ABSTRACT:This study has been conducted to testthe affect of devaluation on trade balance in case of a developing countryPakistan over the period from 1980-2016.Basic aim of this study is to check thelong run relationship between devaluation of domestic currency, real effectiveexchange rate (REER), external debt (ED), imports of goods and services (IMP),foreign direct investment (FDI), and economic growth in case of Pakistan overthe period from 1980-2016.along with that this study also tests the short runrelationship between variables. With a specific end goal to look at the longrun connection between depreciation of currency and trade balance this studyuses bound testing approach to cointegration and error connection mechanism(ECM).KEYWORDS: ECM,Cointergration, REER, ED, IMP, FDI, table of contents Topic table of contentsabstract Chapter-1INTRODUCTIONChapter-2Literature Review Chapter-3RESEARCHMETHODOLOGYChapter-4 Results analysis Chapter-5 conclusion References CHAPTER NO. 1INTRODUCTION:BACKGROUND: Trade balance is measured as a differencebetween country exports and imports.
Balance of trade of a country shows theimports and exports of goods and how country compete in a global market place (Uzma 2015). The reduction in theofficial value of a currency as compared to other currencies is known asdevaluation. Devaluation could act as a mean of a deficit in trade balance andthe balance of payment. One of the effect of devaluation of money is that itincreases domestic prices of imports and decreases foreign prices of imports., the effect of a devaluation on thebalance of trade depends on its impact on the relative price of traded andnon-traded good (RONALD W. JONES).Pakistan became independent in 1947.Pakistan faced continued trade deficit during globalization era.
This firmly continueddeficit balance of trade is very dangerous for an economy like Pakistan andpolicy makers and economists are needed to take steps towards this issue. (Mohammad, 2010).Pakistani currency wasfirstly devalued in in 1955. After that currency was devalued in 1972. Examining the exports and importsperformance for the floating period of 1982 to 2008, it is evident that importsincreased at a faster rate than the exports of the country.
In 1982, a declineof 10.28% had occurred in the exports of Pakistan against the imports whichshowed an increase of 11.09%.
After that both the sectors showed a mixed picturefor a period of 10 years.Exchange rate plays an important rolein trade balance. Bothexport demand and supply as well as import demand are considerably responsiveto the exchange rate.Motivation of the study:This issue of devaluation and itsimpact on trade balance is not a new topic. It has been discussed by manyresearchers ,policy makers and scholars already .Some are in favor of positiveimpact of devaluation on trade balance and some are against of it. This paperis again a small effort and it will contribute some new information in existingliterature.
OBJECTIVES OF THE STUDY:In Pakistan research has beenconducted in different fields. The objective of this research is to evaluatethe effect of devaluation on trade balance. It has been done by using AutoRegressive Distributed Lag (ARDL) approach and Error correction mechanism forshort run relationship between both the variables.
Major objective of thisstudy is to establish a long run relationship between devaluation and itsimpact on trade balance in case of Pakistan from the year 1980-2016.Research questions of Term Paper:1-How does devaluation affect tradebalance in Pakistan?2-Does growth of country ispositively related with trade balance?3-What is the affect of devaluationon imports of country?Hypothesis of Term Paper:Ho There is no relationshipbetween trade balance and devaluation.Devaluation is taken as a tool tocover the trade deficit of Pakistan. This study will also kept in mind therelation between trade deficit and devaluation. We have developed a nullhypothesis that trade balance doesn’t affected by the devaluation.CONTRIBUTION OF TERM PAPER:This paper will use differenteconometric techniques to prove that trade balance is not affected bydevaluation.Literature review: DATA SOURCES:Data has been collected from WDI(world development indicators over the year 1980-2016.Model Specification: