Impact of Exchange Rate on Trade Balance: Evidence from Pakistan

Abstract

The objective of the research is to detennine the impact of an exchange rate on the trade balance. Thus, in order to assess the volatility of exchange rates and their trend balance, annual data on the exchange rate and trade balance was obtained from the official website of the World Development Indicator. Data from 2000 to 2019 consisted of twenty-year period. To achieve the objective, various tests are used such as the root unit, the ARDL and Error Correction Method tests which have led us to conclude that the exchange rate and trade balance interact significantly with positive factors, so we can come to the conclusion that stable exchange rates can create a positive environment by promoting investment, and that this can help the increase in the balance of trade. The significance of the study, while providing the implications of currency depreciation on trade balance, will help to understand that if relying upon exchange rate whether helps in growth of economy or not in order to improve trade balance. This study contributes to the body of knowledge of economic growth in Pakistan.