Introduction
International trade plays a very important role, and it is a major source of economic
growth. International trade directly contributes in economic development. It is also a
source of generating foreign exchange. This research and literature has focused on
international trade as the prime driver of the economy and the growth in economy
by the imports and exports. The focus of every nation is to increase their economic
growth and improve the quality life of the citizens living in their country.
International trade is a life blood of a global economy. Basically, when a good and
services is produces in one country and sold to a person or businessman in other
country then these goods and services are an export for one country and import for
that other country. Pakistan is one of the largest importers of goods and services in
the world. In 2022 Pakistan imports was 82.28 billion US dollars which show a
31.32% increase from 2021. Exports of Pakistan in 2022 was 39.42 billion US dollars
a 24.49% increase from 2021.
Pakistan import stuff like oil, Automobile, machinery, chemicals etc from countries
all over the world. If we look around local stores and shopping canters, we feel like
everything is made in China, Japan and other countries. This proves that we import
a lot of things from many countries. But in term of both import and export our
largest trading partner is China. Pakistan trade (Import and Export) in many things
like petroleum, machinery, chemicals, leather, cotton, rice, mangoes, medicines,
surgical equipment etc.
Pakistan’s 40% imports are originated from just seven countries. These countries
are USA, Japan, Saudi Arabia, China, Germany, United Kingdom, and Malaysia. Saudi
Arabia is emerging as a major supplier to Pakistan followed by the USA, China and
Japan. Pakistan trade with many countries and many countries gave priorities to
Pakistani goods because of its low price and low exchange rate. These countries are
USA, Hong Kong, Saudi Arabia and Germany. USA is one of the largest export
markets of Pakistan.
1.2 LINK OF INTERNATIONAL TRADE WITH GDP
Exports are goods and services produced domestically but sold abroad and imports
are goods and services produced abroad but sold in Pakistan. Imports are produced
in other country and are counted in that country GDP like a cell phone produced in
America is counted in American GDP it cannot be counted twice that is they cannot
be counted in our GDP.
To understand the link of GDP with trade (import and export) here we take equation.
GDP = C + I + G + (X - M)
We focused on the last part of the equation (X-M). This part is known as net exports.
This is the result of subtracting Exports (X) from Imports (M). Here in this equation
point to be noted is that all variables form GDP except imports (M). The M variable is
subtracted from GDP because GDP measure domestic production. Domestic
production mean goods and services produced inside a country. Imports are not
produced domestically so subtracting in necessary.
1.3 SIGNIFICANCE OF STUDY
The study on “Impact of international trade on economic growth” hold great
importance. In this study we look that How international trade put impact on
economic growth of a country and overall economic performance. Our aim is to
develop policy recommendations for the policy makers to obtain and make ease for
the growth of economy.
1.4 OBJECTIVE OF STUDY
The objective of the study is to examine how international trade put impact on the
economic growth of a country. In case of Pakistan.
1.5 RESEARCH QUESTION
What is the impact of international trade on economic growth in case of Pakistan?
Does it affect positively or negatively?
Literature review
Bakari (2016), explores the relationship exports, imports and economic growth in
Canada. The study analyzes annual data from 1990 to 2015 using Granger-
Causality and the Johansen co-integration method. The study finds that both exports
and imports have a causal connection to economic growth. In other words, the
study shows that imports and exports have separate effects on Canadian economic
growth. Moreover, the article does not show a clear overall relationship between the
variables, it does suggest a bi-directional causality between imports and economic
growth.
Bakari and Mabrouki (2017) investigates the relationship between exports, imports
and economic growth from 1980 to 2015 of Panama. The Granger- Causality test
and Johansen co-integration analysis of VAR model is used to examine annual data.
The study shows there is no statistical significant but positive relationship between,
International trade and economic growth. The study does not consider the role of
other factors, such as foreign direct investment and technology transfer, in
economic growth. These factors are thought to play an important role in economic
growth, and their omission from the study may limit the comprehensiveness of the
findings.
Saaed and Hussain (2015), examines the relationship between Tunisia’s exports,
imports, and economic growth from 1977 to 2012. To determine the long-run and
short-run causation, stationary tests, co-integration analysis are used. The results
reveals that exports and economic growth are causally related in a single direction.
The article uses a relatively short time period that may not be enough time to
capture the long-term effects of exports and imports on economic growth.
Akhtar et al (2019) investigates the relationship between imports and Pakistan’s
economic growth over a 40- year period is analyzed, using statistical techniques
including Granger causality and simple regression. The study’s results indicates,
that there is a bi-directional causality between imports and economic growth in
Pakistan. The Granger causality test is used in this article to examine the
connection between imports and economic growth. However, it does not give a
proper justification for selecting this approach over others. The analytical flexibility
would be improved with a discussion of why this approach is appropriate for this
investigation.
Mukhtar & Rasheed (2010) investigates the long-term relationship between
Pakistan’s exports and imports. The study examines quarterly data from 1972 to
2006 and employs the VECM to establish causality in order to evaluate the long-
term link between exports and imports using the Johansen co-integration technique.
According to analysis, imports and exports have a long- term link, indicating
beneficial trade balances. Further, the results indicates that there is a bi-directional
causality between imports and exports. The study does not use a time series
analysis, which would be more appropriate for testing a long-run relationship and
the sample size is small, which limits the generalizability of the results.
Mahmood et al (2018), determines the impact of agricultural exports on
macroeconomic performance of Pakistan from 1972 to 2008.. The main aim is to
analyze the relationship between agricultural and non-agricultural exports and GDP.
In order to understand long- term relationship, the study applies the Johansen co-
integration approach to examine data According to the findings, there is a negative
relationship between agricultural exports and Pakistan’s economic growth. While
non- agricultural exports has a positive relation with economic growth. The study
does not consider the long-term effects of agricultural exports on economic growth.
The study does not address the potential negative consequences of agricultural
exports, such as environmental degradation and social inequality.
Reddy (2020) explores the relationship between imports, exports and economic
growth in India by using econometric approach. Co-integration is used to investigate
the long-run connection. The analysis shows that exports, imports, and economic
growth are all causally related over the long in India, with exports and economic
growth being causally related over the short run. The study does not use a time
series analysis, which would be more appropriate for studying the relationship
between exports, imports and economic growth over time.
METHODOLOGY
This study examined relationship between international trade and economic growth
of Pakistan. Data from WDI (World Development Indicators) time series from 2000 to
2024 is use for the analysis.
Here is the models that address relationship between international trade and
economic growth.
lnGDPt = β0 + β1 ln(IMP)t + β2 ln(EXP)t + β3 ln(REXR)t + µt
Where,
Ln GDP = Gross Domestic Product
Ln IMP = Imports of goods and services
Ln EXP = Exports of goods and services
Ln REXR = Real Exchange Rate
β0 = Intercept Term
µt = Error Term
β1, β2, β3, (Slopes of coefficient)
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)