Impact of Currency Devaluation on Balance of Trade.

Abstract

This study investigates the impact of devaluation on balance of trade and, in case of Pakistan over the period of 1980 to 2014. The key focus of this study is to check the long run relationship among devaluation of domestic currency on Pakistan Balance of Trade over the specific period of time and the two main proxies of the devaluation are FOREX and inflation. Further, this study also examines the short run relationship between these two variables. In order to examine the long run relationship between devaluation of domestic currency and balance of trade in the presence of control variables. It has been seen that there is a short run relationship between devaluation of domestic currency and balance of trade. This study will recommend improved policy recommendations that whether devaluation should be carried out or not. Thus, this paper will certainly benefit the policy makers in Pakistan to deal with Exchange rates in the context of international trade and also to deal with currency exchange in this regard. The data for this study which was selected is secondary data. The data was gathered from state bank of Pakistan and ministry of finance, Pakistan. In regard to inflation, the measured and taken elements were CPI, food and non-food. However, the conclusion and findings of this study examines that there is a sub sequential impact of devaluation on balance of trade in Pakistan