TRADE BALANCE AND TERMS OF TRADE RELATIONSHIP: Evidence from Pakistan

The terms of trade (TOT) have an important role in determining direction of the trade which finally transmits into trade balance. The current study is an effort to seek the effect of TOT on the trade balance. The short and long-estimates are computed through Autoregressive Distributed Lag (ARDL) methodology; the results reveal that in the case of Pakistan, there is no significant relationship between TOT and trade balance. Furthermore, the estimated Marshall Lerner (ML) condition is calculated by addition of the absolute values of import and export demand elasticities. The study shows that it does not hold for Pakistan, neither in the short-run, nor in the long-run. The computed ML condition, evidently infers that price have negative impact on trade balance. The demand for exports and imports are price inelastic; thus, to curtail trade balance the government should take measures to increase exports and limit the unnecessary imports