Abstract
This study investigates and compares the determinants of the trade balances of Pakistan and India. In this research the impact of gross domestic product (GDP), foreign direct investment (FDI), exchange rate (ER) and the remittances on the trade balance of India and Pakistan have also been considered. For this, time series data from 1981 to 2010 is used. The results of the study are based on the regression analysis, and granger causality test. Regression analysis showed that the GDP of India and Pakistan both have significant positive impact on the balance of the trade, FDI has significant negative impact on TB of Pakistan and significant positive impact on the TB of India, this negative relation in case of Pakistan is due to multiple reasons, such as security concerns, political unrest, the different wars, corruption and improper utilization of labor and capital. ER has significant negative impact on both India and Pakistan’s TB and remittances have significant negative impact for Pakistan and significant positive impact for the TB of India. Granger causality result showed bidirectional causal relation in Indian model, and unidirectional causal relation in Pakistani model. The outcome recommends that local currency needs to be stronger in order to improve the trade balance of both the countries, also for Pakistan a more comprehensive research is required in order to identify the factors which are responsible for the negative effect of both FDI and Remittances on the trade balance.
Highlights
The trade balance is a measure that reflects the competitive strength of a country, the lower the trade deficit, the country have the greater competitive strength and has more rapid growth of the economy1
The results explored that there is a significant positive affect of domestic household consumption, real effective exchange rate (REER) and foreign investment (FI), on the trade deficit
A number of researches have been performed on trade balance and its determinants, but few have conducted a comparison between two neighboring countries
Summary
The trade balance is a measure that reflects the competitive strength of a country, the lower the trade deficit, the country have the greater competitive strength and has more rapid growth of the economy. Too many factors are there which are affecting the trade balance of a country. The majority of the past studies have focused on the factors that are affecting the trade balances of different countries individually, whereas this study is a comparison between the determinants of the trade balances of Pakistan and India. Many studies have explored that devaluation develops the balance of trade in long run and provide competitive advantage. In 1947-1948, Pakistan had a surplus of Rs. 125 million, and the reason was high amount of export. The amount of surplus in 1972 was Rs. 124 million
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