This study has been conducted to test
the affect of devaluation on trade balance in case of a developing country
Pakistan over the period from 1980-2016.Basic aim of this study is to check the
long run relationship between devaluation of domestic currency, real effective
exchange rate (REER), external debt (ED), imports of goods and services (IMP),
foreign direct investment (FDI), and economic growth in case of Pakistan over
the period from 1980-2016.along with that this study also tests the short run
relationship between variables. With a specific end goal to look at the long
run connection between depreciation of currency and trade balance this study
uses bound testing approach to cointegration and error connection mechanism
Cointergration, REER, ED, IMP, FDI,
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CHAPTER NO. 1
Trade balance is measured as a difference
between country exports and imports. Balance of trade of a country shows the
imports and exports of goods and how country compete in a global market place (Uzma 2015). The reduction in the
official value of a currency as compared to other currencies is known as
devaluation. Devaluation could act as a mean of a deficit in trade balance and
the balance of payment. One of the effect of devaluation of money is that it
increases domestic prices of imports and decreases foreign prices of imports.
, the effect of a devaluation on the
balance of trade depends on its impact on the relative price of traded and
non-traded good (RONALD W. JONES).
Pakistan became independent in 1947.
Pakistan faced continued trade deficit during globalization era. This firmly continued
deficit balance of trade is very dangerous for an economy like Pakistan and
policy makers and economists are needed to take steps towards this issue. (Mohammad, 2010).Pakistani currency was
firstly devalued in in 1955. After that currency was devalued in 1972. Examining the exports and imports
performance for the floating period of 1982 to 2008, it is evident that imports
increased at a faster rate than the exports of the country. In 1982, a decline
of 10.28% had occurred in the exports of Pakistan against the imports which
showed an increase of 11.09%. After that both the sectors showed a mixed picture
for a period of 10 years.
Exchange rate plays an important role
in trade balance. Both
export demand and supply as well as import demand are considerably responsive
to the exchange rate.
Motivation of the study:
This issue of devaluation and its
impact on trade balance is not a new topic. It has been discussed by many
researchers ,policy makers and scholars already .Some are in favor of positive
impact of devaluation on trade balance and some are against of it. This paper
is again a small effort and it will contribute some new information in existing
OBJECTIVES OF THE STUDY:
In Pakistan research has been
conducted in different fields. The objective of this research is to evaluate
the effect of devaluation on trade balance. It has been done by using Auto
Regressive Distributed Lag (ARDL) approach and Error correction mechanism for
short run relationship between both the variables. Major objective of this
study is to establish a long run relationship between devaluation and its
impact on trade balance in case of Pakistan from the year 1980-2016.
Research questions of Term Paper:
1-How does devaluation affect trade
balance in Pakistan?
2-Does growth of country is
positively related with trade balance?
3-What is the affect of devaluation
on imports of country?
Hypothesis of Term Paper:
Ho There is no relationship
between trade balance and devaluation.
Devaluation is taken as a tool to
cover the trade deficit of Pakistan. This study will also kept in mind the
relation between trade deficit and devaluation. We have developed a null
hypothesis that trade balance doesn’t affected by the devaluation.
CONTRIBUTION OF TERM PAPER:
This paper will use different
econometric techniques to prove that trade balance is not affected by
Data has been collected from WDI
(world development indicators over the year 1980-2016.