Abstract
The main objective of this study is to measure the impact of Keynesian four sector open economy multiplier model in the context of Pakistan's economy and to suggest to the government how the size of multiplier could be increased. For this purpose, 19 years time series data have been collected for different components of the aggregate demand function of the Keynes model. Stationarity of the data was checked by Augmented Dickey-Fuller (ADF) unit roots test. Next, the regression analysis is applied. By Keynesian multiplier model, multiplier (K) value is obtained for each year and on the basis of multiplier value, national income equilibrium is determined. Overall, the mean value of multiplier (K) is equal to 0.841088 times. The significance of the model R2 (0.970894) indicates that 97.08% of the dependent variable are explained by the independent variables. This is because of the fact that there is significant unbiasedness in the data and adjusted R2 =0.963133 which is closer to the R2. The consumption, investment and government expenditure have a significant impact on national income, whereas the t value of net export (X) is less than two which is insignificant and may be because of recession and fluctuation in the pattern of international demand. The coefficient of variation, t-statistic, R2, and adjusted R2 lies within the acceptable ranges. For policy recommendations, government must provide incentives to develop industrial base in the country. Expenditure dampening policy should be encouraged to discourage imports of luxury and unnecessary imports. Simultaneously expenditure switching policies should be adopted by the government to find out substitutes to the expensive imports like ethanol could be developed to decrease oil imports. The scope of the government expenditures should be increased. The transfer payments systems like Benazir Income support programme (BISP), Bait-ul-Mall scheme and Zakat should be improved. Key words: Marginal propensities, multiplier, national income, John Maynard Keynes, recession, expenditure dampening, expenditure switching.
Highlights
Economic phenomena are very complex in its nature but are always unique in its application
A basic proposition of the Keynesian theory is that the equilibrium level of income and output depends upon the economy’s aggregate spending for output
To determine national income equilibrium (Table 2), different marginal propensities are calculated like marginal propensity to save, tax, and imports
Summary
Economic phenomena are very complex in its nature but are always unique in its application. The laws of economics are not like natural laws, with minor changes, model developed in one country could be applied in another country or economy (Alam, 2009). The provisions for minor adjustments are given because all economic models or laws are true under ceteris paribus conditions. A basic proposition of the Keynesian theory is that the equilibrium level of income and output depends upon the economy’s aggregate spending for output. If the aggregate spending is not sufficient to call forth the level of output that require the employment of all variables like workers for its production, unemployment results, and production of goods and services falls below its potential. If the aggregate spending is just sufficient, full employment results, and production reaches its potential.
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