Income, Money, and Prices in Pakistan: Trends and Interrelationship

Abstract

Income, Money, and Prices are important macroeconomic variables which play crucial roles in an economy. There has been a long debate in economics regarding their roles. For example, the Monetarists claim that money plays an active role and leads to changes in income and prices. In other words, changes in income and prices in an economy are mainly caused by the changes in money stocks. The Keynesians, on the other hand, argue that money does not play an active role in changing income and prices. In fact, changes in income cause changes in money stocks via demand for money. Similarly, changes in prices are mainly caused by structural factors. Although there is disagreement among economist on the roles of income, money, and prices as well as their interrelationship, these variables are considered important and large amount of literature in economics deals with these variables. The purpose of this paper is to look at the trends of these variables in Pakistan’s economy over fifty years. We also look at the components of these variables as well as their interrelationship.