EXCHANGE RATE FLUCTUATION AND ITS IMPACT ON THE TRADE IN PAKISTAN

Abstract

Purpose- Pakistan economy is in menace from the last few decades, when the floating exchange rate is adopted. This research is conducted to find out the impact of exchange rate on economy and most importantly on trade. Methodology/sample- The data was collected by secondary sources because there was a lot of study had done by scholars on the topic of exchange rate. In order to find out the impact of exchange rate on trade, the sample of 24 years was chosen from 1991 to 2014 to find the linear regression. The linear regression model was used to co-relate the dependent and independent variables. It is found that exchange rate fluctuation has direct bearings and impact on different macroeconomic performance. Findings- This research also examines the impact of exchange rate on different macroeconomic variables that are import, export and inflation. A significant association of exchange rate with inflation rate as well as with imports is observed. On the other hand no significant association has between exchange rate and annual exports are recorded. Therefore, the results suggest that the explanatory and dependent variables are highly co-related with each other. Practical implications- The policy makers in Pakistan should consider the exchange rate fluctuation and its impact on each macroeconomic variable in making and implementation of the trade policies of the country so the value of rupee stabilized and not to be devaluated. Furthermore this study also shows the recent catastrophic devaluation in Pakistani rupee against US$, what are the reasons and factors which paid way to appreciate the value of Pakistani rupee and its temporary or long lasting. The findings show that there is both the short term and long term solution to this problem. The short term temporary so we policy makers and economists avoid short term solution and try to implement long term solutions to this problem.