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TRADE BALANCE AND TERMS OF TRADE RELATIONSHIP: Evidence from Pakistan

Author

Listed:
  • Rizwana YASMEEN*
  • Muhammad HAFEEZ**
  • Ihtsham ul Haq PADDA***

Abstract

The terms of trade (TOT) have an important role in determining direction of the trade which finally transmits into trade balance. The current study is an effort to seek the effect of TOT on the trade balance. The short and long-estimates are computed through Autoregressive Distributed Lag (ARDL) methodology; the results reveal that in the case of Pakistan, there is no significant relationship between TOT and trade balance. Furthermore, the estimated Marshall Lerner (ML) condition is calculated by addition of the absolute values of import and export demand elasticities. The study shows that it does not hold for Pakistan, neither in the short-run, nor in the long-run. The computed ML condition, evidently infers that price have negative impact on trade balance. The demand for exports and imports are price inelastic; thus, to curtail trade balance the government should take measures to increase exports and limit the unnecessary imports.

Suggested Citation

  • Rizwana YASMEEN* & Muhammad HAFEEZ** & Ihtsham ul Haq PADDA***, 2018. "TRADE BALANCE AND TERMS OF TRADE RELATIONSHIP: Evidence from Pakistan," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 28(2), pages 173-188.
    • Handle: RePEc:pje:journl:article28wini
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    References listed on IDEAS

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    Cited by:

    1. Mahmood, Asif & Zahoor, Muhammad Awais, 2021. "Role of Global Value Chains and Exchange Rate: An Empirical Examination in case of Pakistan," MPRA Paper 115958, University Library of Munich, Germany.
    2. Muhammad Omer & Junaid Kamal & Jakob Haan, 2023. "Does an exchange rate depreciation improve the trade balance of Pakistan?," International Journal of Economic Policy Studies, Springer, vol. 17(1), pages 163-185, February.
    3. Hafsa Hina, 2020. "Correction of Trade Deficit through Depreciation - A Misdirected Policy: An Empirical Evidence from Pakistan," PIDE-Working Papers 2020:24, Pakistan Institute of Development Economics.
    4. Hafsa Hina, 2021. "What Do We Know of Trade Elasticities?," PIDE Knowledge Brief 2021:30, Pakistan Institute of Development Economics.
    5. Shah, Wasi Ul Hassan & Hao, Gang & Yan, Hong & Yasmeen, Rizwana & Padda, Ihtsham Ul Haq & Ullah, Assad, 2022. "The impact of trade, financial development and government integrity on energy efficiency: An analysis from G7-Countries," Energy, Elsevier, vol. 255(C).

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