance of Trade balance on
GDP to show their relationship many of them concluded that is no significant impact of trade
balance on GDP but in long run there is negative relationship with GDP which can be seen from
decrese in trade in 2012 to 2015. So this will examine that what type of relationship they have.
Research objective
The objective of the research is to find that upto what extent GDP is dependent of the
macroeconomic variable (Inflation, Real Interest Rate, Unemployment, Balance of Trade) in the
south Asian countries combine. We will see the the effect of these variable on GDP individually.
Rearch Hypothesis
H1: no effect of Inflation on GDP exist
H2: effect of Inflation on GDP exist
H3: effect of real interest rate on GDP
H4: no effect of real interest rate on GDP
H5: no effect of unemployment on GDP
H6: effect of unemployment on GDP
H7: no effect of balance of trade on GDP
H8: effect of balance of trade on GDP

Literature review
Macroeconomics
Sukrino (2011) in his theory of macroeconomics told about all problems of economic actor i.e.
consumer and producer. While Sloman and Norris in 2005 explained that macroeconomic
problems are related to government expenditure, rate of inflation, balance of trade, recession and
unemployment. It is explained in broader spectrum by zakaria (2009) and sujianto & suryanto
(2018) that macroeconomics examines the government policies mainly subject to national
economic indicators.
Gross Domestic Product
GDP (gross domestic product) is value of all commodities including services which are brought
by the final user which are produce in a country over certain period of time mainly it is one (1)
year. GDP has two types nominal GDP is value of all things using market value or price. While
real GDP is at the constant price. Karlina (2007) explain that economic growth’s rate is one the
important factor to examine the performance at macro level which can be calculated from the
deviation of GDP. The term GDP is for all thing’s value whether in it is sold by the state
companies or those foreign companies which are working in that country. Sukirno (2005)
explained that from GDP the stongness of country in sales in specific time can be measured.
Inflation
According to Huda in 2009 that inflation is the increase in general longed prices in an economy.
Also according to Karlina (2007) and Zakaria (2009) and two others that inflation happens when
economy of the country become weaken as it can have been seen from the rise in in prices of
important commodities in the country. Gilarso in 2004 stated that inflation happens because of,
1) it can occur from production side i.e. due to wars, some national disaster, changes in
techniques of production etc. 2) It can also be occurring from demand side as demand for
specific goods or services increase or decrease. 3) it can also be occurring from the price
perspective as if the salaries of government employees rise and for also from the changes in
exchange rate which can greatly affect the prices of imported goods and services.4) it can also be
happen due to money supply as when supply of money increases the prices of the commodities
generally increases.
Inflation can be expreesed in terms of rate of inflation. Kurniawan (2014) divided inflation in
four different catagaries they are 1) when inflation is less than 10% it is mild inflation. 2) When
inflation is 10-30% it is moderate inflation. 3) when inflation is 31% to 100% it is high inflation
and 4) when inflation becomes more the 100% it is called hyperinflation.
Real interest rate
Real rate is interest rate from which the effect of inflation is subtracted. Once inflation is
removed it gives real and real yield. It can be calculated as: Real interest rate= nominal interest
rate-inflation.
We might not know but real interest rate is very important for our daily life because it can affect
our buying power. Consequently, the increasing or decreasing of interest rate have a great impact
on investment, so being an investor we have to notice the trends of real interest rate. Normally
when the interest rate are high it is done for controlling the inflation rate but at the same time it
has negative on economic growth of the country.
It is one important variable in many economic and financial model such as asset pricing model
base on consumption (Lucas, 1978; Breeden, 1979; Hansen, 1982 and singleton, 1983),
neoclassical growth model, model of central bank policy by Taylor and other models for
monetary transmission mechanism. Negative real interest rate may be a sign of economic
instability. High real interest rate is, on balance, for central bankers to consider a looser policy
stance.

Unemployment
The term unemployment refers to when the people in a country are employable and actively
searching for job. Another definition is when a person is looking for a job for more than four
weeks and did not find the job is called unemployment. It can be calculated from the total
number of employed divided by total number of people in workforce. Unemployment is one the
indicator used to measure economic condition of the country so the to give jobs to majority of
the country’s people should be first priority of the government. The word unemployment is often
misunderstood as it includes people who waiting for another job after quitting the first one. It
does not include those people who are not looking for job for more than four weeks due to some
reasons may be due to retirement disability or other issues. It also does not include those people
who are willing to work but not actively looking for the job. Unemployment has 4 different types
1) Demand deficient inflation which the major cause of unemployment. it often occurs during the
recession. It happens when demand for the company decreases so they have to decrease their
production. So they did not want many employees and have to reduce their workforce. 2)
fractional unemployment, this type of unemployment happens when the workers are in between
jobs. The example is that when an employ quit the job or fired from the job and looking for job
in an economy which is not in recession. 3) Structural unemployment is type in which skills of
person doesn’t match the demanded skills for the job. 4) Voluntary unemployment is when a
person leaves a job because it is not fulfilling financial needs of an employ.
Balance of trade
The trade balance is the difference between the imports and exports of country in trade with
other countries Kuriawan (2014). The balance of trade is commonly known as net exports in
international trade activities. Raharda and Manurung (2004); Mustika et al (2005); Fadhila in
2008 and Adriani in 2018 also stated that balance of trade is difference between value of imports
and exports. Rehmawati told that exports are clearing goods from customs areas and the goods
that are transported or they will be loaded to transport from the area. While the imports are the
goods that are deliver in the country by anyone whether it is from government side or from
individual or by private sector. Hapsari and Kurnia in 2018 stated in their research that exchange
rate and domestic income have a major impact on balance of trade.
GDP and inflation
Various studies and research have been conducted to find that what is the relationship between
GDP and inflation. The problem that whether there is positive effect of inflation on GDP or there
is negative effect of inflation on GDP rises in 1950s between the structuralist and monetarist.
The structuralist argued that there is positive effect of inflation on GDP whereas the monetarists
argued that there is negative effect of inflation on GDP. For now, Millik & Choudry (2001) and
Bruno & Easterly (1998) carried out the studies to investigate the effect of inflation on GDP and
concluded that there is negative effect of inflation on economic growth. These findings endorse
the findings of Dornbush (1993) in which he stated that extreme value of inflation affects the
economic growth of country. From extremes values he means extreme high level or extreme low
level of inflation.
Bruno and Easterly (1998) carried out their research of those cases where inflation rate is so
high. They take cases of areas having inflation 40% or above. In their studies they conclude that
there is very inverse effect of inflation on the country’s economic growth. They also concluded
that economy would get better immediately when inflation decreases in that country. Gregorio in
1993and Barro in 1995 also concluded in their studies that there is opposite relationship between
inflation and gross domestic product. The studies Symth (1992,1994,1995) also concluded that
when inflation in a country is increases by 1% there in 0.223% decrease in the economic growth
rate. This relationship is inverse and have negative impact of GDP but it is not significant at
lower rates of inflation. Whereas the inflation has significant inverse effect at high level of
inflation. Qayyum (2006) and Blejer (2000) also have the same conclusion that when there is
high rate of inflation economic growth of the country suffer and have many problems for the
government.
Keeping decrease in GDP rate aside, inflation creates uncertainty as well. That is why nowadays
it is one of the main tool in the economy of a country.
GDP and Real Interest Rate
Fry (1995) conducted a study to show the effect of GDP and real interest rate, similarly Galbis
(1995) carried out a study to see the effect of real interest rate and GDP. Both the researcher
concluded that there is direct or positive and significant effect of real interest rate on economic
growth or GDP. Similarly, in 1993 a study was carried out by world bank to show impact of
interest rate on GDP and found positive impact of interest rate without inflation. Because when
inflation was included the result was insignificant, this mean positive impact of real interest rate
on GDP growth. Gregorio and Guidotti in 1995 also carried out a research in which they
explained that v low value of real rate cause disturbance in the economic condition of a country
due to which economic rate decrease.
GDP and Unemployment
Meidani and zabiha (2011) carried out the research for Iran to know the impact of
unemployment on gross domestic product. And they reach on the conclusion that there is effect
of unemployment on GDP. Rigas, odosiou and Blanas in 2011 do a research on three countries
and explains that GDP will change with the change in unemployment
Kitov explained that unemployment is an economic problem related to social sector.
This is explaining by Caraiani (2006) that the employment is important because it influence the
life of public greatly. For the age 1970 -2004 Caraiani’s research implements regression
analyses. It is more explained by the research that the labour market of Korean is among the
largest regulated between succeed economies.
Many years’ government think to continue stability among the guidelines which safeguard
laborer against unemployed and those which restrict unemployment rate. Malley and Molana
(2001) do a research to show relationship between product rank and unemployment,
implementing the predicting procedure in research which permits for interrupt, trend and circular
changes only Germany is a country that reveal a pessimistic interconnection among the rank of
product and unemployment rate.
It is opinion of other studiers that from Okun’s law relationship among the
development and unemployment comes. In law of okun law that there is revers connection with
in product and jobless. This assert allows Sinclair (2004) studied relation between GDP and lack
of employment. The result shows relation between GDP and unemployment.
GDP and Balance of trade
The effect of GDP on trade balance can be seen from the balance of trade. Where Export have
direct and positive effect on GDP and economic growth while Import have negative and inverse
effect on the GDP and economic growth. Mustika et al (2015) carried out a research in which she
concluded that there is no significant effect of trade of balance on GDP and economic growth of
a country. Similar researches was carried y Fadhilah (2018) and Adriani (2008) and said that
there is no such impact of net export or balance of trade on the economic but in long run there is
negative effect if linked with GDP with the assumption that there is decline in the trade of
balance in the years 2012 to 2015.

Chapter 3 Methodology
Data source
To see the effect of macroeconomic variable on GDP secondary data was used. Times series data
was collected from macroeconomictrend.com, world bank for the years 2010-2010 for Pakistan,
India, Sri lanka, Bangladesh.
Variables
Independent variable
 Inflation
 Real interest rate
 Unemployment
 Balance of trade
Dependent variable
 Gross Domestic Model
Description of variable
Gross domestic product (GDP)
It is the value of all goods and services that is produce and sold with in a country in specific
period of time. The value of GDP is taken as log of value of GDP in million.
Inflation
The word inflation means the increase in prices of goods and services in a country. The inflation
is taken in term of percentage.
Real interest rate
Real interest is the rate adjusted for inflation in country. It can be calculated as; nominal interest
rate minus inflation. The value of real interest rate is taken in percentage.
Unemployment
Unemployment is term used for when a person is actively looking for job for four weeks and
cannot find the job. Here we take unemployment rate in percentage.
Balance of trade
Balance of trade is the difference between the value of imports of country and value of exports of
a country. We take the balance of trade in billions.
Model specification
Regression model was used to study the effect of macroeconomic variable of south Asian countries on
GDP. The model used was as given below

GDP = b1 + b2inflation + b3 real Interest rate + b4 unemployment +b5 balance of trade+ µ

Result and Discussion

Results
Table 1 Regression Analysis

Source | SS df MS Number of obs = 44

F(4, 39) = 23.82
Model | 9.17812998 4 2.2945325 Prob > F = 0.0000
Residual | 3.75732708 39 .09634172 R-squared = 0.7095
Adj R-squared = 0.6797
Root MSE = .31039
Total | 12.9354571 43 .300824583

In the table given above R-Square is .07095 which means that 70.95% the dependent variable
gross domestic product of country is explained by independent variable Inflation, real interest
rate, Unemployment and balance of trade. This is not 100% because there also other variable
which can explain GDP for example poverty, health, etc.
To fine overall significance of model F-statistic analyzed. The value of F is 23.82 which means
that model is significant.
Table 2 individual significance of coefficient

loggdp | Coef. Std. Err. t P>|t| [95% Conf. Interval]-

inflationrate | .0267114 .0209977 1.27 0.211 -.0157604 .0691833
realinterestrate | .025389 .0157628 1.61 0.115 -.0064943 .0572724
unemployementrate | .1038036 .0466087 2.23 0.032 .0095286 .1980787
balanceoftrade | -.012219 .001785 -6.85 0.000 -.0158295 -.0086084
_cons | 4.410779 .2942547 14.99 0.000 3.815593 5.005965

For inflation rate, p-value is .211 which is greater than the .05 thus it means inflation rate has no
significant effect on GDP, so here H2 accepted. For real interest rate, p-value is .115 which is
also greater than .05 which there is no significant effect of real interest rate on GDP so here H4 is
accepted. The p-value of unemployment is .032 which is less than .05, this means that there is
significance effect of unemployment on GDP and here H5 is accepted and H6 is rejected. Foe
Balance of trade we see that the p-value is 0 which mean there is significant effect of balance of
trade on GDP and here H7 is accepted and H8 is rejected.
Discussion
This study examines the effect of Inflation on GDP and it is found that there no significant effect
of inflation on GDP is south Asian countries which verifies the result of Symth (1992, 1994,
1995) in which he concluded that there is no relationship between inflation and real interest rate.
Our result however does not comply with the result of Barro (1995), Easterly (1998) and Mallik
& Choudhry (2001) in which they concluded that there is relationship between inflation and
GDP.
This study also saw the effect of real interest rate on GDP and found that there is no relationship
between Real interest rate and GDP which is not comply with results of world bank study carried
out in 1993 and Fry & Galbbis (1995).
The research also looks for the effect of Unemployment on GDP and found that there is
significant effect of Unemployment on GDP. It endorses the studies of Sinclair (2004) Revoreda-
Giha, Leat and Renwick (2012) and many other iwhich they concluded that there is effect of
unemployment on GDP. So the government of the south Asian countries need to focus on this
issue.
This study also focuses on to show the effect of balance of trade on GDP and concluded that
there is relation between the balance of trade and GDP. The result is contradictory to the
Mustika (2005) in which she explains there is no relationship between net export and GDP.
 Chapter: 5 Conclusion and Recommendation
The research shows the effect of macroeconomic factor such Inflation rate, real interest rate,
unemployment and trade of balance. This study examines the effect of Inflation on GDP and it is
found that there no significant effect of inflation on GDP is south Asian countries which verifies
the result of Symth (1992, 1994, 1995) in which he concluded that there is no relationship
between inflation and real interest rate. Our result however do not comply with the result of
Barro (1995), Easterly (1998) and Mallik & Choudry (2001) in which they concluded that there
is relationship between inflation and GDP. But inflation should be in controlled for prosperity of
country and public
This study also saw the effect of real interest rate on GDP and found that there is no relationship
between Real interest rate and GDP which is not comply with results of world bank study carried
out in 1993 and Fry & Galbbis (1995). But the real rate should in control
The research also looks for the effect of Unemployment on GDP and found that there is
significant effect of Unemployment on GDP. It endorses the studies of Sinclair (2004) Revoreda-
Giha, Leat and Renwick (2012) and many other iwhich they concluded that there is effect of
unemployment on GDP. So the government of the south Asian countries need to focus on this
issue.
This study also focuses on to show the effect of balance of trade on GDP and concluded that
there is relation between the balance of trade and GDP. The result is contradictory to the
Mustika (2005) in which she explains there is no relationship between net export and GDP. But
in countries like south Asia the countries should focus on export.
 Abstract
Macroeconomic variable such as Inflation, Real interest rate, Unemployment and trade of
balance have a very crucial role in the economy of country. This objective of the study is to
examine the effect of inflation, real interest rate, unemployment and trade of balance on the GDP
combine in the south Asian country over a period of 11 years for each country Pakistan, India,
Sri lanka and Bangladesh (total 44 observation) from 2010-2020. Secondary data was used. Data
was collected from website macrotrend.com and world bank. Regression analysis was used in the
study to show the effect of macroeconomic variable on GDP. The study concluded that there is
no relationship between inflation and GDP. Similarly, there is no effect of Real interest rate on
GDP. The study further confirms that there is effect of unemployment and Balance of Trade on
GDP.