Impact of Gross Domestic Products, Exchange Rates and Relative Price on Exports in Pakistan

Abstract

The empirical research was conducted to observe the impact of Gross Domestic Product, Exchange Rate, and Relative Price on the exports in Pakistan since last three decades. By plotting the correlogram of the variables, the problem of stationarity was experienced. In this regard, Augmented Dickey Fuller test was applied in order to make the data as non-stationary. Additionally, with the help of Engle-Granger or Augmented Engle-Granger, all variables under study were found co-integrated (dµ = -0.32 µt-1) with t-statistic (-2.35). The results findings revealed that GDP and RP are positively correlated (+0.64) while Exports and ER are negatively correlated (-0.76). It was also noticed that GDP had positive significant impact on exports while ER observed negative significant impact on exports. Error Correction Model was also used and the insignificant value of equilibrium error term is (-0.11) with t-statistics (-0.95), therefore, it is concluded that the explanatory variables GDP, ER and RP had adjusted to changes in Exports in the same time period. Pakistan’s exports consist of limited commodities which mainly comprise of textile goods. So new industries should be set up in order to increase export goods volume. Pakistan direction of export goods is mostly with the traditional exporting Partner i.e. USA, UK, Germany, Hong Kong and UAE; nearly 40% of total export’s direction is to these countries but new market should be discovered to increase the export direction and volume.