The Nexus Among Trade Volume, Trade Deficit and Real Exchange Rate: An Empirical Evidence from Pakistan

Abstract

The study estimates the causal nexus among trade volume, trade deficit and real exchange rate in Pakistan by using a time series data from 1985 – 2017. Certain Econometric techniques have also been applied i.e. Unit Root Test has employed to stationeries the data of the selected variables which leads to avoid the Autocorrelation problem in the model. The study uses Johnson Co-integration for long run cointegration. The results confirmed that all the chosen variables are co-integrated in long run. The ordinary least square is employed to examined long run relationship between the variables of interest. The result shows that there is strong robust significant relationship among trade, trade deficit and real exchange rate. Beside the main variable the control variables of infrastructure, Foreign Direct Investment inflow impact significantly on dependent variables which strengthen the causal relationship among the selected variables. It is suggested that the Government should enhance the quality and quantity of infrastructure facility which will leads to favorable balance of trade in Pakistan. It is also suggested that whenever the policy makers providing the policy of trade, especially exports, then adverse effect of Exchange Rate Depreciation is to be quantified and necessary measures be suggested so as to reduce the repercussion.

Keywords: Trade, Trade Deficit, Exchange Rate, Co-integration, Pakistan.

DOI: 10.7176/JESD/10-4-10