Does exchange rate effects the trade balances really? Evidence from Pakistan

Exchange Rate (ER) stability is an important factor in determining the economic position of an economy. Speculation in the exchange rate shows the poor performance of a country. A change in the exchange rate may affect the inflation as well as interest rate in the country and Pakistan in not an exception to this relationship. In this paper, we have tried to examine the impact of exchange rate on the trade balance. We used the data for 30 years and tested the relationship with the help of correlation and regression. The findings show that Pakistan’s is facing a deficit in trade balance continuously and correlation is highly negative. This means that the small open economy of Pakistan has low saving rate and thus NX (trade balance) is negative. This is due to the continuous depreciation of currency or in another word due to an increase in the exchange rate.