Bilateral Trade Elasticities: Evidence from Pakistan and her Major Trade Partners

Abstract

This paper estimates bilateral trade Elasticity between Pakistan and her major trade partners for the period 1981-2021. Johnson’s co-integration technique is used to estimate the long-run relationship between the real GDP, Export, Imports and exchange rate of Pakistan and her trading partners. The study finds no long-run relationship between real exchange rate, bilateral Export and imports, which mean that the domestic currency's depreciation is not helpful in improving our trade balance. In this study, we also find that trade is beneficial for both Pakistan and India but India is comparatively in a more advantageous position. The study finds that Pakistan’s income elasticity is high for USA and China which means that Pakistan’s economic growth boosts both USA and China’s economy as Pakistan mostly imports from these two economies. The study also concludes that the income elasticity of USA and UK imports is very small which is due to the fact that we are mainly exporting agricultural goods. Policies of diversification of export should be pursued to increase export earnings.