Abstract
The study examined the relationship between Budget deficit and Trade deficit for the economy of Pakistan. Time series data was used from the period 1972 to 2011. Augmented Dickey Fuller Test used to check the stationary of the variables and found that all variables were stationary at first difference. Johansen Co-integration used to find the long relationship and found that budget deficit has positive effect on trade deficit in long run. Error correction model indicated the convergence or divergence of the economy in short run to long run. The ECM results showed that 30.88% convergence occur within year. Granger causality test used to check the direction of causality between the budget deficit and trade deficit and results was indicated that there is bi-directional between the variables.
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