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Business Review

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.

Keywords

Trade balance, Regression, Remittances, Exchange rate, FDI, Granger causality

Creative Commons License

Creative Commons Attribution 4.0 License
This work is licensed under a Creative Commons Attribution 4.0 License.

Published Online

March 02, 2021

Included in

Business Commons

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