The Nonlinear Relationship between Trade Balance and Income for Selected Asian Economies

Abstract

This research study is an attempt to explore the nonlinear relationship between domestic and foreign income and deficit in the trade balance for a sample of 13 high deficit Asian countries from 1990 to 2019. Furthermore, the study also moderates the role of financial development and carbon emissions with trade balance. The study results validated the existence of a nonlinear relationship between trade balance and domestic and foreign income. For this purpose, three different types of model are formulated. The first model was of the benchmark type, which contains only the domestic and foreign income effect, while in the other two models, the role of financial development and carbon emissions is also included. The estimated results evinced the existence of U shape relationship for domestic income and inverted U shape curve for World income. The results revealed that it would be very suitable for selected countries to boost up domestic income. Because of it, the deficit in trade balance will start to decline. The financial development and carbon emissions are found to be a significant contributor to reduce the deficit in the trade balance.