CHAPTER 5

Estimation, Results and Discussion

We see results in this section

Empirical Analysis

The dependent variable of the models estimated are Gross Domestic Product (GDP), and time

series data are used for the year 1980 to 2024. The explanatory variables include Imports of

goods and services, Exports of goods and services and Real Effective Exchange Rate.

Estimation Technique

The stationarity of variables and long run impact are discussed in this section as econometric

issue. Analysis of the data’s stationarity is conducted using the Augmented Dickey-Fuller test.

Augmented Dickey-Fuller Test (Unit Root Test)

Unit root test is an econometric technique that is used to examine the stationarity of variables. It

is necessary to make the variables stationary for the estimation of data. We are checking

stationarity with Augmented Dickey-Fuller test (ADF)

Variables T-Statistics Probability Order of Integration

GDP -4.869517 0.0002 I (0)

EXP -6.646985 0.0000 I (I)

IMP -6.962990 0.0000 I (I)

REXR -6.119395 0.0000 I (I)

Table 5.1 show the results of (ADF) Unit Root Test. The results show that, at level of

significance, every variable is stationary.

Gross Domestic Product (GDP)

Gross Domestic Product is the dependent variable which is integrated at level I (0), the

probability value is 0.0002 which is less than 0.05. it shows that our dependent variable GDP is

stationary at level.

Imports

Imports is one of the independent variables which is integrated at first difference I(1), the

probability value is 0.0000 which is less than 0.05. it shows that our independent variable

imports are stationary at first difference.

Exports is also one of the independent variables which is integrated at first difference l(1), the

probability value is 0.0000 which is less than 0.05, it means that our independent variable

exports are stationary at first difference.

Real Effective Exchange Rate

Real effective exchange rate is also one of the independent variables which is integrated at first

difference l(1), the probability value is 0.0000 which is less than 0.05, it means that our

independent variable exports are stationary at first difference.

ARDL (Auto Regressive Distributed Lag)

The ARDL Auto Regressive Distributed Lag technique is the preferred method for examining

the long-term relationship between series that have different integration orders, namely I(0) and

I(1). In this approach, the lower critical bound indicate that all variables are stationary at level

I(0), implying the absence of co-integration among the variables. Conversely the upper critical

bound denotes co-integration, and at first difference I(1). If the F-statistic surpasses the upper

critical value, co-integration is present. Conversely, co-integration is not present if the f-statistic

value is less than the lower critical constraint. The test is not conclusive if the F-statistic result

lies between the upper and lower critical boundaries.

ARDL Bound Test

ARDL bound test is used to determine either there is an impact in long run or not.

F-Statistic is 12,76

Table 5.2
 Significance Upper Bound I(I) Lower Bound I(0)

10% 3.1 2.01

5% 3.63 2.45

2.5% 4.16 2.87

1% 4.84 3.42

Interpretation

In table 5.2 the ARDL bound test results are shown. They are obtained by comparing the F-

statistic with the previously provided bounds. If the F-statistic value is greater than the upper

bound critical value, there is a long-term association between the variables. If the F-statistic

value is less than the upper bound critical value, no long-term association exists. Given the

findings, it is possible to draw the conclusion that the variables have a long-term association

since the estimated F-statistic value of 12.76 surpasses the upper bound critical value of 3.63 at a

5% level of significance.

ARDL (Long Run Results)

Table 5.3

Variables Coefficient Std Error Probability

EXP 0.1715 0.101020 0.0975

IMP -0.496 0.150623 0.0021

REXR 0.043 0.009889 0.0001

Interpretation
The table 5.3 provided illustrates the long run coefficients estimated through an ARDL approach

to co-integration. The findings indicate that there is a positive and statistically significant impact

of international trade on economic growth. According to coefficients, a 1% increase in imports is

projected to decrease GDP by 0.49 %. Exports have positive but statistically insignificant impact

on economic growth. According to coefficients, a 1 % increase in exports is expected to increase

GDP by 0.17 %. Real effective exchange rate put a positive and statistically significant impact

on economic growth. According to real effective exchange rate a 1% increase in it will raise

GDP by 0.04%.

Short Run and ECM Regression

Table 5.4

Variables Coefficient Std-Error Probability

D(EXP) 0.023115 0.195986 0.9068

D(IMP) 0.265749 0.129502 0.0475

D(REXR) 0.025956 0.024825 0.3027

CointEq(-1) -1.035506 0.125192 0.0000

Interpretation

The table 5.4 show the short run coefficient estimations. The finding indicates that in short run

exports have positive but insignificant impact, According to coefficient 1% increase in exports

will raise GDP by 0.02%, here imports put a positive and significant impact on economic growth

in short run. If 1% increase arises in imports it will raise GDP by 0.25%. real effective exchange
rate has positive and insignificant impact on GDP in short run. If real exchange rate increase by

1% it will raise GDP by 0.02%. This result indicate that the Error Correction Model have

negative value of 1.03 indicating that if any disequilibrium arises in this model, it will return to

equilibrium in 1.03 % of a year.

Cusum Graph

Interpretation of CUSUM Graph

This CUSUM chart shows that all the variables are stable at 5% level of significance, because it

lies between the critical regions of the chart. The Null hypothesis says that do not reject H0,

which means that all the variables are stable.

Cusum Square
Interpretation of CUSUM Square Graph

This CUSUM square chart shows that all the variables are stable at 5% level of significance,

because it lies between the critical regions of the chart. The Null hypothesis says that do not

reject H0, which means that all the variables are stable.

Chapter 6

Conclusion

Using time series data from 1980 to 2024, the study aims to investigate the effect of foreign trade

on Pakistan's economic growth. Every variable utilized in this study has its stationarity level

checked using the Augmented Dickey Fuller (ADF) test. The methodology's results indicate that

the variables at both the level and first difference. Then, the relationship between the variables is

examined using the Auto Regressive Distributed Lag (ARDL) technique. This study
demonstrates the beneficial effects of both import and export for Pakistan's economic expansion.

Exports and imports stimulate growth in the GDP. The imports of petroleum products increase

productivity due to which economic growth increases. Pakistan mostly export agricultural

products like rice, cotton, wheat etc. In this study we saw that exports don’t have a significant

impact on economic growth it is due to the political instability in Pakistan in few past years.

According to economists is dangerous for economic development. Pakistan is also facing this

problem from many years that’s why political instability causes a decrease in FDI and also in

exports of goods and services in Pakistan. Real effective exchange rate has a positive and

significant impact on economic growth in long run but it doesn’t have any effect in short run.

Policy Recommendations

1 Increase Value Added Exports

Pakistan should not only depend on agricultural commodities like rice and cotton. The

government should support businesses that produce valuable products, such as processed foods,

textiles, and manufactured goods, so investors can contribute more to economic growth.

2 Maintain Political Stability

The political situation is reducing exports and foreign investments. The government should

ensure effective policies and good governance to build investor confidence and improve trade

and economic growth.

3 Use Imports Productively

growth. The government should allow the importation of machinery, energy, and raw materials

that support business growth, while preventing illegal imports.

4 Keep Exchange Rate Stable

Stable and competitive pricing contributes to long-term economic growth. The government

should avoid sudden changes in price to support exports and encourage long-term investment.

5 Improve Trade Facilities and Infrastructure

Better roads, ports, customs systems, and trade procedures can reduce costs and delays.

Improving business practices will help increase sales and drive economic growth