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ABSTRACT
The present study re-estimated the import demand function for Pakistan on the basis of quarterly time series data by employing autoregressive distributed lag approach. The present study draws various significant conclusions from the estimation of aggregate merchandized import demand function. The results support the proposition that in Pakistan there exist a long-run relationship among, import demand, real economic growth, real effective exchange rate and real effective exchange rate volatility. It further found that aggregate import demand is income and price inelastic, implying that Pakistan's imports comprises essential goods. The study found evidence to suggest that real effective exchange rate volatility has adverse effect on import demand for Pakistan in long-run.
JEL Classification: F10, F31, F41, C32.
Keywords: Import demand, Exchange rate volatility, Real economic activity, Pakistan, Autoregressive distributed lag approach.
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INTRODUCTION
In the globalize world, countries enhance their interdependence through international trade. For achieving the benefits of globalization, each country needs to faster its growth and economic development through international trade. For this purpose domestic and external environment - economic development and enhancement of trading activities - play an important role in shaping the country's trade with rest of the world. The implementation of WTO (World Trade Organization) rules and substantial reduction in the trade barriers, the imports of most of the developing countries are rising rapidly. Like other developing countries, Pakistan is also depends on rest of the world and the level of interdependence has increased in previous decade. Pakistan's export performance has been impressive in last few years with exports registering an average growth of 16 percent per annum on the back of strong macroeconomic policies pursued at home and international trading environment remaining hospitable. Pakistan's import grew at an average rate of 29 percent per annum during contemporaneous period due to surge in investment in the same period. The rise in domestic demand due to strong economic growth increased the level of investment which ultimately increased the country's imports demand. Long-term economic growth of Pakistan depends on the imports of capital goods and machinery that accelerates economic productivity. With the structural change in the Pakistan's economy, there had been a significant increase in the share of imported capital goods and industrial raw materials at the...