Macroeconomic Determinants of Final Consumption Expenditure in Pakistan: Evidence from Foreign Direct Investment, Income Levels, Capital Formation, and Trade

Muhammad Hammad Hussain; Khalid Zaman

doi:10.55047/transekonomika.v6i3.1206

Authors

Muhammad Hammad Hussain Department of Economics, The University of Haripur, Haripur Khyber Pakhtunkhwa 22620, Pakistan
Khalid Zaman* Department of Economics, The University of Haripur, Haripur Khyber Pakhtunkhwa 22620, Pakistan https://orcid.org/0000-0002-2585-2790

DOI:

https://doi.org/10.55047/transekonomika.v6i3.1206

Keywords:

Capital Accumulation, Domestic Demand, Household Income, Investment Inflows, Trade Liberalization

Abstract

Backgrounds: Final Consumption Expenditure is essential for maintaining economic activity and improving living standards in emerging nations. Understanding the macroeconomic determinants of consumption patterns is crucial for formulating policies that promote sustained economic stability and inclusive development in Pakistan.

Objectives: This study examines the impact of economic growth, gross fixed capital formation, household income, and trade openness on final consumption expenditure in Pakistan from 1990 to 2023.

Methodology: The study uses annual time-series data from 1990 to 2023 and employs the Generalized Method of Moments (GMM) to obtain robust, efficient parameter estimates and address potential endogeneity.

Findings: The empirical findings demonstrate that foreign direct investment has a statistically significant positive impact on final consumption expenditure, highlighting its role in income generation and in strengthening purchasing power. In contrast, economic growth and gross fixed capital formation are negatively correlated with consumer expenditure, suggesting that a heightened focus on capital accumulation may temporarily inhibit current household spending. Household income and trade openness significantly enhance domestic consumption, highlighting the critical roles of income growth and worldwide market integration.

Conclusions: The results indicate that Pakistan’s consumption-led economic development is contingent on implementing balanced macroeconomic policies that encourage productive investment, raise household incomes, and facilitate trade liberalization. To achieve sustainable and inclusive growth, policymakers must meticulously balance the trade-off between short-term consumption needs and long-term capital formation.

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