Exploring the Empirical Linkages between Economic Growth and Private Consumption: Contextual Evidence from Pakistan

Abstract

The sustainable development of a country is assumed to be a healthy sign for domestic consumers as well as producers. As private consumption is a vital component of real gross domestic product (GDP) and it can influence economic growth. This study explored a dynamic relationship between economic growth represented by real GDP and real private consumption expenditure (PCE). Stationarity of private consumption expenditure and GDP in first differences led to cointegration analysis between these time series data. Cointegration test indicated the existence of co-integrating relationship between these two variables. Vector error correction model (VECM) was employed to test the possibility of long-run adjustment towards equilibrium as well as nature of short-run dynamics. Granger causality test shows plausible role of short run consumption dynamics significantly improve predictive power of the model for real GDP growth.