IDEAS home Printed from https://ideas.repec.org/a/pje/journl/article14sumiv.html
   My bibliography  Save this article

PAKISTANS TRADE PATTERNS WITH CHINA AND UAE:Application of Purchasing Power Parity Theory

Author

Listed:
  • Arsalan FARID*
  • Alvina Sabah IDREES*

Abstract

The present study examines the trading patterns of Pakistan with its two major trading partners: China and the United Arab Emirates (UAE), through the application of purchasing power parity (PPP) theory. Purchasing Power Parity (PPP) is a theory of exchange rate determination and a way to compare the average price of goods and services between the countries. The theory assumes that the transactions undertaken by importers and exporters are motivated by the cross country price difference; which in turn induce changes in the bilateral exchange rate. The objective of the research paper is to assess the PPP theory behavior, in case of Pakistan, with its two major trading partners, i.e., whether the long-run movements in the exchange rate are affected by changes in the price level in the country. The study examines the PPP theory on the time series data from 1980 to 2013, through an application of the Ordinary Least Square (OLS) regression. The results indicate that in the case of China, PPP theory holds with Pakistan and the price level has a significant role to play. It induces changes in the exchange rate determining the long-run equilibrium path for trade between Pakistan and China. On the other hand, for UAE, the PPP theory does not hold with Pakistan, which might be due to productivity differences or fiscal shocks.

Suggested Citation

  • Arsalan FARID* & Alvina Sabah IDREES*, 2014. "PAKISTANS TRADE PATTERNS WITH CHINA AND UAE:Application of Purchasing Power Parity Theory," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 24(1), pages 75-86.
    • Handle: RePEc:pje:journl:article14sumiv
    as

    Download full text from publisher

    File URL: http://aerc.edu.pk/wp-content/uploads/2016/08/Article_41Paper-591-IV-Arsalan-Farid-1.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ali Acaravci & Ilhan Ozturk, 2010. "Testing Purchasing Power Parity in Transition Countries: Evidence from Structural Breaks," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 12(27), pages 190-198, February.
    2. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    3. Sofiane Sekioua & Menelaos Karanasos, 2006. "The real exchange rate and the Purchasing Power Parity puzzle: further evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 199-211.
    4. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72(6), pages 584-584.
    5. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    6. Coakley, Jerry & Flood, Robert P. & Fuertes, Ana M. & Taylor, Mark P., 2005. "Purchasing power parity and the theory of general relativity: the first tests," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 293-316, March.
    7. Abuaf, Niso & Jorion, Philippe, 1990. "Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-174, March.
    8. Muhammad Arshad Khan & Abdul Qayyum, 2008. "Long-Run and Short-Run Dynamics of the Exchange Rate in Pakistan: Evidence FromUnrestricted Purchasing Power Parity Theory," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 13(1), pages 29-56, Jan-Jun.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marc Audi & Amjad Ali, 2023. "The Role of Environmental Conditions and Purchasing Power Parity in Determining Quality of Life among Big Asian Cities," International Journal of Energy Economics and Policy, Econjournals, vol. 13(3), pages 292-305, May.
    2. James R. Lothian & Mark P. Taylor, 2008. "Real Exchange Rates Over the Past Two Centuries: How Important is the Harrod‐Balassa‐Samuelson Effect?," Economic Journal, Royal Economic Society, vol. 118(532), pages 1742-1763, October.
    3. Taylor, Mark P. & Sarno, Lucio, 1998. "The behavior of real exchange rates during the post-Bretton Woods period," Journal of International Economics, Elsevier, vol. 46(2), pages 281-312, December.
    4. Arize, Augustine C. & Malindretos, John & Ghosh, Dilip, 2015. "Purchasing power parity-symmetry and proportionality: Evidence from 116 countries," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 69-85.
    5. Jyh‐Lin Wu & Pei‐Fen Chen & Ching‐Nun Lee, 2009. "Purchasing Power Parity, Productivity Differentials And Non‐Linearity," Manchester School, University of Manchester, vol. 77(3), pages 271-287, June.
    6. Renu Kohli, 2004. "Real Exchange Rate Stationarity in Managed Floats: Evidence from India," International Finance 0405011, University Library of Munich, Germany.
    7. Goh, Soo Khoon & Mithani, Dawood, 2000. "Deviation from Purchasing Power Parity: Evidence from Malaysia, 1973–1997," MPRA Paper 51922, University Library of Munich, Germany.
    8. Yan, Beiling, 2002. "Purchasing Power Parity: A Canada/U.S. Exploration," Economic Analysis (EA) Research Paper Series 2002002e, Statistics Canada, Analytical Studies Branch.
    9. Goldberg, Lawrence G. & Gosnell, Thomas F. & Okunev, John, 1997. "Purchasing power parity: Modeling and testing mean reversion," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 949-966, July.
    10. Apte, Prakash & Sercu, Piet & Uppal, Raman, 2004. "The exchange rate and purchasing power parity: extending the theory and tests," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 553-571, June.
    11. Sarno, Lucio & Valente, Giorgio, 2006. "Deviations from purchasing power parity under different exchange rate regimes: Do they revert and, if so, how?," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3147-3169, November.
    12. Abdullah Noman, 2008. "Testing for PPP in the mean-group panel rgression framework: further evidence," Economics Bulletin, AccessEcon, vol. 6(20), pages 1-12.
    13. Francis W. Ahking, 2002. "Is the Bayesian Approach Necessarily Better than the Classical Approach in Unit-Root Test?," Working papers 2002-18, University of Connecticut, Department of Economics.
    14. Dimitrios Malliaropulos & Ekaterini Panopoulou & Theologos Pantelidis & Nikitas Pittis, 2013. "Decomposing the persistence of real exchange rates," Empirical Economics, Springer, vol. 44(3), pages 1217-1242, June.
    15. Frederic Bec & Melika Ben Salem & Marine Carrasco, 2004. "Tests for Unit-Root versus Threshold Specification With an Application to the Purchasing Power Parity Relationship," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 382-395, October.
    16. Herwartz, Helmut & Reimers, Hans-Eggert, 2002. "Testing the purchasing power parity in pooled systems of error correction models," Japan and the World Economy, Elsevier, vol. 14(1), pages 45-62, January.
    17. Yan, Beiling, 2002. "Parité de pouvoir d'achat : le cas du Canada et des États-Unis," Série de documents de recherche sur l'analyse économique (AE) 2002002f, Statistics Canada, Direction des études analytiques.
    18. Coe, Patrick J. & Serletis, Apostolos, 2002. "Bounds tests of the theory of purchasing power parity," Journal of Banking & Finance, Elsevier, vol. 26(1), pages 179-199, January.
    19. Kul B. Luintel, 2000. "Real exchange rate behaviour: evidence from black markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(2), pages 161-185.
    20. Engel, Charles, 2000. "Long-run PPP may not hold after all," Journal of International Economics, Elsevier, vol. 51(2), pages 243-273, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pje:journl:article14sumiv. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Samina Khalil (email available below). General contact details of provider: https://edirc.repec.org/data/aekarpk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.