ANALYZING THE FACTORS AFFECTING THE TRADE BALANCE: EMPIRICAL STUDY OF PAKISTAN’S ECONOMY

Abstract

By analyzing Pakistan's Balance of payment from 1980 to 2019, the study aims to analyze the effect of various factors exchange rate, trade barriers and money supply on balance of trade. The empirical analysis investigated the SR and LR effect. A statistically significant LR relationship between the study variables is verified by the results except for foreign trade policy. The study found that in Pakistan, both monetarist and absorption approaches have insignificant foundation. Furthermore, the ER is insignificant in the short run at level and lag, while all other variables are statistically significant in SR. Thus, results provide significant information in reaching the desired conclusion. Based on findings this study suggests that the State bank is needed to play its role in fixing the balance of the trade problem by using money supply as a policy tool. Moreover, the authorities should focus upon the income rather than ER policy as a tool for correcting the Balance of the Payment.