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ore than the twice of that exports. The acceleration seen in imports is largely being driven by a surge in international oil prices and the fact is that Pakistan is heavily dependent on oil imports.

This had a negative impact not only in BOP but also possess a threat of industrialization and technological improvements to the manufacturing sectors which results in decorating the exports which as a negative effect on the economy.

However the inflation depends upon the following factors, and the reasons for rising of inflation are as fallows

Decelerating economic growth

Loose Monetary policy

Output set backs

Higher duties and taxes

Depreciation of Pakistan rupee

Frequently adjustment in administered prices of gas, electricity and POL.

Political instability

LITERATURE REVIEW

Study of impact of oil prices on inflation have been conducted by many macroeconomic economists nationally as well as internationally. These all are different from each other either from country to country, sample size, time period or from selection of variables. In this section, few of them are comprehensively summarized as below;

The Matteo Monera is of the view that sharp increases in the oil prices are generally seen as the major contributor to business cycle. The recent high prices of oil in the international markets cause very problems and also bring possible slowdowns in the economic performance of the most developed countries. The several authors have considered the direct channel of transmission of energy prices increases and the other authors have argued that economic downturn arises from the monetary policy response to the inflation due to increase in the oil prices. In this paper a structured cointegrated VAR model has been considered for G-7 countrieas in order to study the effect of oil prices shocks on output and prices and the reaction of monetary variables to external shocks. The empirical analysis shows that , for most of the countries considered , there seems to be an impact of unexpected oil prices fluctuations on interest rate, suggested a contactionary monetary policy response directed to fight inflation. In turn, increases in interest rates are transmitted to real economy by reducing output growth and the inflation rate.

Similarly, results by Bernanke, Gentler and Watson (1997) clearly support this view explaianing that if, following an oil price shock, the Federal reserve had not increased interest rates, the economic downturns that hit U.S may be largely avoided. In particular, they show that th U.S economy respond differently to an oil price shocks leads to increase in federal fund rate and decline in real GDP. When the federal fund rate is held constant, BGW find that that oil prices shock result an increase in real GDP and of the inflation rate. According to these three authors, these results show that the importance of real effects of oil prices shock due to monetary policy response.

Michael Leblanc is an article discussed the recent rise in oil prices and shrinking of the existing resources. He analyzed that the impact of energy on economic growth is not the same as of all the resources. He assumed that the inflation which is directly related with the oil prices and analyzed the results. Results in his research show that if there is l