Different Approaches to Merchandise Trade Balance in Pakistan
An Econometric Evidence
The current study empirically examines the three major approaches to trade balance for Pakistan by utilizing the yearly data from 1972 to 2016. Monetary, elasticity, and absorption approaches were tested by developing a model that incorporates all three approaches. The significant contribution of the study is that it uses only the merchandise trade deficit account, which includes trade of only physical goods. The study used time-series data; therefore, variables have been tested for the stationarity, and it is found that there is a combination of I (0) and I (1) variables, so ARDL bounds testing approach to co-integration has been employed to find the short run and long run associations among the variables. The bound test results discovered that there is a presence of stable long-term association among the merchandise trade deficit account, real broad money supply, real effective exchange rate, and real domestic absorption. The results further revealed that merchandise trade discrepancy is determined purely by the real effective exchange rate, which specifies that the exchange rate's devaluation increases the deficit in the long run whereas in the short-run increase in domestic absorption decreases the merchandise trade deficit.
Alhanom, E. (2016). Determinants of Trade Balance in Jordan. NG-Journal of Social Development, 2(5).
Falk, M. (2008). Determinants of the Trade Balance in Industrialized Countries. FIW Research Report.
Bernard & Sin-Yu-Ho (2017). The Real Exchange. The Ghanian Trade Balance, and The J-Curve: Journal of African Business.
Jarita Duasa. (2007). Determinants of Malaysian Trade Balance: An ARDL Bound Testing Approach. Malaysia: Global Economic Review: Perspectives on East Asian Economies and Industries, 36(1), 89-102.
Metzler. (1948). The Theory of International Trade, In Howard. A Survey of Contemporary Economics, Vol. I Richard D. Irwin, INC, Homewood, IL.
Mundell, R. (1973). International Monetary Reform and Exchange Rate Issues. Discussions.
State Bank of Pakistan, (2017). Handbook of Statistics on Pakistan Economy. State Bank of Pakistan.
Pesaran, H. S. and Smith, R.J. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16, 289-326.
Robinson, J. (1947). The Foreign Exchanges: Essays in the Theory of Employment. Oxford: Basil Blackwell.
Waliullah. (2010). Determinants of Pakistan’s Trade Balance: An ARDL Cointegration Approach, The Lahore Journal of Economics 15(1), 1-26.
J. Meade. (1951). The removal of trade barriers: the regional versus the universal approach, Economica, vol. 18, no. 70, pp. 184–198, 1951.
Polak J (1957). Monetary Analysis of Income Formation and Payments Problems, IMF Staff Papers, 6, 1-50.
Prais, S.J. (1961). Some Mathematical Notes on the Quantity Theory of Money in a Small Open Economy, International Monetary Fund Staff Papers, 2, 212 – 226.
Bahmani-Oskooee, M. (1991). Is there a Long–Run Relation between the Trade Balance and the Real Effective Exchange Rate of LDCs? Economic Letters, 403-407.
Gomes, F.A.R., and Paz, L.S. (2005). Can Real Exchange Rate Devaluation Improve Trade Balance? The 1990 – 1998 Brazilian Case, Applied Economics Letters, 12, 525 – 8.
Rose, A.K. (1991). The Role of Exchange Rate in a Popular Model of International Trade: Does the Marshall Lerner Condition Hold? Journal of International Economics, 30, 301 – 316.
Tufail et al. (2014). Effect of budget deficit on trade deficit in Pakistan (a time series analysis). Journal of Finance and Economics, 2(5), 145–148.
Pandey, R. (2013). Trade elasticities and the Marshall Lerner condition for India, Global Journal of Management and Business Studies, 3, 423–428.
Irhan, H. B., Alacahan, N. D., & Korap, L. (2011). An empirical model for the Turkish trade balance: new evidence from ARDL bounds testing analyses. Ekonometri ve I˙statistik Sayı, 7(14), 38–61.
Shah, D. A., & Majeed, D. M. (2014). Real exchange rate and trade balance in Pakistan: an ARDL co-integration approach. MPRA Paper no. 57674.
Ajayi, F. O. (2014). Determinants of the Balance of payments in Nigeria: adjustment analysis, Journal of African Macroeconomic Review, 5(1), 304–314.
Understanding Capital And Financial Accounts In The Balance Of Payments. (n.d.). Retrieved December 11, 2020, from https://www.investopedia.com/investing/understanding-capital-and-financial-accounts-balance-of-payments/
Global Business Management Review (GBMR) has taken all reasonable measures to ensure that material contained in this website is the original work of the author(s). However, the Journal gives no warranty and accepts no responsibility for the accuracy or the completeness of the material; no reliance should be made by any user on the material. The user should check with the authors for confirmation.
Articles published in the Global Business Management Review (GBMR) do not represent the views held by the editors and members of the editorial board. Authors are responsible for all aspects of their articles except the editorial screen design.
Submission of an article is done with the understanding that the article has not been published before (except in the form of an abstract or as part of a published lecture, or thesis) that it is not under consideration for publication somewhere else; that if and when the article is accepted for publication, the author's consent to automatic transfer of the copyright to the publisher.