Ahssan 017 Thesis

Macro-Economics Determinants of Construction
Cost in Pakistan.
By
Muhammad Ahssan
CIIT/SP21-RPM-017/ISB
MS Thesis
In
Project Management
COMSATS UniversityIslamabad
Islamabad Campus -Pakistan
Spring, 2023
ii
COMSATS University Islamabad

Cost in Pakistan.
A Thesis presented to
In partiall fullfilment
Of the requirement of the degree of
MS(Management Sciences)
By
Muhammad Ahssan
Spring, 2023
iii
Cost in Pakistan.
A Post Graduate thesis submitted to the department of Management Sciences

as partial fulfillment of the requirement for the award of Degree of MS/MBA
in Finance/Management Sciences/Project Management/Energy Management.
Name Registration Number
Muhammad Ahssan CIIT/SP21-RPM-017/ISB
Supervisor
Dr. Naveed Raza

Assistant Professor
Department of Management Sciences
Final Approval
iv
This thesis titled

Cost in Pakistan.
By
Muhammad Ahssan
Has been approved
For the COMSATS University Islamabad
External Examiner: ________________________________________________
Supervisor: ______________________________________________________
Dr. Naveed Raza
Assistant Professor
Department of Management Sciences, COMSATS University Islamabad
HoD: ___________________________________________________________
v
Author’s Declaration
I, Muhammad Ahssan, bearing Registration No. CIIT/ SP21-RPM-017/ISB, hereby

declare that my thesis titled “The dissertation title is your first opportunity to let the
reader know what your dissertation is about. Only few words to highlight the
purpose” is my own work with no significant contribution from any other person.
Small contribution/help wherever taken has been duly acknowledged. I also declare
that I have produced the work presented in this thesis within the scheduled period of
study. I understand the zero-tolerance policy of HEC and COMSATS University
Islamabad towards plagiarism and it is in acceptable range. If the violation of HEC
rules on research has occurred in this thesis, I shall be liable to punishable action
under the plagiarism rules of the HEC.
Date: _____________________
_______________________
Muhammad Ahssan
vi
Plagiarism Undertaking
I solemnly declare that research work presented in the thesis titled “The dissertation
title is your first opportunity to let the reader know what your dissertation is about.
Only few words to highlight the purpose” is solely my research work with no
significant contribution from any other person. Small contribution or help wherever
taken has been duly acknowledge and that complete thesis has been written by me.
I understand the zero-tolerance policy of HEC and COMSATS University Islamabad

towards plagiarism. Therefore, I as an author of the above titled thesis declare that no
portion of my thesis has been plagiarized and any material used as reference is
properly referred / cited.
I undertake if I am found guilty of any formal plagiarism in the above titled thesis
even after award of MS Degree, the University reserves the right to withdraw/revoke
my MS degree and that HEC and the university has the right to publish my name on
the HEC/University website on which names of students are placed who submitted
plagiarized thesis.
Date: _____________________ _____________________
Muhammad Ahssan
vii
Certificate
It is certified that Muhammad Ahssan, Registration No. CIIT/ SP21-RPM-017/ISB,

has carried out all the work related to this thesis under my supervision at the
Department of Management Sciences, COMSATS University Islamabad and the work
fulfils the requirement for award of MS degree.
Date: ___________________
Supervisor:
______________________
Dr. Naveed Raza
Assistant Professor
In-charge/Head of Department:
______________________
COMSATS University, Islamabad
viii
DEDICATION
I want to dedicate this achievement my parents, teachers and friends who

always encourage and support me in every crucial time.
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ACKNOWLEDGEMENTS
First of all, I am thankful to Almighty Allah who blessed me with knowledge,

strength, courage and patience during my studies. I am also very grateful to
my supervisor Dr. Naveed Raza who monitored the progress of this thesis
very closely and provided insights at every stage and corrected the direction
where ever necessary.
I would like to pay huge debt of gratitude to my dearest family members: my
father, my mother and my siblings who always supported me during thick and
thin and encouraged me to stay motivated throughout my degree program in
order to reach my destination.
I would also like to express my thanks to everyone that helped me to achieve
my goals especially to Mr. Aqib Nawaz who helped me a lot during this
research.
Muhammad Ahssan
x
ABSTRACT
Macro-Economics determinants of construction

cost in Pakistan.
The cost of building materials in Pakistan has been linked to the government's
unstable economic policies. However, this study examined the impact of a few
macroeconomic variables, including inflation, exchange rates, and interest rates, on
the costs of some building materials. The State Bank of Pakistan (SBP) statistical
bulletin was used to gather data on interest rates, exchange rates, and inflation.
Meanwhile, the Pakistan Institute of Quantity Surveyors published journals from 2016
to 2022 with prices of materials, and building material merchants conducted market
research. According to the report, the primary factors contributing to high
construction costs are high finance prices and irregular volatility brought on by the
tensions in the oil price regime. Pakistan's construction industry has performed well
and has significantly contributed to GDP growth. Additionally, regression analysis is
used to estimate future construction costs based on the specific macro variability
indices using the variables studied (as described above). The data were analyzed using
a multiple regression analysis approach short run and ARDL used for long run
relationship between them. It was determined that there was a strong correlation
between the pricing of building materials and the chosen economic indices. According
to the report, stable economic policies are required to keep interest rates, inflation, and
exchange rates from rising or falling, and banks should look into ways to reduce loan
interest rates to levels that are affordable.
Keywords: Macro-economic indicators; exchange rate; inflation rate; interest rate and
materials.
xi
TABLE OF CONTENTS
1. Introduction ……………………………………………………... 01
1.1. Overview of the Chapter ……………………..…………. 02
1.2. Introduction of the Study ……………………..………… 02
1.3. Background of the Problem ………………..…………… 02
1.4. Problem Statement ………………………..…………….. 04
1.5. Purpose of the Study ……………...……………..……… 04
1.6. Research Aims, Methods, Objectives and Research

Questions………………………………………………… 05
1.6.1. Research Aims …………………….…………. 05
1.6.2. Research Objectives ……………………….…. 05
1.6.3. Research Questions ………………………….. 05
1.7. Significance of the Study ………………………..……… 05
2. Literature Review …………………………………………….. 22
2.1. Introduction ……………………………………………. 07
2.2. Construction industry ….………………………………. 08
2.3. Construction an Economic Activity…………………... 29
2.4. Macro-Economic Variables……..……………………... 45
2.5. Inflation…………………………………………............ 12
2.6. Exchange Rate………. …………………………..……... 14
2.7. Interest Rate……………………………………………… 16
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2.8. Industrial Production……………………………………..
2.9. Theoretical Framework………………………………….. 16
2.10. Conceptual Model ……………………………..………... 17
2.11. Hypotheses Development …………………………….… 17
3. Research Methodology …………………………………………. 20
3.1. Introduction ……………………………………………. 21
3.2. Research Methodology ………………………………… 21
3.2.1. Research Approach …………………………. 21
3.2.2. Methodological Choices ……………………. 22
3.2.3. Time Horizon …………………..…………... 22
3.2.4. The Purpose of the Research ……………..… 22
3.2.5. Data Collection and Data Analysis …………. 22
3.3. Industry Setting ………………………………………... 23
3.4. Data Collection …………………………...……………... 23
3.5. Data Analysis ……………………….…………………. 24
3.5.1. Regression Analysis……………….. ……..…. 24
3.5.2 ARDL ……………………………. ……..…. 24
4 Data Analysis ……………………………………………………. 25
4.1. Introduction……..………………………………………. 26
4.2. Nature of the data ... ……………………..……………… 28
4.3. Descriptive Statistics ……………………………..…..…. 29
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4.3.1 Construction Component…………………………. ……. 29
4.3.2 Industrial Production ………….………………. 30
4.3.3 Interest Rate ………………………………………. 31
4.3.4 Inflation……………………………………………. 32
4.4. Summary………….……………………………………… 33
5. Discussion ………………………………………………………... 43
5.1. Concluding remarks………...…………………………. 44
5.1.1 Correlation…….………………..……………………... 45
5.1.2 OLS……………………………………………………. 45
5.1.3 ARDL…………………………………………………… 45
5.2 Recommendation……………………………………….. 46
References …………………………………………………………... 48
LIST OF FIGURES
xiv
Figure 1.....................................................................................................................................28
Figure 2.....................................................................................................................................28
Figure 3.....................................................................................................................................29
Figure 4.....................................................................................................................................29
Figure 5.....................................................................................................................................35
Figure 6.....................................................................................................................................37
Figure 7.....................................................................................................................................38
Figure 8.....................................................................................................................................40
Figure 9.....................................................................................................................................41
LIST OF TABLES
Table 1ANALYSIS OF DESCRIPTIVE STATISTICS.......................................................30

Table 2CORRELATION ANALYSIS:..................................................................................35
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Table 3OLS RESULT ANALYSIS..........................................................................................37
Table 4ARDL RESULT ANALYSIS:....................................................................................39
LIST OF ABBREVIATIONS
xvi
UNCH United Nation Centre for Human Settlement
CPI Consumer Price Index
GDP Gross Domestic Product
REITs Real Estate Investment Trusts
SBP State Bank of Pakistan
NBS National Bureau of Statistics
APAC All Pakistan Cement Manufacturers Association
CI Construction Industry
IR Interest Rate
IP Industrial Production
INF Inflation Rate
EXR Exchange Rate
CC Construction Components
PCA Principal Component Analysis
OLS Ordinary Least Squares
ARDL Autoregressive Distributed Lag
SD Standard Deviation
SE Standard Error
xvii
CHAPTER 1
INTRODUCTION
1
1.1 Overview of the Chapter
The basic introduction to the research in this chapter (section 1.2) serves as the basis
for this proposal. It contains the problem description (section 1.4), the research
objective (section 1.5) and the problem background (section 1.3). Section 1.6 provides
a summary of the objectives, goals, methods and questions of the study. Section 1.7
explains the significance of the study, while Section 1.8 presents the theoretical
underpinnings of the study. Section 1.9 provides an overview of the organization and
structure of the work. Section 1.10 defines the terms and section 1.11 summarizes this
chapter.
1.2 Introduction of the Study

1.2.1 Background of the Problem
The construction sector contributes significantly to a nation's economic growth by

creating jobs and revenue for its citizens Ofori (2015). According to (Hillebrandt,
1984, 2000) the economy is impacted by developments in the building sector on all
levels and in almost every facet of life.
The construction sector, which is in charge of providing capital projects, consists of

building projects, heavy engineering projects, and civil engineering projects, which
take care of building and maintaining civil projects like highways, railroads, and
harbors. Both the commercial and governmental sectors of the economy rely heavily
on these two interconnected subsectors, which together make up the construction
industry. The construction sector is an important part of any economy because of its size and
its ability to contribute to economic growth. The fact that it builds the infrastructure
required for the production and delivery of all other commodities and services is one
of its most significant economic characteristics.
For a number of years, Lopes et al. (2002)have studied at the macroeconomic level
the link between the level of development of a country and the level of activity in the
construction sector. According to the author Olalokun (1987), it made up on average
around one-third of all fixed capital investments and generated an average of 5% to
the yearly gross domestic product. This is equivalent to the contribution of the global
building sector to industrialized nations. Pakistan's construction sector hasn't done
2
well, despite the industry's major contribution to the country's economic restructuring
and the enormous workforce it employs. The assertion made by Fagbenle et al.
(2004)that "most empirical studies revealed that the output of the industry is quite low
when compared with the construction industry of many developed countries" is
convincing evidence of this. Adams This low output was attributed to the developing
countries' extensive reliance on imported labor, machinery, and building supplies for
their domestic construction industry.
According to Chan (2002), the construction industry in developing countries is

distinguished by its heavy dependence on imported building materials and
components.. Author mentioned According to Hillebrandt (1984), the building sector
is mostly a domestic business. As a result, raw, semi-processed, and processed
resources are in demand due to building operations, according to the author in
reference Lean (2001), However, there is a closed connection relating to
manufacturing and business sectors, which supply the supplies required by the
construction industry. Due to the tight relationship between financial activities in the
economy and construction, loan funding is necessary for building projects. The selling
of its goods, the acquisition of its inputs, and the creation of jobs are other sources of
revenue for the construction sector other revenue streams for the construction industry
include the sale of its products, the purchase of its inputs, and the creation of jobs.
authors mentioned Lean (2001) believed that the construction industry is particularly
susceptible to changes in monetary and fiscal shocks. This is true since the vast
majority of construction projects are expensive and need loan funding Oladipo and
Oni (2012)believed that the industry was significant., whereas the authors in the
reference Akinsiku and Oyediran (2020)felt that not enough attention had been paid to
Nigerian architectural history. As a result of the oil boom, the country's demand for
imported goods grew and imports of building materials increased to an average of
about N2 billion per year.
Due to the secular decline of the manufacturing sector and the growth of the service
sector, the current ratio will change. According to the United Nations Centre for
Human Settlements (UNCHS), the high price of building materials, especially in
Pakistan, is a significant barrier to improving housing standards in low-income
countries. According to some experts, the material components of a building account
3
for around 60 % of the total construction costs. In the country's current economic
environment, which includes a weakening rupee and escalating inflation, material
costs have risen far faster than the small increases in labour costs. Yousaf and Ali
(2021), which claimed that prices of all products and services have increased since the
liberalization of the Pkr currency rate, confirmed this claim. It should be noted that
the exchange rate is currently around Rs. 287 for US$1. This exchange rate directly
affects the quantity of imported resources compared to naturally occurring resources.
The price of naturally occurring materials has been affected by the continuous
increase in oil prices, which affects the quantity supplied to end users.
The increase in the cost of building materials will impact the sector in a number of
ways, including fluctuations in construction costs and the eventual cancellation of
projects.
1.3 Problem Statement
The expansion of the Pakistani economy as a whole is significantly influenced by

aspects of the construction industry such as macroeconomic indicators and profit
margin. According to professionals working in the Architecture, Engineering, and
Construction (A/E/C) industry, the absence of reliable information regarding
construction productivity is one of the most significant challenges to achieving the
goal of increasing construction productivity. Tuchman (2003). The absence of reliable
sources is the primary factor contributing to the paucity of research in this field. There
has not been any significant research conducted on the topic of analyzing construction
productivity on the state level, along with other pertinent elements, and how these
factors influence the construction industry. To overcome the issue this study includes
all dimensions and attempt to examine how macro-economic Variables shocks impact
on construction industries. So, in this study I will focus on macro-economic Variables
shocks impact on construction industry.
1.4 Purpose of the Study
This study's goal is to evaluate construction sector projects to identify the factors that
influence project costs and how they do so. This investigation will be carried out in a
context that is naturally occurring. Explanatory in nature, this study. Examining
4
theoretical links between variables and determining how much macroeconomic
factors affect project costs are the primary goals.
1.5 Research Aims, Objectives and Research Questions
1.5.1 Research Aims
This study contributes to expanding literature regarding the impact of macro-

economic shocks on the construction industry in the following ways. Firstly, this
research offers a wealth of insights into the impact of macro-economic shocks on the
industry. Secondly, we determined both the positive and the negative effect of macro-
economic shocks on the construction. Therefore, I collect the data from the January of
2016 to the December of 2022.
1.5.2 Research Questions

 How the macro-economic variable like interest rate, exchange rate, industrial
production and inflation impact on the cost of construction project?
 How construction costs will interact with the other variables?
1.5.3 Research Objectives

 To determine the effect of macro-economic variable like interest rate,
exchange rate, industrial production and inflation impact on the cost of
construction project.
and
 Build a regression model to predict how construction costs will interact with
the other variables as given above.
1.6 Significance of the Study
The study will be the kind in the construction sector to use multivariate regression
analysis to examine the relevant elements that affect the profitability of the
construction industry public sector at the country level. Through research, a predictive
model will be developed to evaluate gross margin relative to key parameters. These
studies offer large information to investors and policymakers not only in terms of risk
management and portfolio diversification but also helps in managing asset allocation
and mitigate losses. In this way profit margin of investors become increases. With the
5
help of this study investors will easily determine as to which uncertainty shock may
impact the construction industrial more and into which industry or the combination of
industries they will invest.
6
CHAPTER 2
LITERATURE REVIEW
7
2.1 Introduction
Economic theorists, analysts, and stakeholders in both developed and developing

economies have long been interested in exploring, monitoring, and managing the
structural links between macro-variability metrics and various parts of the real sector
of the economy. It does not matter whether the industries are established or emerging.
When inadequate or scarce conditions support the ability to achieve or produce certain
positive outcomes, this can be both a "blessing" and a "curse," as Stijns and Philippe
(2005) note. If this is true, then there are significant economic resources available that
are well utilized in the pursuit of economic growth. The housing market and the
financing industry have a major impact on construction.
2.2 Construction Industry
The price of building materials makes up a significant amount of the total cost of
construction Ive and Gruneberg (2000). Therefore, the cost of building materials
directly affects how much it will ultimately cost. The price of a particular building
material depends on a variety of factors, including market dynamics, supply and
demand. Customers' tastes, their level of affluence, the building codes in their area
and the decisions of architects and builders all affect the demand for a particular
building material. According to Ofori (1990), the choices made by designers and
builders fluctuate based on the experience of the designers, the builders'
understanding of the technology involved in employing the materials, and the
accessibility of individuals with the appropriate skills.
The supply of a particular building material is influenced by a number of factors,

including the availability of raw materials, technology for extracting and processing
those materials, the impact of production on the environment, and governmental
regulation. The availability of raw resources has a direct impact on the supply of
construction materials. Some countries that lack raw materials are forced to import
them. In addition to a lack of raw materials, there may not be enough production
capability or building material quality, especially in developing countries, to meet
local demand. The extraction and processing techniques used by Ofori (1990) affect
the quality and production efficiency of the building materials. In general, the
technology of emerging countries is less advanced than that of developed countries.
8
Due to the outdated technology, the environmental impacts in developing countries
are also more severe than in developed countries. As a result of growing awareness of
these environmental impacts, governments in developing countries are now restricting
the production of low-quality materials with outdated technology and encouraging the
import of more modern technologies from developed countries (ICR Research, 2007,
2008).
The government can control the prices of construction materials in addition to market
forces. To promote the local construction sector, the government can set price ceilings
and provide subsidies for certain materials, especially those used in public projects.
The government can encourage or discourage the import of certain construction
materials by changing import tariffs, taxes or quotas (World Bank, 1984; ICR
Research, 2007, 2008).
2.3 Construction an Economic Activity
According to Luo et al. (2015), construction is often divided into three phases. One
theory is that construction is an economic activity that spans all three sectors of the
economy, including the primary sector, which includes the extractive industries and
includes the production of raw materials, building materials and components, and the
provision of professional services such as design and project management.; the
tertiary sector, which includes the provision of consultancy services such as project
management, design and building construction Sui Pheng et al. (2019). The secondary
sector includes the production of building materials and components and the
processing of these materials into finished buildings. From this point of view, the
actual construction process starts much earlier than the actual work on the
construction site, where materials and designs are transformed into finished buildings,
structures and services. On the other hand, construction is seen as an industry that
focuses primarily on the actual physical work on the construction site in the final
phase of the process.
According to this view, all services are excluded, including those related to project
management, planning and design, as well as the supply of construction materials and
the production of goods off-site. The definition provided by the International
Organization (2015) for Standardization's International Standard Industrial
9
Classification of All Economic Activities . This classification covers several areas
outside the construction industry, such as the management of construction projects,
activities in the fields of architecture and engineering, and the manufacture of
construction materials. According to Ofori (1990),this form of categorization makes
sense for statistical reasons. According to this classification, construction is
considered to be an economic activity that focuses on the production of new
construction, rehabilitation, repair or expansion of buildings, structures and other
significant projects such as highways, bridges, dams and other facilities Organization
(2015).According to Ive and Gruneberg (2000), the construction workforce consists
only of those working on construction sites.
There is a third definition of construction that lies somewhere in the middle between
the two extremes mentioned above. Construction in this sense is described as the
process of creating the built environment, encompassing many tasks from idea to
design to execution. Objects of the built environment include permanent constructions
such as buildings Ive and Gruneberg (2000). Or in other words, construction
"transforms various resources into built assets through planning, design, construction,
maintenance and operation" Isa et al. (2013). Because of this, the construction
industry encompasses all companies or organizations that professionally engage in the
construction process, from those that provide consulting services in the areas of
planning, design, supervision, and management to those who carry out work on the
job site, like general contractors and builders Gransberg and Molenaar (2019); Ofori
(1990). These organizations or companies, in turn, often have close relationships with
their patrons and financial backers Hillebrandt (2000). The characteristics of the
industry's products, which are described in more detail below, directly influence this
phenomenon.
2.4 Macro-economic Variables
According to Madlener and Sunak (2011), the demand for construction services is
expected to increase due to the pick-up in economic activity.
The different hierarchical levels of economic sectors and macroeconomic aspects
have been extensively covered in the literature. According to Alexander et al. (1996),
economic indicators for an investigation include the consumer price index (CPI), the
10
unemployment rate, creditworthiness and exchange rates for foreign currencies. They
consist of gross domestic product (GDP), real GDP and GDP. Further research has
examined the relationships between these variables and various sectoral subcategories
of the economy, including the secondary, tertiary and quaternary sectors, as well as
basic industries. The primary and secondary sectors of the economy are mining and
the production of commodities (e.g. the extraction and sale of oil), respectively. The
third sector of the economy, often referred to as the service sector, is responsible for,
in simple terms: Research and training to create the skills needed for other sectors of
the economy (e.g. financial institutions).
Many studies on the relationship between the construction sector and the development
of the agglomeration of industry have focused on the question of how to define the
increase in the GDP of enterprises and what role this development plays in the overall
increase in prosperity. However Lopes et al. (2011), established a link between
fluctuations in growth expenditure in the Australian construction sector and inflation
or labour unrest. Certain studies have sparked industry interest in cost management,
process improvement and waste elimination as local industry and other closely
watched sectors have harshly criticized the price, duration, quality and safety of
construction projects. It is noteworthy that the expectations placed on them by
construction clients have remained largely the same.
The growth of expenditure variance in the Australian construction project, in contrast,

was linked by Lopes et al. (2011)to inflation and worker discontent. Certain studies
have sparked industry interest in cost management, process improvement and waste
elimination as local industry and other closely watched sectors have harshly criticized
the price, duration, quality and safety of construction projects. It is worth noting that
the expectations construction clients have of them have remained largely the same.
However, a wealth of data suggests that this is not always the case. Primorac et al.
(2019) concluded that the cost accounting industry is not illiterate when it comes to
developing and putting into practice effective cost management strategies. The
industry needs to tighten economic sanctions and minimize wasteful spending
resulting from poor corporate communication and cost management, according to Fox
(2001) the renowned business press. Even when all cost reduction strategies are
implemented at the same time, as is the case with about 65 of them, the overall effect
rarely goes beyond 10%. So, there are more issues with cost performance than just
11
developing and implementing leading-edge solutions. Rather, it is critical to consider
how environmental factors can affect the price stability of key performance indicators.
Objective The objective of this study is to establish a relationship between

construction costs in Pakistan and macroeconomic indicators. Due to the dependence
of the Pakistani economy on crude oil imports and the national trade liberalization
policy, the price of oil is considered the main cause of some economic instability. A
similar research was carried out by Hosein and Michael Lewis (2005) to look at the
effects of oil on ecosystems. They examined the impact on Trinidad and Tobago's oil-
poor construction sector. They concluded that although oil has a low GDP and is
important to the country, it often creates and contributes to very unstable
macroeconomic features. Given the heavy dependence of Pakistan's economy on the
oil sector, other macroeconomic indicators reflect the stresses and strains resulting
from changes in oil prices. According to Olatunji (2010), this often results in hyper
cyclical inflation, increased borrowing rates, a drop in the value of the local currency,
pressure on domestic expenditure, or a large loss in productive enterprises. The next
section examines how different petrol price regimes affect these variables.
2.5 Inflation in Construction Industry
According to Kimani and Memba (2017) an increase in inflation can lead to an increase in the
growth rate. Numerous other factors also affect the rise in the inflation rate. For example,
even though debt is often used to finance real estate, inflation can rise if more loans are taken
out. To reduce the likelihood of prices rising as the property market grows, it is essential to
keep inflation under control. People will choose to store their savings in assets to hedge
against inflation when inflation rises so that the purchase value of their money is maintained.
In general, the demand for assets is thought to reflect the direction of economic inflation.
During an inflationary time, some individuals utilize real estate assets. The rate of inflation
has a direct influence on real estate values Abdul-Rahman et al. (2012).
Inflation and the cost of real estate are closely linked. In a period of inflation, the prices of
most goods rise. Rising development costs lead to a reduction in the supply of real estate
available on the market. It is important to keep in mind that in the current world situation, an
increase in the money supply can lead to inflation and an increase in property prices. Inflation
is the continuous increase in the average price level that reduces the purchasing power of
money. Inflation causes money to gradually lose some of its purchasing power. Investors
invested in maintaining the value of real estate because they considered it the best protection
12
against inflation, which increased demand and caused prices to rise Deng et al. (2018).
Therefore, inflation can lead to a decline in property values. Both positive and negative
effects of inflation on property values are possible Shen et al. (2017).However, changes in
real estate prices can affect inflation in several ways. First, when real estate prices rise,
investment in real estate and the demand for building materials also rise. This can increase the
price of these goods and contribute to inflation. Second, as property values rise, property
owners feel more independent and strive for greater wealth, which increases inflation and
consumer spending. Third, according to Zhang and Deng (2010), rising property prices
improve the value of the underlying security, which boosts bank lending and increases
inflation rates. A rise in property prices will therefore make it more difficult for residents to
make their payments, which will reduce inflation and limit the consumption of everyone who
wants to buy a house. The impact of real estate prices on inflation is often uncertain Shen et
al. (2017).Therefore, when developing macroeconomic policies, the government needs to take
into account how growth rates in the construction sector will affect future inflation in
different cities. The government needs to focus on changes in the price level, plan for
excessive price increases and take effective measures to control inflation when property
prices rise rapidly Shen et al. (2017).Real estate prices sometimes fluctuate less than those for
other assets on the capital market and only react to economic developments with a delay. Real
estate prices usually exhibit considerable price stability, as no one sells their house for less
than a certain price during a recession. As a result, property values often fall in times of
inflation instead of nominal prices falling Adams and Füss (2010). According to some
theories, growing inflation, together with steadily rising prices for products and services,
leads to an increase in property values Gasparėnienė et al. (2016).When inflation rises, people
often hold their money in assets, as these serve as a hedge against inflation. In general, the
demand for assets should follow the economic inflation trend of the country. When people use
real estate, the inflation rate directly affects real estate prices, according to Almutairi and El-
Sakka (2016). Property values increase when inflation rates are high, as previously predicted.
Property supply, demand intensity and market conditions are just some of the variables that
can influence the response of property prices to inflation rates, according to Almutairi and El-
Sakka (2016). It was shown that the trend had a positive impact on how property returns
affected inflation and a negative impact on how inflation affected property returns.
2.6 Exchange Rate
The price at which one currency is exchanged for another is represented by the
exchange rate. Exchange rates also affect the strength of the currency, and from an
economic perspective they also represent the consequences of inflation, according to
13
Alkali et al. (2018). Therefore, when the value of the local currency falls, foreign
investors often invest in the country's real estate market. According to Alkali et al.
(2018), the increased demand for residential property in the affected country would
increase property costs. However, the most important factor affecting exchange rates
is macroeconomic factors, which account for about one third of price fluctuations in
the foreign exchange market. Omrane and Savaşer (2017) examine how foreign
capital flows affect property values in a number of Asian countries Ohno and Shimizu
(2015).
They determined how exchange rates and capital restrictions affect property values.
The results show that capital constraints and exchange rate changes can drive up
property prices in Asia. In addition, excessive global liquidity has exacerbated the ups
and downs of international property markets in Asian countries. Ngo (2017) examines
how changes in exchange rates can affect the profits of US real estate investment
trusts (REITs). An appreciation of the US dollar adversely affects the returns of
REITs, regardless of exchange rate fluctuations, the size of the REIT or
macroeconomic characteristics. As a result, REITs are not protected against currency
fluctuations. Similarly, the available research on REITs ignores fluctuations in
exchange rates and oil prices in favour of inflation, interest rates and market factors as
indicators of REIT returns. However, Yang and Zhiqiang (2012) studied the
relationship between real estate prices and exchange rates between 2007 and 2010.
The results showed that while real estate has a positive impact on the exchange rate in
China, an increase in real estate values leads to a decrease in the exchange rate.
Moreover, the relationship between the exchange rate and real estate prices intensified
with the increasing global diversification of real estate investment. The appreciation
of the exchange rate and the increase in property values can both be seen as examples
of harmonious conditions. Rising exchange rates increase the demand for real estate,
which causes real estate prices into rise in order to maintain asset values Alkali et al.
(2018).
2.7 Interest Rate
In terms of liquidity, bank loans affect property prices in several ways. The price of
real estate could be determined by the discounted flow of future cash flows, similar to
asset values. If credit is more widely available, banks will charge lower lending rates,
boosting both current and future economic activity. However, if interest rates rise,
14
borrowing also becomes more expensive, discouraging potential buyers and reducing
demand for housing. Similarly, according to Panagiotidis and Printzis (2016), demand
for real estate will increase and user costs will decrease when interest rates rise. The
availability and demand for real estate can affect the cost of real estate. The supply
side of the relationship between interest rates and property availability will be
negative. Most investors use bank loans to acquire real estate while it is in an early
stage of development, which is crucial. According to Zhang and Deng (2010), if
interest rates increase, the cost of investing in real estate will also increase. As a
result, some property investors would cut back on their purchases, which would
reduce the supply of affordable properties and drive up the price. A higher interest
rate also affects pricing in several other ways. Almutairi and El-Sakka (2016) point
out that a higher interest rate would, for example, lead to a decline in housing
demand, which would affect the development of property prices. Interest rates have a
negative impact on both the supply and demand side of the property market. Thus, if
the impact of the interest rate on the supply of real estate is greater than the impact on
the demand for real estate, the impact of the interest rate on the supply of real estate
will be negative. However, the impact of the interest rate on property prices will be
beneficial if the impact of the interest rate on property demand is greater than the
impact of the interest rate on property supply Shen et al. (2017). Real interest rates
indicate not only the financial cost (i.e. the mortgage rate) but also the opportunity
cost of owning real estate. Interest rates affect the demand for real estate. The cost of
borrowing to buy a house is determined by the current interest rate. Higher interest
rates increase the cost of borrowing, which affects the demand for and price of
housing Almutairi and El-Sakka (2016). Shi and Riley (2014) also examined how
central bank policy and retail mortgage rates affected house prices in New Zealand
between 1999 and 2009. In addition, interest rates and house prices were found to be
positively and significantly related, suggesting that raising the policy rate may not be
the most efficient way to reduce house prices. However, banks in areas where
property prices have fallen significantly may have experienced high loan default rates,
high bankruptcy rates and low profits. Interest rates may hinder the expansion of the
real estate market. Kimani and Memba (2017) are of the view that the government
needs to create a mechanism for external borrowing to promote growth in the real
estate sector. Short-term government domestic borrowing reduces real estate
expansion by increasing the cost of credit. The real estate market in the United States
15
has grown much more slowly since 2005. According to Park and Bae (2015), an
investment bank actually failed in 2008 due to excessive borrowing of financial
instruments that lost value as a result of a decline in property values.
2.8 Industrial Production
Industrial organization theory focuses on the actions of firms within industries.

According to an economic theory of industrial organization, the activities of firms and
the outcomes of firms are linked to the "structure" of markets. The theory of
construction supply chains can benefit from the considerations of industrial
economics.
Pakistan's industrial output climbed by 4.96 percent year between 1990 and 2023,
with an average growth of 77.84 percent in April 2021 and a record-low decrease of
45.78 percent in April 2020.
According to Linden and Mahmood (2007), the share of the three main economic sectors -
industry, services and agriculture was positively correlated with economic progress over time
in the case of the fifteen Schengen countries. Abdullah Hokoma et al. (2008), have
empirically found a long-run favorable relationship between GDP growth rate and agricultural
sector growth rate in Pakistan and Thailand using the Johansen cointegration test. According
to Javed and Farooq (2009), exports and the exchange rate had a favorable effect on
Pakistan's economic development.
2.9 Theoretical Framework
In quantitative research, regression analysis is a technique for describing and

analyzing many elements of a study in which there is a relationship between a
dependent variable and one or more independent variables. This type of study can
include any number of variables. Regression analysis is a statistical approach used to
examine the relationships between a dependent variable and a set of independent
variables. In its most basic form, regression analysis is a statistical procedure.
Where
v Y depends on the Xs
v Y and the Xs are continuous variables
The linear regression model is of the form
Y = B0 + B1X1 + B2X2 + e
16
Coefficients B1 and B2 are used to indicate the slopes, which can also be considered
as rates of change of Y for each unit change of X1 and X2, while coefficient B0 is
used to represent the intercept. (where the number 1 serves as a constant multiplier).
The error term is included in the model to capture the total variance of the dependent
variable that cannot be captured by the independent variables. It refers to the
difference between the actual regression equation and the measured Y-value.
2.10 Conceptual Model

A conceptual modal of the study illustrates that the dependent variable is
composed of Diesel Oil (DO), Kerosene Oil (KO), Plastic Product (PP), Paints
and Varnishes (PV), Glass Sheets (GS), Ceramics, Sanitary and Fixture (CSF),
Bricks, Blocks & Tiles (BBT), Cement (C), Steel Bar & Sheets (SS), Pipe Fittings
(PF), Steel Products (SP), Concrete Mixture (CM), Electric Wires (EW) and
Lighting Equipment’s (LE)construction Cost whereas the independent variables
are Interest Rate (IR), Inflation (INF), Exchange Rate (EXR) and Industrial
Production. The main propose of this study is to explore the effect of macro-
economic indicators on cost of construction industry. For this purpose, measure
the short run relation with the help of OLS and used the ARDL measure for long
run effect.
17
The Following Model equations are used to estimate the model:
1. CI =α + β1 IR+ β 2 IP + β 3 INF + β 4 EXR+ e
2. y t =α 0+ α 1 x t +α 2 x t −1+ α 3 y t−1 + μt
Where CI represent Construction industry of Pakistan, α are Y-intercept, IR

Interest rate, INF Inflation Rate and IP Industrial Production and ε is the Model
error.
2.11 Hypothesis Development
The hypothesis has a form that can be tested and is directly linked to a theory.
However, it contains variables that are operationally specified. With the help of
hypotheses and research, we can determine whether our theory is correct or not.
As a direct result of increasing economic activity, demand for industrial goods for the
construction industry is expected to rise. Therefore, the price level of construction
materials indirectly affects the value of construction output. The price of a particular
type of material is determined by the dynamics of the market and the supply and
18
demand for that particular construction material. The report includes sections on
economic indicators such as the inflation rate and the interest rate. In addition, both
the exchange rate and industrial production are considered here. The interaction of
these factors with other segments of the economy, such as primary industry,
secondary industry, the tertiary sector and the quaternary sector, is also the subject of
further research. Mining and basic resource production (such as the extraction and
sale of oil) form the primary component of the economy, while manufacturing and
construction make up the secondary part of the economy.
Despite the fact that the hypothesis is testable and includes operationally described
variables, the hypothesis is directly linked to a theory. We are able to investigate the
relationship between the variables considered in the model by researching and testing
the hypotheses.
There is a significant correlation between property prices and general inflation. In times of
inflation, the prices of most goods and services increase. However, this leads to an increase in
construction costs, which in turn reduces the amount of housing available on the market.
Given the current state of the global economy, it is important to be aware of the possibility
that an increase in the money supply would lead to inflation and an increase in construction
costs. Therefore, we put the following hypothesis to the test:
H 1=Inflation Rate positively affects construction industry
H 2= Inflation Rate negatively affects construction industry
However, if interest rates continue to rise, the cost of borrowing will also continue to
rise. This will discourage people who are considering buying a house, which will lead
to a decrease in demand for housing. Similarly, if the interest rate is lowered: The cost
of using real estate will decrease, which will lead to an increase in demand for real
estate. In addition, the demand for and supply of real estate are important factors that
influence the price of real estate. The relationship between the interest rate and the
supply of real estate will be negative, which is on the supply side of the equation. It is
important to make investments in real estate in the early stages of growth; most
19
investors obtain loans from financial institutions. Therefore, when interest rates rise,
the cost of investing in real estate will also rise. This will cause some real estate
investors to reduce the size of their investments, leading to a decrease in real estate
supply and an increase in prices. In our study, we therefore test the relationship
between the two factors in the following way:
H 3= Interest Rate positively affects construction industry
H 4 = Interest Rate negatively affects construction industry
The value of one currency in relation to another is called the "exchange rate". In
addition, the exchange rate serves as an indicator of the strength of the currency and
also shows the impact of inflation from an economic perspective (Kiat et al., 2015).
Therefore, when the value of a country's currency falls, investors from abroad are
more likely to invest in that country's property market. An increase in property prices
is likely to be the result of an increase in demand for residential property in the
country concerned. Our research shows the nature of the relationship between these
factors.
H 5=Exchange Rate positively affects construction industry
H 6=Exchange Rate negatively affects construction industry
The behavior of firms within industries is the focus of the academic field of
economics known as industrial organization. An economic paradigm known as
industrial organization recognizes the existence of links between the 'structure' of
markets, the behavior of firms and the performance of firms. The considerations of
industrial economics have the potential to support supply chain theory in the
construction industry.
H 7= Industrial Production positively affects construction industry
H 8=Industrial Production negatively affects construction industry
20
CHAPTER 3
RESEARCH METHODOLOGY
21
3.1 Introduction
The study design helps the researcher to answer the issue statement rationally and
unambiguously using evidence. To ensure that the research problem is effectively
handled, several study components must be integrated logically and coherently. It
provides an overview of tasks including data collection, measurement, analysis, and
reporting.
3.2 Research Methodology
Research methodology is essentially a plan that outlines how to gather, evaluate, and
measure data. The main goal of research methodology is to create a framework for
organizing a study and testing a research hypothesis Sekaran and Bougie (2016).
3.2.1 Research Approach
The three research methods of inductive, deductive, and adductive are used to connect
theory to reality Osman et al. (2018). In an inductive approach, the focus is on
developing theories that are subsequently based on facts from the real world (real
world to theory). The deductive approach involves developing hypotheses based on an
accepted theory, which are then statistically tested to confirm or disconfirm them (real
world theory to theory). To overcome the shortcomings of both approaches in data
analysis, the adductive approach combines both inductive and deductive
methodologies.
In this study, a deductive approach is taken, in which hypotheses are formed based on
an accepted theory and data are collected from State Bank of Pakistan and National
Buru of Statistics. These data are then examined and empirically verified to confirm
the research hypothesis.
3.2.2 Methodological Choices
There are three categories of research methods: qualitative, quantitative, and mixed
methods Huyler and McGill (2019). Qualitative research analysis focuses on visual
data that show people's actions, attitudes, or events. Based on the interview, break out
Fossey et al. (2002).The basis of quantitative analysis is the numerical data, where
22
relationships between variables are derived using statistical approaches Sukamolson
(2007). Mixed-Methods Analysis of Qualitative and (open and closed questions)
Halcomb and Hickman (2015).
The main objective of the research was to investigate the impact of socio-economic
variables on construction project prices in Pakistan. Construction project costs were
linked to socioeconomic factors through quantified association analysis.
3.2.3 Time Horizon
Cross-sectional and longitudinal studies are the two types of research studies that can
be conducted to collect data over a period of time. In this study, a cross-sectional
strategy was used to collect data. The use of the cross-sectional approach is justified
by time constraints. The recommended period for data collection is about four years.
3.2.4 The purpose of the Research
This study's goal is to evaluate construction sector projects to identify the factors that
influence project costs and how they do so. This investigation will be carried out in a
context that is naturally occurring. Explanatory in nature, this study. Examining
theoretical links between variables and determining how much macroeconomic
factors affect project costs are the primary goals.
3.2.5 Data Collection and Data Analysis
The objective of this study is to examine how Pakistan construction costs are affected
by changes in oil prices. Selected measures of macro fluctuation and unit building
prices from January 2016 to December 2022 have had their historical data gathered
from government databases. The State Bank of Pakistan (SBP), National Bureau of
Statistics (NBS) websites, Karachi Stock Exchange and other Pakistan dailies are
specific sources of data on macro variability. Project databases from estimators and
government agencies are the sources of actual construction costs for projects
completed during the period under consideration. In particular, Inflation Rate, Interest
Rate, Exchange Rate and Industrial Production. The study also takes into account
information on monthly variations in the cost of gasoline (per liter), cement, and the
23
average price per square foot of reinforced concrete structures. The typical height of
the chosen buildings is three levels.
3.3 Industry Setting
Industry is the commercial production and distribution of products. Production of

physical commodities for sale to the general public, the government, or other
organizations is the function of industrial firms. They create things through
manufacturing processes when none previously existed. For this study, businesses and
organizations in Pakistan's construction industry were chosen.
3.4 Data Collection
Data collection is the process of gathering and measuring information on

variables of interest, in an established systematic fashion that enables one to answer
stated research questions, test hypotheses, and evaluate outcomes.
The objective of this study is to examine how Pakistan construction costs are affected
by changes in Macro-economic indicators. Selected measures of macro fluctuation
and unit building prices from January 2016 to December 2022 have had their
historical data gathered from government databases. The State Bank of Pakistan
(SBP),All Pakistan cement Manufacturers Association (APAC), Energy Year book,
National Bureau of Statistics (NBS) websites, and other Pakistan dailies are specific
sources of data on macro variability and the output gap in cement prices. Project
databases from estimators and government agencies are the sources of actual
construction costs for projects completed during the period under consideration. In
particular, average oil prices are related rates, and the cement prices. The study also
takes into account information on yearly variations in the cost of gasoline (per liter),
cement, and the average price per square foot of reinforced concrete structures. The
typical height of the chosen buildings is three levels.
24
3.5 Data Analysis
3.5.1 Regression analysis
If you want to know which factors have an effect on your research question,
regression analysis is a solid choice. By running a regression, you can definitively
establish which variables are most significant, which can be disregarded, and how
they all impact one another.
In order to understand regression analysis fully, it’s essential to comprehend the

following terms:
 Dependent Variable: This is the most important aspect of the situation that
you wish to analyze and forecast.
 Independent Variables: Your working hypotheses for your dependent
variable are these.
The EViews are used to build mathematical models through in addition to the
association analysis, a regression analysis can be performed. The cost construction
was regressed against each variable in the study goals. This model is shown below in
Equation 1.
 CI =α + β1 IR+ β 2 IP + β 3 INF + β 4 EXR+ e

CI=Construction industry, IR= Interest Rate, IP= Industrial production,
INF= Inflation Rate, EXR= Exchange Rate,
3.5.2 ARDL
y t =α 0+ α 1 x t +α 2 x t −1+ α 3 y t−1 + μt
25
CHAPTER 4
DATA ANALYSIS
26
4.1 Introduction
The dataset provided includes a range of economic indicators, such as Construction Component
(CC), Industrial Production (IP), Exchange Rate (EXR), Interest Rate (IR), and Inflation Rate
(INF), which have been measured over a period spanning from January 2016 to December
2022.
Principal Component Analysis (PCA) is a popular technique used to uncover
underlying patterns in data by reducing the number of variables and identifying the
most significant components that explain the majority of the variance in the data. This
study used PCA to analyze the data and identify the most influential factors in the
dataset. Specifically, two methods were used to model the relationships between the
economic indicators: Ordinary Least Squares (OLS) and Autoregressive Distributed
Lag (ARDL).
OLS is a widely used method for estimating the relationship between two or more
variables by minimizing the sum of the squares of the differences between the
predicted and observed values. ARDL, on the other hand, is a regression model used
for analyzing the long-run relationships between economic variables. In this study,
both methods were used to model the relationships between the different economic
indicators and to determine the extent to which they impact each other.
The coefficient of determination (R-squared) is a statistical measure that represents

the proportion of the variance in the dependent variable that can be explained by the
independent variables in a regression model.
In the case of the ARDL result provided earlier, the R-squared value is 0.902353,
which means that approximately 90.2% of the variation in the dependent variable
(CC) can be explained by the independent variables (IP, IR, EXR, INF, and CC itself
in the previous two periods) included in the model. The adjusted R-squared value is
0.893117, which is similar to the R-squared value but takes into account the number
of independent variables in the model and adjusts the value accordingly
These R-squared values indicate that the model has a relatively high explanatory
power and that the independent variables included in the model are able to account for
27
a significant portion of the variation in the dependent variable. However, it's
important to note that R-squared alone doesn't tell the whole story and should be used
in conjunction with other diagnostic measures to evaluate the performance of the
model.
The analysis of this dataset provides a unique opportunity to gain insights into the
dynamics of the economy and the inter-relationships between different economic
indicators. By analyzing the relationships between the various economic indicators,
policymakers, investors, and researchers can make informed decisions that are crucial
to the economy's growth and development. Therefore, the findings from this study
could be of significant interest to a broad range of stakeholders.
4.2 NATURE OF THE DATA
Data collection is the process of collecting and analyzing information on relevant

variables in a predetermined, methodical way so that one can respond to specific
research questions, test hypotheses, and assess results. For this analysis, we are using
cross-sectional data from January 2016 to December 2022. For each variable, there
are 84 observations. Cross-sectional studies make it possible to collect data from a
large number of respondents and compare differences between groups. International
financial statistics include information on interest rates, industrial production,
inflation and exchange rates. The Consumer Price Index (CPI) is used to collect
information on the cost of construction. The Consumer Price Index (CPI) tracks the
average change in prices paid by consumers for a variety of products and services
over time. For the period covered by the study, information on construction
expenditure was collected from the monthly CPI bulletin produced by the Pakistan
Bureau of Statistics. The data is kept on Excel sheet and then used in EViews.
28
4.3 DESCRIPTIVE STATISTICS:
Table 1ANALYSIS OF DESCRIPTIVE STATISTICS

Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability Sum Sum Sq. Dev. Observations
CC 7.590967 7.727555 7.95165 7.219568 0.249521 -0.32142 1.413563 10.25505 0.005931 637.6412 5.167623 84
IP 4.863233 4.819429 5.240609 4.522809 0.166781 0.305505 1.975952 4.977024 0.083033 408.5115 2.308711 84
IR 2.026087 1.988295 2.579209 1.695799 0.248284 0.656611 2.473649 7.005582 0.030113 170.1913 5.116521 84
EXR 2.026087 1.988295 2.579209 1.695799 0.248284 0.656611 2.473649 7.005582 0.030113 170.1913 5.116521 84
INF 5.23364 5.199244 5.673861 4.992396 0.189241 0.637116 2.43043 6.818268 0.03307 439.6257 2.972411 84
This part of the analysis consists of a descriptive analysis of the variables in the study,
measuring the mean standard deviation and the minimum and maximum values of all
variables in the analysis. Short information coefficients known as descriptive statistics are
used to summarize a collection of data, which might be the entire population or only a subset
of the population. It is possible to divide descriptive statistics into measures of central
tendency and variability (dispersion). Mean, median, and mode are indicators of central
tendency, whereas standard deviation, variance, minimum and maximum variables, kurtosis,
and skewness are measurements of variability. Descriptive statistics is a technique used in
studies to analyze the basic characteristics of the data in the study. They provide simple and
concise information about the sample data collected in the study. A data set's mean (average)
is calculated by summing all of the numbers in the set and then dividing by the number of
values in the set. When a data collection is arranged from largest, the median is the midway
value. The mode is the number that appears the most frequently in data collection. It shows
the typical separation between the mean and each data point. Smaller values indicate that the
data points are more evenly distributed around the mean, indicating that the values of the data
set are generally stable. Larger values, on the other hand, indicate that the values deviate more
from the mean. Extreme values become more likely and data values become less similar.
Standard deviation simplifies interpretation using the original data units. It is therefore the
most commonly used measure of variability. The lowest number in the data set at which all
outliers are eliminated is called the statistical minimum, also known as the low outlier
threshold. The highest value in the data set at which all outliers are not eliminated is called
the statistical maximum or maximum, also called the high outlier limit.
29
4.3.1 CONSTRUCTION COMPONENT (CC)
 For the construction component (CC), the mean is 7.590967, which indicates that
the average value of the component is close to 7.6. The median, 7.727555, is
slightly higher than the mean, indicating that the distribution of the component
may be slightly skewed to the left. The maximum value is 7.95165, and the
minimum value is 7.219568, indicating a relatively narrow range of values for this
component.
 The standard deviation of 0.249521 is relatively small, indicating that the values
of the component are tightly clustered around the mean. The skewness of -
0.321416 is negative, indicating a slight left skew in the distribution, and the
kurtosis of 1.413563 indicates that the distribution is relatively flat compared to a
normal distribution.
 The Jarque-Bera statistic of 10.25505 and its corresponding probability of
0.005931 indicates that the distribution of the component deviates from a normal
distribution at the 5% significance level, which further confirms the slightly left-
skewed and flat distribution.
 The sum of the component values is 637.6412, and the sum of squared deviations
from the mean is 5.167623. Finally, the number of observations is 84.
4.3.2 INDUSTRIAL PRODUCTION (IP)
 Mean: The mean value of IP is 4.863233, which indicates the average level of
industrial production during the period being analyzed.
 Median: The median value of IP is 4.819429, which suggests that half of the
observations lie below this value and the other half lie above it.
 Maximum: The maximum value of IP is 5.240609, which represents the highest
level of industrial production during the period analyzed.
 Minimum: The minimum value of IP is 4.522809, which indicates the lowest
level of industrial production recorded.
30
 Standard deviation: The standard deviation of IP is 0.166781, which indicates that
the values of IP are relatively close to the mean value, indicating a relatively small
amount of variation in the data.
 Skewness: The skewness value of 0.305505 suggests that the distribution of IP is
slightly right-skewed, indicating that there are more observations on the left side
of the distribution than on the right side.
 Kurtosis: The kurtosis value of 1.975952 indicates that the distribution of IP is
leptokurtic, which means that the distribution has heavy tails and a sharp peak
compared to a normal distribution. This suggests that there may be some outliers
or extreme values in the data.
 Jarque-Bera: The Jarque-Bera value of 4.977024 with a low probability of
0.083033 indicates that the distribution of IP is not normal, which could affect the
validity of some statistical tests.
 Sum: The sum of all the values of IP is 408.5115, which represents the total level
of industrial production over the period being analyzed.
 Sum of squared deviations: The sum of squared deviations of IP, which is
2.308711, is a measure of the total amount of variability in the data.
 Observations: Finally, there are 84 observations of industrial production in the
dataset.
4.3.3 INTEREST RATE (IR):
 Mean: The mean value of IR is 2.026087, which represents the average interest
rate over the period analyzed.
 Median: The median value of IR is 1.988295, which indicates that half of the
observations lie below this value and the other half lie above it.
 Maximum: The maximum value of IR is 2.579209, which represents the highest
interest rate observed during the period analyzed.
 Minimum: The minimum value of IR is 1.695799, indicating the lowest interest
rate recorded.
 Standard deviation: The standard deviation of IR is 0.248284, which suggests that
the values of IR are relatively spread out from the mean.
31
 Skewness: The skewness value of IR is 0.656611, indicating that the distribution
of IR is moderately right-skewed, with more observations on the left side of the
distribution than on the right side.
 Kurtosis: The kurtosis value of IR is 2.473649, indicating that the distribution of
IR is leptokurtic, which means that the distribution has heavy tails and a sharp
peak compared to a normal distribution. This suggests that there may be some
outliers or extreme values in the data.
 Jarque-Bera: The Jarque-Bera value of IR is 7.005582 with a low probability of
0.030113, indicating that the distribution of IR is not normal, which could affect
the validity of some statistical tests.
 Sum: The sum of all the values of IR is 170.1913, which represents the total
interest earned over the period being analyzed.
 Sum of squared deviations: The sum of squared deviations of IR is 5.116521,
which is a measure of the total amount of variability in the data.
 Observations: There are 84 observations of interest rate in the dataset.
4.3.4 INFLATION
 Mean inflation during the period analyzed is 5.23364.

 Median inflation is 5.199244, indicating that half of the observations lie below
this value and half above it.
 Maximum inflation value recorded is 5.673861, while the minimum value is
4.992396.
 The standard deviation of inflation is 0.189241, suggesting a relatively small
amount of variation in the data.
 The skewness value of 0.637116 indicates that the distribution of inflation is
slightly right-skewed, with more observations on the left side of the distribution.
 The kurtosis value of 2.43043 suggests that the distribution of inflation is
leptokurtic, with heavy tails and a sharp peak compared to a normal distribution.
 The Jarque-Bera value of 6.818268 with a low probability of 0.03307 indicates
that the distribution of inflation is not normal, which could affect the validity of
some statistical tests.
32
 The sum of all the values of inflation is 439.6257, representing the total level of
inflation over the analyzed period.
 The sum of squared deviations of inflation, which is 2.972411, is a measure of the
total amount of variability in the data.
 There are 84 observations of inflation in the dataset
4.4 SUMMARY:
The descriptive statistics provided in the analysis offer important insights into the
characteristics of the four variables being studied. By examining the mean, standard
deviation, skewness, and kurtosis of each variable, we can better understand the
central tendency, variability, shape, and distribution of the data.
Starting with Construction Component (CC), the mean value of 7.590967 indicates
that this variable tends to be centered around that value. The small standard deviation
of 0.249521 indicates that the data points are clustered closely around the mean, and
there is relatively little variation in this variable. The slightly left-skewed and flat
distribution suggests that the majority of data points are clustered towards the right-
hand side of the distribution, with a smaller number of values towards the left-hand
side.
Moving on to Industrial Production (IP), the mean value of 4.863233 indicates that
this variable tends to be centered around that value. The small standard deviation of
0.166781 suggests that the data points are clustered closely around the mean, and
there is relatively little variation in this variable. The slightly right-skewed,
leptokurtic distribution indicates that there are a larger number of data points towards
the left-hand side of the distribution, with a smaller number of values towards the
right-hand side, and that the data points are more tightly clustered around the mean
than would be expected in a normal distribution.
For Interest Rate (IR), the mean value of 2.026087 indicates that this variable tends to
be centered around that value. The larger standard deviation of 0.248284 indicates
that there is more variability in this variable than in the previous two variables. The
moderately right-skewed, leptokurtic distribution indicates that there are more data
points towards the left-hand side of the distribution, and the data points are more
tightly clustered around the mean than would be expected in a normal distribution.
33
Finally, for Inflation, the mean value of 5.23364 indicates that this variable tends to
be centered around that value. The range of the distribution between 4.992396 and
5.673861 suggests that the data points are clustered relatively closely around the
mean. The analysis does not provide information about the skewness or kurtosis of
this variable, so it is difficult to draw conclusions about the shape and distribution of
the data.
Overall, the descriptive statistics provide valuable information about the

characteristics of the four variables being studied. The information about the central
tendency, variability, skewness, and kurtosis can be used to better understand the data
and to make informed decisions based on the results of the analysis.
CORRELATION ANALYSIS:
Table 2CORRELATION ANALYSIS:
Correlations
CC IP IR EXR INF
CC 1
IP -0.57238 1
IR -0.34732 0.278801 1
EXR -0.34732 0.278801 0.7862 1
INF -0.51107 0.7862 0.444745 0.444745 1
The correlation matrix above shows

Correlati on the pairwise correlations between the
1.2
five variables: Construction
1
0.8 Component (CC), Industrial
0.6
0.4 Production (IP), Interest Rate (IR),
Axis Title
0.2
Exchange Rate (EXR), and Inflation
0
CC IP IR EXR INF
-0.2 (INF). Correlation is a statistical
-0.4
-0.6 measure that describes the strength
-0.8
and direction of the linear
Axis Title
relationship between two variables.
Figure 1 Correlation values range from -1 to
34
1, with -1 indicating a perfect negative correlation, 0 indicating no correlation, and 1
indicating a perfect positive correlation.
Looking at the matrix, we can see that there are both positive and negative
correlations between the variables. The strongest positive correlation is between
Industrial Production and Exchange Rate (0.786), indicating a strong positive linear
relationship between these two variables. This suggests that as Industrial Production
increases, the Exchange Rate also tends to increase, and vice versa.
The strongest negative correlation is between Construction Component and Industrial

Production (-0.572), indicating a strong negative linear relationship between these two
variables. This suggests that as Construction Component decreases, Industrial
Production tends to increase, and vice versa.
There is also a moderate negative correlation between Construction Component and

Inflation (-0.511), indicating a moderate negative linear relationship between these
two variables. This suggests that as Construction Component decreases, Inflation
tends to increase, and vice versa.
The correlation between Interest Rate and Construction Component is moderately

negative (-0.347) as well as the correlation between Interest Rate and Exchange Rate
(-0.347). This suggests that there may be some relationship between these variables,
but it is not as strong as the correlations observed between other pairs of variables.
It's worth noting that correlation does not imply causation. A strong correlation
between two variables may suggest a relationship, but it does not necessarily mean
that one variable causes the other. Further analysis would be needed to determine the
causal relationships between these variables.
In summary, the correlation matrix provides important information about the

relationships between the variables. It helps identify which variables are most strongly
related and which are not. These correlations can be useful in developing models and
making predictions about future trends.
OLS RESULT ANALYSIS:
35
Table 3OLS RESULT ANALYSIS
Sr variable coefficient std-error t-statistics prob

1 C 3671.932 366.1323 10.02898 0
2 IP 12.73999 2.913014 4.373473 0
3 IR 15.99517 30.61451 0.52247 0.028
4 EXR 7.368653 6.8039 1.083004 0.0282
5 INF 6.44409 6.121607 1.05268 0.0957
6
7 R squared 0.39351 Mean Dependent var 2039.949
8 Adjusted R-squared 0.362801 S.D. dependent var 4825612
9 S>E> of regression 385.2031 Akaike info criterion 14.8031
10 Sum squared resid 11722134 Schwarz Criterion 14.94779
11 Log likelihood -616.7301 Hannan-Quinn Criter 14.86126
12 F-statistics 12.81442 Durbin-Watson stat 0.365246
13 Prob(F-statistics) 0
The OLS (ordinary least squares) regression results shown above relate the dependent
variable Construction Component (CC) to several independent variables including
Industrial Production (IP), Interest Rate (IR), Exchange Rate (EXR), and Inflation
(INF). The OLS method is a common statistical technique used to estimate the
relationship between a dependent variable and one or more independent variables.
The first column of the table shows the name of each independent variable. The
second column shows the estimated coefficients or slopes for each independent
variable. The coefficients tell us how much the dependent variable (CC) is expected to
change when the corresponding independent variable changes by one unit, all else
held constant. For example, the coefficient for IP is 12.73999, meaning that for every
one unit increase in Industrial Production, we expect a 12.73999 unit increase in
Construction Component, holding all other independent variables constant.
36
Figure 2
The third column shows the
OLS standard error for each coefficient,
4000
which measures the precision of
3500
3000
the estimated coefficient. The
2500
2000 fourth column shows the t-statistic,
1500
1000 which is the ratio of the estimated
500
0 t-Statistic coefficient to its standard error.
C IP Coefficient
IR EXR The t-statistic measures the
INF
number of standard errors that the
Coefficient Std. Error t-Statistic Prob.
estimated coefficient is away from
zero. A t-statistic greater than 2 (or less than -2) indicates that the estimated
coefficient is statistically significant at the 5% level, meaning that it is unlikely to
have occurred by chance.
The fifth column shows the p-value for each independent variable, which is the
probability of observing a t-statistic as extreme or more extreme than the one
observed, assuming that the null hypothesis (that the true coefficient is zero) is true. A
p-value less than 0.05 (or 0.01) indicates that the estimated coefficient is statistically
significant at the 5% (or 1%) level.
The next set of statistics shows various measures of goodness of fit for the regression
model. The R-squared value measures the proportion of the variance in the dependent
variable (CC) that is explained by the independent variables. In this case, the R-
squared value is 0.39351, indicating that about 39.35% of the variation in CC can be
explained by the independent
OLS variables. The Adjusted R-
squared value is a modified
12000000
10000000
version of R-squared that
8000000 penalizes the inclusion of
6000000
additional independent
4000000
2000000
variables that do not improve
0 Series5 the fit of the model.
Series3
-2000000 1 2 3 4 5 Series1
6 7 The standard error of the
Series1 Series2 Series3 Series4 Series5 regression (S.E. of regression)
Figure 3
37
is an estimate of the standard deviation of the errors in the regression model. The sum
of squared residuals (Sum squared resid) measures the total amount of unexplained
variation in the dependent variable. The F-statistic tests the overall significance of the
regression model, which is the joint significance of all the independent variables. In
this case, the F-statistic is 12.81442, and the associated p-value is 0, indicating that
the regression model is statistically significant.
Finally, the Durbin-Watson statistic measures the presence of autocorrelation in the

residuals of the regression model. A value close to 2 indicates no autocorrelation,
while values significantly above or below 2 indicate positive or negative
autocorrelation, respectively. In this case, the Durbin-Watson statistic is 0.365246,
which indicates the presence of positive autocorrelation in the residuals.
The respondents' evaluation on the impact of macroeconomic variables on

construction cost prices is shown in Table 1.
This was within 12.73999 for Industrial Production, 15.99517 Interest Rate, 7.368653
Exchange rate and 6.44409 for inflation. The four most important indicators are
industrial production, interest rate, exchange rate, and inflation. This supported
Omole's (2001) assertion that since the local currency exchange rate was liberalized,
the cost of all goods and services has been rising.
According to Agene (1991), a change in a country's import will quickly impact the exchange
rate. These results supported Owoeye's (2003) conclusion that one of the elements influencing
currency rate was inflation rate. Additionally, Agene's (1991) research confirmed that a
change in a nation's imports or exports quickly impacts the exchange rate for that nation's
currency.
Government economic policies, money demand, inflation, interest rate deregulation, and the
value of money in circulation are the main drivers of interest rates. According to Ajibade
(2009), higher interest rates would result from the local currency decline in value against the
dollar.
ARDL RESULT ANALYSIS:
Table 4ARDL RESULT ANALYSIS:
38
Sr variable coffecient stad-error t-statistics prob
1 CC(-1) 0.772888 0.112703 6.857737 0
2 CC(-2) 0.16367 0.11487 1.424829 0.1584
3 IP 0.191748 1.389968 0.137951 0.8907
4 IR -24.44109 13.29165 -1.83883 0.07
5 EXR 9.402338 5.300467 1.77387 0.0802
6 EXR(-1) -11.08904 5.535729 -2.003177 0.0488
7 INF 1.710842 2.652744 0.644933 0.521
8 C 197.408 240.9023 0.819453 0.4152
9
10 R squared 0.902353 Mean Dependent var 2034.236
11 Adjusted R-squared 0.893117 S.D. dependent var 487.0594
12 S.E. of regression 159.2344 Akaike info criterion 13.0711
13 Sum squared resid 1876315 Schwarz Criterion 13.3059
14 Log likelihood -527.9151 Hannan-Quinn Criter 13.16537
15 F-statistics 97.69079 Durbin-Watson stat 2.037764
16 Prob(F-statistics) 0
The ARDL model is a popular approach to estimate long-run relationships

between variables that are integrated of different orders, which is the case for the
variables in this model. The ARDL model allows for the inclusion of both lagged
dependent variables and lagged independent variables as dynamic regressors.
In this ARDL model, the dependent variable is CC, and the model includes
four dynamic regressors: IP, IR, EXR, and INF, with four lags used for each
regressor. The model also includes a constant term. The final equation selected by the
model is ARDL(2,0,0,1,0), which means that the model includes two lags of the
dependent variable, no lags of
ARDL the independent variables, and
Coefficient Std. Error t-Statistic Prob.* one lag of the exchange rate
300
250
variable.
240.9023
200
197.408 The coefficients of the
150
100 model indicate the impact of
50 each variable on the dependent
-1.83883 -11.08904
-2.003177
0 -24.44109
6.85773699999
0.77288800000
0.112703
CC(-1) 1.424829 IP 13.29165
1.389968
0.191748
00.16367
0.11487
0.15840.8907
CC(-2)0.137951 9.402338
0.07
IR 5.535729
5.300467
1.77387 2.652744
1.710842
0.08020.0488
EXR EXR(- 0.81945299999
0.644933
0.521
INF 0.4152
C variable, while controlling for
-50 999
0001 1) 9999
Figure 4
the effects of other variables in
the model. The coefficient of
39
CC(-1) is positive and statistically significant, indicating a strong positive relationship
between the past value of CC and the current value of CC. The coefficient of CC(-2)
is positive but not statistically significant, suggesting that the relationship between CC
and its second lag is weaker than its first lag.
The coefficient of IP is positive but not statistically significant, indicating that

there is not enough evidence to suggest a significant relationship between IP and CC.
The coefficient of IR is negative and statistically significant, indicating that higher
interest rates are associated with lower values of CC, while controlling for the effects
of other variables in the model. The coefficient of EXR is positive but not statistically
significant, suggesting that the relationship between EXR and CC is weak. However,
the coefficient of EXR(-1) is negative and statistically significant, indicating that a
decrease in the exchange rate in the previous period is associated with an increase in
CC in the current period.
The coefficient of INF is positive but not statistically significant, indicating

that there is not enough evidence to suggest a significant relationship between
inflation and CC. The
ARDL constant term is positive but

not statistically significant,
2000000 indicating that the model is
1500000
1000000 not affected by any omitted
500000
variable bias.
0
Series3
-500000 ed
r ed n Series1 The model's R-
qua uar ss
io s id od c
- s s q re re ho sti c)
R R -
e g re d e l i a ti sti
d f r
ua lik s t a ti squared value of 0.902353
te .o sq og F- st
j us .E L ( F-
Ad S
Su
m ob indicates that the model
Pr
Series1 Series2 Series3 Series4 explains 90.23% of the

Figure 5 variation in CC, while the
adjusted R-squared value of 0.893117 suggests that the model is parsimonious and
includes only the relevant variables. The Durbin-Watson statistic of 2.037764
suggests that there is no autocorrelation in the model's residuals. Overall, the ARDL
model suggests that interest rates and the exchange rate's lagged value are the most
relevant variables in explaining the variation in CC.
40
CHAPTER 5
DISCUSSION
41
5.1 Concluding Remarks
The results obtained from the correlation analysis, OLS regression, and ARDL
model suggest that there is a relationship between the variables included in the
analysis and the dependent variable CC.
Firstly, the correlation matrix shows that there is a negative correlation

between CC and IP, IR, and INF, while there is a weak negative correlation between
CC and EXR. These results suggest that as IP, IR, and INF increase, CC tends to
decrease.
Secondly, the OLS regression model shows that IP has a positive coefficient,
indicating that as IP increases, CC tends to increase. IR and EXR have positive
coefficients but they are not statistically significant at the 5% level. On the other hand,
INF has a positive coefficient but it is only marginally significant at the 10% level.
The R-squared value of 0.39351 indicates that the model explains around 39% of the
variation in CC.
Finally, the ARDL model suggests that there is a positive relationship between
CC and lagged values of CC, indicating the presence of autocorrelation. IP and EXR
have positive coefficients, but they are not statistically significant at the 5% level. IR
has a negative coefficient, indicating that as IR increases, CC tends to decrease. EXR
lagged by one period has a negative coefficient, indicating that as EXR decreases, CC
42
tends to increase. However, only EXR lagged by one period is statistically significant
at the 5% level. The R-squared value of 0.902353 indicates that the ARDL model
explains a much higher percentage of the variation in CC compared to the OLS
model.
Overall, the results suggest that there is a relationship between CC and the
independent variables included in the analysis, but the nature and strength of the
relationship differ depending on the model used. The ARDL model with selected lags
provides the most comprehensive and significant results, indicating that lagged values
of CC, IP, and EXR are important determinants of CC.
5.1.1 Correlation
The strongest positive correlation with CC is observed with IR (0.786).
The strongest negative correlation with CC is observed with IP (-0.572).
5.1.2 OLS:
IP and EXR are significant predictors of CC at the 5% significance level.
IR and INF are marginally significant predictors of CC at the 5% and 10%

significance level, respectively.
The adjusted R-squared value suggests that the model explains around 36% of the
variance in CC.
5.1.3 ARDL
The lagged value of CC, CC(-1), is a highly significant predictor of CC, suggesting
that the past values of CC are useful in predicting the current value of CC.
The other significant predictors of CC include EXR(-1) and IR, while IP and INF do
not appear to have a significant effect on CC.
The model shows a very high R-squared value of 0.90, indicating that it explains a
large proportion of the variance in CC.
43
The Durbin-Watson statistic of 2.04 suggests no significant autocorrelation in the
residuals, indicating that the model has captured the important dynamics in the data.
In summary, both OLS and ARDL models suggest that exchange rate (EXR) and
interest rate (IR) are significant predictors of CC. However, the ARDL model
outperforms the OLS model in terms of the adjusted R-squared value and goodness-
of-fit statistics, indicating that it provides a better representation of the data.
5.2 Recommendation
This study therefore recommended that there is need for stable economic policies in
order to stabilize exchange rate, inflation and interest rate. This will enhance the
procurement of building projects in Pakistan and subsequent reduction in the cost of
buildings. The use of locally produced materials should also be encouraged so as to
reduce the heavy dependence on foreign or imported materials. This will further
enhance to a great extent the procurement of buildings.
5.3 Limitation and Future Research

 Data was collected in one go using cross-sectional analysis due to time
constraints, future researchers can collect data from multiple points in time
using longitudinal analysis for better results.
 Since we only chose a sample from Pakistan for this study, the results have a
limited capacity for external rationality.
 Only one EXR, IP, IR and INF is examined; however, future study may
expand the model and examine additional variables as well.
44
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Macro-Economics Determinants of Construction

Macro-Economics Determinants of Construction

COMSATS University Islamabad

Of the requirement of the degree of

A Post Graduate thesis submitted to the department of Management Sciences

Name Registration Number

Muhammad Ahssan CIIT/SP21-RPM-017/ISB

Dr. Naveed Raza

Macro-Economics Determinants of Construction

Has been approved

For the COMSATS University Islamabad

External Examiner: ________________________________________________

I, Muhammad Ahssan, bearing Registration No. CIIT/ SP21-RPM-017/ISB, hereby

I understand the zero-tolerance policy of HEC and COMSATS University Islamabad

Date: _____________________ _____________________

It is certified that Muhammad Ahssan, Registration No. CIIT/ SP21-RPM-017/ISB,

I want to dedicate this achievement my parents, teachers and friends who

First of all, I am thankful to Almighty Allah who blessed me with knowledge,

Macro-Economics determinants of construction

1.1. Overview of the Chapter ……………………..…………. 02

1.2. Introduction of the Study ……………………..………… 02

1.3. Background of the Problem ………………..…………… 02

1.4. Problem Statement ………………………..…………….. 04

1.5. Purpose of the Study ……………...……………..……… 04

1.6. Research Aims, Methods, Objectives and Research

1.6.1. Research Aims …………………….…………. 05

1.6.2. Research Objectives ……………………….…. 05

1.6.3. Research Questions ………………………….. 05

1.7. Significance of the Study ………………………..……… 05

2. Literature Review …………………………………………….. 22

2.1. Introduction ……………………………………………. 07

2.2. Construction industry ….………………………………. 08

2.3. Construction an Economic Activity…………………... 29

2.4. Macro-Economic Variables……..……………………... 45

2.6. Exchange Rate………. …………………………..……... 14

2.7. Interest Rate……………………………………………… 16

2.9. Theoretical Framework………………………………….. 16

2.10. Conceptual Model ……………………………..………... 17

2.11. Hypotheses Development …………………………….… 17

3. Research Methodology …………………………………………. 20

3.1. Introduction ……………………………………………. 21

3.2. Research Methodology ………………………………… 21

3.2.1. Research Approach …………………………. 21

3.2.2. Methodological Choices ……………………. 22

3.2.3. Time Horizon …………………..…………... 22

3.2.4. The Purpose of the Research ……………..… 22

3.2.5. Data Collection and Data Analysis …………. 22

3.3. Industry Setting ………………………………………... 23

3.4. Data Collection …………………………...……………... 23

3.5. Data Analysis ……………………….…………………. 24

3.5.1. Regression Analysis……………….. ……..…. 24

3.5.2 ARDL ……………………………. ……..…. 24

4 Data Analysis ……………………………………………………. 25

4.2. Nature of the data ... ……………………..……………… 28

4.3. Descriptive Statistics ……………………………..…..…. 29

4.3.2 Industrial Production ………….………………. 30

4.3.3 Interest Rate ………………………………………. 31

5.1. Concluding remarks………...…………………………. 44

Table 1ANALYSIS OF DESCRIPTIVE STATISTICS.......................................................30

CPI Consumer Price Index

GDP Gross Domestic Product

REITs Real Estate Investment Trusts

SBP State Bank of Pakistan

Date: _ _