The Determinants of Trade Balance in Pakistan: An ARDL Approach

Abstract

Trade balance is one of the important indicators that are used to examine the macroeconomic performance and competitiveness of a country in international market. Hence, the determinants of trade balance are considered supportive for investigation of the interactions between the domestic and international trade dynamics. The core objective of this study is to explore the main determinants of trade balance in Pakistan economy under macroeconomic framework. Using Autoregressive Distributive Lag Modeling approach to co-integration and Error Correction Modeling approach over the period of 1980-2017. The study is an endeavor to contribute in the empirical literature as the results reveal that real effective exchange rate shows insignificant results with trade balance. Moreover, money supply and final consumption expenditure have negative and significant relationship with trade balance both in short run and long run. The findings provide specific highlights for the concerned policymakers to consider the money supply, final consumption expenditures and exchange rate while framing the trade strategies in order to achieve the sustainable trade balance