Determinant of Balance of Trade: Case Study of Pakistan

Abstract

The core object behind this study is to explore the long run as well as short run determinant of trade deficit with reference to Pakistan by using Johansen co-integration approach and Error correction model (ECM). The finding of this study suggests that foreign income, foreign direct investment, domestic house hold consumption and real effective exchange rate are significantly affect the trade deficit. To highlight the short run dynamics VECM (Vector Error correction model) was used. The result of VECM pointed out that there is disequilibrium in the short run which will be adjusted within one year.