Terms of Trade and Economic Growth in Pakistan: An Empirical Analysis Rizwana Yasmeen1 , Ihtsham Ul Haq Padda2

Abstract

This paper evaluates the impact of terms of trade on economic growth for Pakistan economy. We divided our analysis into two parts. Firstly, this study estimates the relationship between terms of trade and economic growth and further the impact of volatility in terms of trade on economic growth. Secondly, focuses on the export demand and import demand elasticities for Marshall Lerner condition. The ARDL test is used to estimate long run and short run relationship. In empirical estimation, no evidence of significant impact of terms of trade and volatility terms of trade on economic growth in the long run as well as in the short run is found although Marshall Lerner condition holds in Pakistan. A movement in terms of trade can be explained in terms of export demand elasticities and import demand elasticities. Despite of satisfaction of Marshall-Lerner condition; only devaluation of currency may not be advantageous. Under situations where export demand and import demand elasticities are not fully elastic separately; devaluation may not be successful.