Income, Money and Prices in Pakistan: Trends and Interrelationship

This paper attempts to look at the trends in income, money, and prices in Pakistan over the years. In addition, we also look at the components of, as well as interrelationship among, these variables. Annual data from 1949-50 to 1998-99 are used and the period is further divided into five decades. The analyses show a greater expansion in these variables in the 1970s. However, these expansions can be attributed to phenomenal expansions in prices. Real income, on the other hand, improved marginally. Real income expanded significantly in the 1960s and remained stable till the 1980s but significantly declined in the 1990s. This is an alarming situation and requires suitable remedial measures. Similarly, the analyses show a significant decline in NFI in the 1990s. In fact, it has been negative for the last four years indicating capital outflow from the country which is also alarming. The analyses also indicate a significant difference between measures of money, M1 and M2, in the 1990s due to the opening of foreign currency deposits. The opening of foreign currency deposits has also affected the demand deposits and there seems to be shifting of funds between the two deposits. Finally, the correlation analyses indicate a little role of money in changing income as well as prices. On the other hand, money seems to be significantly affected by nominal income, particularly by three years back level of income. Regarding price, it seems to have a small association with money.