Imran Joiya Full Thesis

1111

DETERMINANTSDETERMINANTSDETERMINANTSDETERMINANTS OFOFOFOF EXPORTEXPORTEXPORTEXPORT

(A(A(A(A CASECASECASECASE STUDYSTUDYSTUDYSTUDYOFOFOFOF PAKISTAN)PAKISTAN)PAKISTAN)PAKISTAN)

MUHAMMADMUHAMMADMUHAMMADMUHAMMAD IMRANIMRANIMRANIMRAN SABIRSABIRSABIRSABIR

FA11-M.SC.FA11-M.SC.FA11-M.SC.FA11-M.SC. (ECO)(ECO)(ECO)(ECO) 33-VHR33-VHR33-VHR33-VHR

SESSIONSESSIONSESSIONSESSION 2011-132011-132011-132011-13

MASTERMASTERMASTERMASTEROFOFOFOF SCIENCESCIENCESCIENCESCIENCE ININININ ECONOMICSECONOMICSECONOMICSECONOMICS

DEPARTMENTDEPARTMENTDEPARTMENTDEPARTMENTOFOFOFOFMANAGEMENTMANAGEMENTMANAGEMENTMANAGEMENTSCIENCESSCIENCESSCIENCESSCIENCES

COMSATSCOMSATSCOMSATSCOMSATS INSTITUTEINSTITUTEINSTITUTEINSTITUTEOFOFOFOF INFORMATIONINFORMATIONINFORMATIONINFORMATIONTECHNOLOGYTECHNOLOGYTECHNOLOGYTECHNOLOGYVEHARIVEHARIVEHARIVEHARI CAMPUSCAMPUSCAMPUSCAMPUS

2222

COMSATSCOMSATSCOMSATSCOMSATS INSTITUTEINSTITUTEINSTITUTEINSTITUTEOFOFOFOF INFORMATIONINFORMATIONINFORMATIONINFORMATIONTECHNOLOGYTECHNOLOGYTECHNOLOGYTECHNOLOGYVEHARIVEHARIVEHARIVEHARI CAMPUSCAMPUSCAMPUSCAMPUS

DETERMINANTSDETERMINANTSDETERMINANTSDETERMINANTS OFOFOFOF EXPORTEXPORTEXPORTEXPORT

(A(A(A(A CASECASECASECASE STUDYSTUDYSTUDYSTUDYOFOFOFOF PAKISTAN)PAKISTAN)PAKISTAN)PAKISTAN)

AAAA ThesisThesisThesisThesis SubmittedSubmittedSubmittedSubmitted inininin thethethethe PartialPartialPartialPartial FulfillmentFulfillmentFulfillmentFulfillment ofofofof thethethethe requirementsrequirementsrequirementsrequirements ofofofofthethethethe DegreeDegreeDegreeDegree ofofofof MasterMasterMasterMaster ofofofof ScienceScienceScienceScience inininin EconomicsEconomicsEconomicsEconomics

BY:BY:BY:BY:

MUHAMMADMUHAMMADMUHAMMADMUHAMMAD IMRANIMRANIMRANIMRAN SABIIRSABIIRSABIIRSABIIR

FA11-M.Sc.FA11-M.Sc.FA11-M.Sc.FA11-M.Sc. (ECO)(ECO)(ECO)(ECO) 033-VHR033-VHR033-VHR033-VHR

SESSIONSESSIONSESSIONSESSION 2011-132011-132011-132011-13

SUPERVISORS:SUPERVISORS:SUPERVISORS:SUPERVISORS:

MRS.MRS.MRS.MRS. FARRAHFARRAHFARRAHFARRAHYASMINYASMINYASMINYASMIN

MR.MR.MR.MR. AFAQAFAQAFAQAFAQMEHMOODMEHMOODMEHMOODMEHMOOD

3333

APPROVALAPPROVALAPPROVALAPPROVAL CERTIFICATECERTIFICATECERTIFICATECERTIFICATE

DETERMINANTSDETERMINANTSDETERMINANTSDETERMINANTS OFOFOFOF EXPORT:EXPORT:EXPORT:EXPORT:

AAAA CASECASECASECASE STUDYSTUDYSTUDYSTUDYOFOFOFOF PAKISTANPAKISTANPAKISTANPAKISTAN

SupervisorSupervisorSupervisorSupervisor 1:1:1:1: ________________________________________________________________________ SupervisorSupervisorSupervisorSupervisor 2:2:2:2: ____________________________________________________________________

Mrs.Mrs.Mrs.Mrs. FarrahFarrahFarrahFarrah YasminYasminYasminYasmin Mr.Mr.Mr.Mr. AfaqAfaqAfaqAfaqMehmoodMehmoodMehmoodMehmood

HeadHeadHeadHead ofofofof Department:Department:Department:Department: ________________________________________________________________

Mr.Mr.Mr.Mr. SyedSyedSyedSyed TouqeerTouqeerTouqeerTouqeer AhmadAhmadAhmadAhmad

ExternalExternalExternalExternal Supervisor:Supervisor:Supervisor:Supervisor: ____________________________________________________________________

Date:Date:Date:Date: _________________

4444

DECLARATIONDECLARATIONDECLARATIONDECLARATION

I, Muhammad Imran Sabir, Registration No., FA11, M.Sc. (Eco), 033-VHR,

in the Department of Management Sciences at The COMSATS, Vehari do here by

solemnly declare that the thesis entitle, ““““DeterminantsDeterminantsDeterminantsDeterminants ofofofof ExportExportExportExport :::: AAAA CaseCaseCaseCase StudyStudyStudyStudy ofofofof

PakistanPakistanPakistanPakistan”””” submitted by me in partial fulfillment of the requirement of M.Sc. in the

subject of Economics is my original work. I solemnly declare that this is my original

work and has not been submitted or published earlier and also shall not be submitted

in future. It shall also not be submitted to obtain any degree to any other university or

institution.

M.ImranM.ImranM.ImranM.Imran SabirSabirSabirSabir

CERTIFICATECERTIFICATECERTIFICATECERTIFICATE

The research entitled ““““DeterminantsDeterminantsDeterminantsDeterminants ofofofof Export:Export:Export:Export: AAAA CaseCaseCaseCase StudyStudyStudyStudy ofofofof PakistanPakistanPakistanPakistan””””

is conducted under my supervision and the thesis is submitted to COMSATS, Vehari

in the partial fulfillment of the requirement of the degree of Master of Economics with

my permission.

Mrs.Mrs.Mrs.Mrs. FarrahFarrahFarrahFarrah YasminYasminYasminYasmin

5555

DEDICATEDDEDICATEDDEDICATEDDEDICATED TOTOTOTO

ALMIGHTYALMIGHTYALMIGHTYALMIGHTY ALLAH,ALLAH,ALLAH,ALLAH,

HOLYHOLYHOLYHOLY PROPHETPROPHETPROPHETPROPHET (P.B.U.H),(P.B.U.H),(P.B.U.H),(P.B.U.H),

MR.MR.MR.MR. &&&&MRS.MRS.MRS.MRS. SABIRSABIRSABIRSABIR ALIALIALIALI JOIYAJOIYAJOIYAJOIYA (LATE),(LATE),(LATE),(LATE),

MYMYMYMYBROTHERSBROTHERSBROTHERSBROTHERS

&&&&

MYMYMYMYRESPECTEDRESPECTEDRESPECTEDRESPECTED TEACHERSTEACHERSTEACHERSTEACHERS

6666

ACKNOWLEDGEMENTACKNOWLEDGEMENTACKNOWLEDGEMENTACKNOWLEDGEMENT

All praises to Almighty Allah, who enables us to know about certain unknown

things in the universe and helps us to overcome a lot of difficulties. All respect for

Holy Prophet Muhammad (PBUH) who clearly mentioned the difference of right and

wrong path, to ensure the success in our lives.

I am deeply indebted and wish my utmost appreciation and gratitude to my

research supervisor Mrs. Farrah Yasmin for her encouragement, technical discussion,

inspiring guidance, remarkable suggestions, keen interest and constructive criticism

which enabled me to complete this research study.

I also express my thanks to honorable head of department Mr. Syed Touqeer

Ahmad and honorable Mr. Affaq Mehmood for providing me possible facilities for

the completion of this research work.

I cannot find proper words to express my heartiest gratitude to my Loving

Parents and Friends whose chain of prayers, cooperation have created incredible

impression in my life.

In the end, I am thankful to Almighty ALLAH who enabled me to complete

my research work. Alhamdulillah!

MuhammadMuhammadMuhammadMuhammad ImranImranImranImran SabirSabirSabirSabir

7777

AbstractAbstractAbstractAbstract

This study represent the estimates of the export on Gross Domestic

Product ,Exchange rate ,Foreign direct investment ,agriculture growth rate and

industry growth rate form the Pakistan last three decades. The Export is the

dependent variable on the other side the GDP, ER, FDI, AGRI and INDU are the

independent variables. The focus of the study is to find out empirical relationship

among variables, the data set on variables belongs to the period 1981 to 2010 and data

type is secondary. Econometric techniques like ADF, Johnson co integration, FM

OLS and impulse response function are applied for finding the required results. The

estimation result shows that GDP has the positive impact on the Export. When the

GDP increased the progress of a country and increased the production. While the

agriculture growth rate has negatively impact on the Export of the country .Industry

growth rate and foreign direct investment has significant result and when both of

these are increased the export increases. Exchange rate has positive coefficient that

shows when exchange rate increases, in other words domestic country currency

devalues which gives to raise in exports in the country.

8888

TableTableTableTable ofofofof ContentsContentsContentsContents

CHAPTER I.................................................................................................................................11

INTRODUCTION........................................................................................................................ 11

2 1.1 Background and context.............................................................................................11

1.2 Statement of problem................................................................................................ 14

1.3 Objective of the study................................................................................................ 14

1.4 Adopted Methodology................................................................................................ 14

1.5 Structure of the thesis:...............................................................................................15

3 CHAPTER II........................................................................................................................16

4 INTRODUCTION................................................................................................................ 16

5 2.1 Literature Review:...................................................................................................... 16

2.2 TABULAR LITERATURE FORM:...................................................................................... 20

3.1 THEORETICAL BACKGROUND...................................................................................... 26

3.2 Theoretical Basis...........................................................................................................26

CHAPTER IV...............................................................................................................................28

4.1 Methodology:...............................................................................................................28

4.2 Sources of the Variables...............................................................................................30

4.3 Variable description:.................................................................................................... 31

4.4 Gross domestic product (GDP).....................................................................................31

4.5 Exchange rate...............................................................................................................31

4.6 Foreign direct investment (FDI)....................................................................................32

4.7 Agriculture growth rate................................................................................................32

4.8 Industrial growth rate..................................................................................................33

4.9 Data description........................................................................................................... 33

4.10 Fact and figure of Pakistan.......................................................................................... 33

4.10.1 Export...............................................................................................................34

4.10.2 Exchange rate.......................................................................................................34

4.10.3 Foreign direct investment.................................................................................35

4.10.4 Gross dogmatic product (GDP)..............................................................................36

4.10.5 Agriculture growth rate.........................................................................................36

4.10.6 Industrial growth rate........................................................................................... 37

4.11 Statistical Techniques:.................................................................................................37

9999

6 CHAPTER V........................................................................................................................39

THE EMPIRICAL ANALYSIS........................................................................................................ 39

5.1 Unit Root Test...............................................................................................................39

5.1.1 Augmented Dickey Fuller Test (ADF) (table #3).................................................... 39

5.2 Johansen Co Integration:..............................................................................................40

5.3 VAR (vector auto regression)....................................................................................... 42

5.3.1 Impulse Response Analysis.......................................................................................42

5.3.2 Variance decomposition...........................................................................................50

5.4 Granger Causality Trace Tests...................................................................................... 52

5.4.1 HYPOTHESIS:.............................................................................................................52

5.5 Fully Modified Least Squares (FMOLS):........................................................................56

5.5.1 Result of FMOLS........................................................................................................56

7 CHAPTER: VI......................................................................................................................58

6.1 Conclusion:......................................................................................................................... 58

6.2 Policy implications:.......................................................................................................59

REFERENCES............................................................................................................................. 60

10101010

LISTLISTLISTLIST OFOFOFOF TABLESTABLESTABLESTABLES

TableTableTableTable No.No.No.No. NameNameNameName ofofofof TableTableTableTable PagePagePagePage No.No.No.No.

Table No.1 Literature Review Table 13

Table No.2 Data Source 23

Table No.3 Unit Root Test 32

Table No.4 Johansen co integration 34

Table No.5 Variance decomposition of the Export 44

Table No.6 Granger Causality Tests 47

Table No.7 FMOLS 49

LISTLISTLISTLIST OFOFOFOF FIGURESFIGURESFIGURESFIGURES

FigureFigureFigureFigure No.No.No.No. NameNameNameName ofofofof FigureFigureFigureFigure PagePagePagePage No.No.No.No.

Figure No. 1 Export 43

Figure No. 2 Exchange rate 34

Figure No. 3 FDI 35

Figure No. 4 GDP 36

Figure No. 5 Agriculture growth rate 36

Figure No. 6 Industrial growth rate 37

11111111

CHAPTERCHAPTERCHAPTERCHAPTER IIII

1111

INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

2222 1.11.11.11.1 BackgroundBackgroundBackgroundBackground andandandand contextcontextcontextcontext

Exports are extensively believed to play a key role in the development

procedure of any economy. Access to the world market allows domestic firms to

attain economies of scale and consequently enhance their productivity. Being a strong

foundation of foreign exchange earnings, higher exports allow a country to meet its

expansion and development needs through import of assets goods and raw materials.

Exports lead to an improvement in economic efficiency by increasing the degree of

competition and exports also play vital role in reducing import export gap.

According to the classical economists and the modern liberal opinion the

trade is an engine of the economic expansion, which can process the economic

maturity. The export sector which can generate foreign reserve earning and increase

nation’s reserve of the country, the country export measure goods and services in

home market as well as the world market .In the long run, enhance the country export

show the development in the industrial sector which can causes the employment in the

country.

In Pakistan, the study of exports last few decades there were high

fluctuating result. Pakistan’s exports are less than its imports, which worsen its

position of trade. If we examine Pakistan history we find just two year in which

12121212

Pakistan enjoy trade surplus. First 1951-52 when the demand of Pakistan raw jute

goes up in international market, so Pakistan increased the export of raw jute. As the

result export of raw jute become the major source of foreign exchange earnings for

the Pakistan in this period. The second year in which Pakistan enjoy the trade surplus

was 1972-73 when concerned strategy of high tariff on luxury item and also

depreciated the Pakistani currency, it made Pakistani goods cheaper for foreigner and

export of Pakistan increased.

Pakistan most important exports are raw cottons, rice, leather, fabric

product, fisheries, vegetables, fruits, cement, sport goods and surgical instrument. If

export increase as contrast the import than nothing to split the being development in

the country , on the other side lower the export means that lower the foreign exchange

and low capacity of the purchasing power. Pakistan gets major part of the foreign

reserve from export.

In developing countries the expansion of the export base on the primary

goods, exports are very significant factor of the national economy which can measure

the goods and services in the world market. The stage of development process of

export used the indicator factor, so that balance of payment represented in the country,

if export greater than import than the balance of trade surplus.

The history of the growth various countries achieve the target of exports

through planning of industrial growth, quality of assurance attentive observation

change the global market and meeting changing their exportable surpluses.

The economic policy reflects three foremost elements. First one as money

demand and supply policy, second one government policy and third one is trade

policy. These three constituent correlates with each other. On the other side the trade

policy reflects the country which owing the other country.

According to report of Pakistan Bureau of Statistics¸ it is baring the

continuously trade deficit in the globalization that is terrible for Pakistan economy.

Pakistan government and economist should take step for this important matter. The

trade deficit of record at 21.27 billion dollar in country growth the negatively growth

rate at over the four percentage .On the other hand the country boost the import at

11.3 % in one year

13131313

[Pakistan Bureau of Statistics]

Domestic exports play very important role in the international market to

increase the domestic production as well as the economic growth and Pakistan

highest export relation is with the USA .The United state is single country which

can above the 27% export. If we compare economy of Pakistan with the

developing nation from the last 30 year than result that growth rate for 6% in this

time period.

The manufacturing sector is very significant of any countries to

increase exports normally base on the manufacturing goods. In Pakistan export

depend on the textile and semi-manufacturing goods and need to enhance

manufacturing segment. Above 75% of exports, manufacturing goods in Pakistan

(1974-2003) and after that real growth shows decline tendency in this export

sector.

Pakistan is an agricultural state and export raw material that fetches

low prices in global market and on the other side Pakistan imports heavy

machinery and petroleum product which have high prices in the international

market. The difference between the export and import prices is the major cause of

Pakistan trade deficit.

The classical economist David Ricardo, strong believer of promotion

of the export is the strong feature of the national growth. Obviously so that the

national asset is reflect in the foreign exchange which can promote the economy

of the country.

Development economics of the literature on trade got concerned

between import substitution and export promotion. Prebisch-Singer theorem

based on export theory, the big push theory and other similar thoughts argued

effectively that developing countries embark on a strategy of substituting imports

by domestic production of those goods.

Pakistan has immeasurable natural resources and foreign trade can

facilitate in utilization of natural resources in the best possible way. Trade

liberalization provides opportunity for foreigners to invest in this region. In this

way, new technologies are brought into the country with the help of other trading

14141414

nations. Exports are big source of foreign reserves, only possible due to foreign

trade.

1.21.21.21.2 StatementStatementStatementStatement ofofofof problemproblemproblemproblem

Exports are base for economy of developing nations such as Pakistan.

The new preparation always required to compete the whole world market, point

for which rays for this study focus on how export are significance for economy of

the developing nation like Pakistan. The required study on export execution is to

earn the foreign reserve and encourage growth in the economy. The study shows

clear picture of exports performance of Pakistan in last three decades.

Another object of this study how to the exports are effected towards

FDI, GDP, exchange rate, agriculture growth rate and industrial growth rate.

Pakistan suffering in trade deficit it the main cause the low demand for its export,

to enhance the export in the country.

1.31.31.31.3 ObjectiveObjectiveObjectiveObjective ofofofof thethethethe studystudystudystudy

This study will focus on macro economics variables that impact on exports

for Pakistan. The variable which are included in this study have directly impacts on

the exports;

1. To determine the relation between factor of exports variable.

2. How many the exports in effect by the exam of exchange rate?

3. What is impact of FDI on exports?

4. What is relationship between agriculture growth rate and

industry growth rate in terms of export?

We study all these suggestion in case of Pakistan

1.41.41.41.4 AdoptedAdoptedAdoptedAdopted MethodologyMethodologyMethodologyMethodology

In this study export is depended variable and exchange rate, GDP,

foreign direct investment, agriculture growth rate and industrial growth are used

as the independent variables. The study contains time series data of this variable

for the time period 1981–2010. Adopted secondary data for further empirical testing

15151515

has been taken from profile of Pakistan. In this study unit root test like ADF apply

to check the stationary of the variables and also apply Johnson co integration for

determine the relationship among the variables and impulse response. Granger

Causality trace test for the final estimation of the result of the study FMOLS test is

used.

1.51.51.51.5 StructureStructureStructureStructure ofofofof thethethethe thesis:thesis:thesis:thesis:

The study is divided into five sections. The background literature is in

chapter 2, chapter 3 explores the theoretical framework, chapter 4 illustrates data

and methodology, chapter 5 contains the empirical results and chapter 6 based on

the conclusion and Policy recommendations.

16161616

3333 CHAPTERCHAPTERCHAPTERCHAPTER IIIIIIII

4444 INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

This chapter of the study based on the previous literature and empirical

work done on determinant of exports. The focal point of literature is Pakistan, which

already done on the export determinate and in this study also takes in the literature of

developing and developed nations on exports take that provide base to our study and

will help to generate required result.

5555 2.12.12.12.1 LiteratureLiteratureLiteratureLiterature Review:Review:Review:Review:

Siddique et al (2012) analyzed the determinants of export textile and

clothing sector of Pakistan .They found the result by using the variable of GDP, CPI

and ER .The type of data was secondary form (1971-2009). They used OLS technique

and co-integration. The result showed that world income was major factor of export

demand of cloth and textile sector, and other factor which can determine the export of

country was trade restriction. In this model the trade restrictions used as proxy

variables.

Hafeez (2011) estimated the determinants of export and it’s occurred result

by the adopted variable as GDP, exchange rate, and relative prices from (1980-

2010).He used the regression analysis and as well as the OLS technique. The data

used was secondary. The empirical result showed that GDP and relative price were

positively effect on the other side the export and exchange rate were negatively affect

each other .So the founded these result GDP has favorable effect on the export but

exchange rate has negatively impact on the export.

17171717

Najia Saqib and Irfan Sana(2010) described the exchange rate volatility

and its effect on Pakistan export and used the date time serious (1981-2010).They

used the variable export ,import ,reserve ,CPI and GDP deflator . Simple linear

regression model used and as well as tested the augmented dickey fuller and used the

Phillips Peron test. The consequence showed that increased the size of international

export connected develops the exchange rate. There were negatively relationship

between the exchange rate and export and showed the positively relation between the

export and import.

Ghafoor et al (2010) studied the determinant of mango export. They used

the primary data and selected the variables as education of the exporter, experience in

export business, average purchasing prices, average marking cost, average sale prices

and used the dummy variables as government policy. They used the regression

analysis as well as the OLS technique in this model. The empirically result showed

that as the variables use in the model effected the mango export on the other hand

government policy was to be known indicative variables.

Musleh, Ejaz and Tariq (2009) developed the determinants of export

performance (Evidence from firm level) and concluded the strategic result by using

the variable textiles, leather, agro, foods and fisheries .Each variable collected the data

in sub variable .They used sample approach total 180 firm were selected and used

statistical analysis and estimated the OLS technique .The empirical result showed that

in investment market the exports positively affected and explain the link between the

foreign owned firm much used the resource as compare the domestic used firm.

Siddiqui et al (2008) highlighted the strategic literature on impact on

export led growth hypotheses in Pakistan. Used the variables were GDP, export,

import and labor force. The date spanned over was from 1971-2005.They used the

regression analysis as well as the auto regressive in distributed lag model. The

empirical result showed that export, import and labor force have the positive effect on

the growth in short run as well as in long run. On the other hand the term of trade has

the negative affected on growth.

Muhammad Tariq Majeed and Eatazaz ahamad (2006) adopted the

determinants of export in developing countries and concluded the strategic result by

using the variables’ as FDI, GDP, indirect taxes national savings ,labor forces, real

18181818

exchange rate and official development assistance from (1970-2004). The nut shell of

this study showed that the export deals with the trade labialization but the developing

countries faced the fiscal deficit and trade deficit. The developing countries take place

of the agriculture export and enhance the industrial export. The exchange rate

unstable the problem in developing nation and another factor was increased the import.

Naeem and Hussain worked the determinants of export in the case of

Pakistan and concluded that deliberate result by used the variables of primary goods

export, semi manufacturing goods export and manufacturing goods exports which

can used the time series date from (1970-2006).They used the ADF test to converted

the data into the stationery and used the Johnson co integration test to discovered the

long run connection with the time serious data and also used OLS technique to

determinate the export in the country. The empirically result showed that if increased

the 1% of the primary goods of export than the export increase the 0.97% and if

increase the 1% of the semi manufacturing goods export increased the 0.99%. On the

same increment in manufacturing export the result indicated that change in export in

1% change.

Sandeep Kaur (2008) adopted the determinant of export service of USA

with its Asian partner and concluded the deliberate result by using the gravity

model ,the type of data was secondary (2000-2008) . The empirically result show that

USA had convergence in exports with three Asian countries Hong Kong, India and

Korea deviation with three Asian countries Japan, China and Singapore. There is a

large scope for export growth for Hong Kong, India and Korea. As these economies

especially India is one of the rising economy, USA’s export of s increase its growth

would be constant.

Yousaf, Hussain and Ahmad (2008) analyzed the impact of FDI (foreign

direct investment) with the circumstance of exports and imports on economic growth

of Pakistan. They acquired the time series data for their study which starts form

(1973 – 2004). They attain import and export demand as dependent variable and real

gross domestic product, foreign remittances, foreign direct investment and a dummy

variable for democracy and military rule era. They make import and export model

individually. They apply Augmented Dickey Fleur test for checking the stationary of

data. After that Johansen Juselius is applied for result the co-integration among

19191919

variables. They concluded that in the import model the relation of foreign direct

investment is positive in long and short term but in export model the foreign direct

investment has negative relation in short run but positive in long run.

Rano (2007) adopted that the determinants of import and export demand in

Nigerian nation. In this study imports and exports dependent variables while exchange

rate, income, imports capacity and level of reserves used as independent variables.

The sample period of this study starts from (1970 – 2004). There was simple linear

relationship between dependent variables and independent variables. The estimation

methods were used co integration and specification of an error correction model. He

concludes that exchange rate was better instrument for achieving the balance of

payment stability.

Khan (1994) examined that effect of devaluation on balance of trade and

balance of payment in case of Pakistan. They sample period of this study starts from

1983 and ends at 1993. By using conventional method they described effects of

devaluation on the external balance and export and import were demand functions. In

this paper they used quarterly data which shows that no optimistic effect on external

balance due to devaluation. They suggested that depreciation in currency improved

the balance of trade.

20202020

2.22.22.22.2 TABULARTABULARTABULARTABULAR LITERATURELITERATURELITERATURELITERATURE FORMFORMFORMFORM:

AuthorAuthorAuthorAuthor

namenamenamename

StatisticalStatisticalStatisticalStatistical

techniquetechniquetechniquetechnique

DependentDependentDependentDependent

variablevariablevariablevariable

IndependeIndependeIndependeIndepende

ntntntnt

variablesvariablesvariablesvariables

SampleSampleSampleSample

periodperiodperiodperiod

conclusionconclusionconclusionconclusion

2012 Sadique They used

OLS

technique

and co-

integration

Export GDP

Consumer

price index

Exchange

rate

s

1971-

2002

Thestatement ofresultshowed Theresultshowed thatworldincome wasmajor factorof exportdemand ofcloth andtextile sector,and otherfactor whichcandeterminethe export ofcountry wastraderestriction

2011 HafeezThe author

used the

regression

analysis and

as well as the

OLS

Export GDP

exchange

rate

relative

prices

1980-

2010

The foundedthese resultGDP hasfavorableeffect on theexport Buton the otherhandexchangerate hasnegativelyimpact onthe export.

2010 Ghafoor

, et, al

they used the

regression

analysis as

Mango

exportthe

variables

as

They

used the

primary

Empirically

result

showed that

TableTableTableTable 1111

21212121

well as the

OLS

technique in

this model

education

of the

exporter,

experience

in export

business,

average

purchasing

prices,

average

marking

cost,

average

sale prices

and they

used the

dummy

variables

as

governmen

t policy

data as the

variables use

in the model

affected the

mango

export on the

other hand

government

policy was to

be known

indicative

variables.

2010 Najia

Saqib

and

Irfana

Simple linear

regression

model used

and as well

as tested the

augmented

dickey fuller

and used the

Phillips

Peron test.

Export import ,res

erve ,CPI

and GDP

deflator

1981-

2010

The

consequence

showed that

increased the

size of

international

export

connected

develops the

exchange

rate. There

were

22222222

negatively

relationship

between the

exchange

rate and

export and

showed the

positively

affected

between the

export and

import.

2009 Musleh,

Ejaz and

Tariq

statistical

analysis and

estimated the

OLS

technique

Export textiles,

leather,

agro, foods

and

fisheries

They

used

sample

approach

total 180

firm

were

selected

and

used

statistica

l

analysis

The

empirical

result

showed that

in investment

market the

export a

positively

affected and

describes the

link between

the foreign

owned firms

much used

the resource

as compare

the domestic

used firm.

2008 Siddiqui They used Export GDP, 1971- The

23232323

, the

regression

analysis as

well as the

auto

regressive

distributed

lag model

import and

labor force

2005 empirical

result shows

that export,

import, and

labor force

have the

positive

effect on the

growth in

short run as

well as in

long run. On

the other

hand the

term of trade

has the

negative

effect on the

growth.

2008 Yousaf,

Hussain

and

Ahmad

Augmented

Dickey Fleur

(Unit Root

test)

Johansen

Juselius (for

finding the

co-

integration

Export and

import

demand

real gross

domestic

product,

foreign

remittance

s, foreign

direct

investment

dummy

variable

for

democracy

and

1974 -

2004

In import

model the

relation of

foreign direct

investment is

positive in

long and

short term

but in export

model the

foreign direct

investment

has negative

24242424

military

rule

relation in

short run but

positive in

long run.

2007

Rano Co

integration,

vector error

correction

model,

ordinary

least square

regression

model

Import

and export

Income,

import

capacity

and level

of reserves

1970 -

2004

Exchange

rate was the

better

instrument

for achieving

the balance

of payment

stability.

2006 Muham

mad

Tariq

Majeed

and

Eatazaz

ahamad

Export FDI, GDP,

indirect

taxes

national

savings ,la

bor forces,

real

exchange

rate and

official

developme

nt

assistance

from

the 75

countries

1970-

2004

The export

deals with

the trade

labialization

but the

developing

countries

faced the

fiscal deficit

and trade

deficit. The

developing

countries

take place of

the

agriculture

export and

enhance the

industrial

export

25252525

1994 Khan Johansenestimation,Marshall-Lernercondition

Exportdemand,importdemand,exportsupply,importsupply

GDP, realexchangerate

Quarterly datafrom1983to1993

Depreciation

in currency

improved the

balance of

trade.

26262626

CHAPTERCHAPTERCHAPTERCHAPTER IIIIIIIIIIII

3.13.13.13.1 THEORETICALTHEORETICALTHEORETICALTHEORETICAL BACKGROUNDBACKGROUNDBACKGROUNDBACKGROUND

This chapter of study is based on theoretical back ground. In this section

we discuss the theory that are related and define our study. Through this theory that

relate our study are helpful to understand our topic more briefly.

3.23.23.23.2 TheoreticalTheoreticalTheoreticalTheoretical BasisBasisBasisBasis

In 1817 David Ricardo presented the theory of comparative advantage.

The other name of this theory called the cost theory .The international trade concept

of comparative benefit most significant. According to Ricardo import and export

among the two countries happen due to difference in labor, labor skill, physical

wealth, nature reserve and technology crossways the countries.

Ricardo used the concept of comparative gain and opportunity cost in his

theory of global trade and stress on the point that the countries should produce that

goods in which it have relative advantage as well as the low opportunity cost. The

main theme of this theory is that the countries should in specialty in the product in

which they have comparative advantage.

If we make certain that, the Ricardian theory is in contrast of Pakistan than

improves his trade balance. Pakistan is the agriculture state and have the relative

advantage to produce the agriculture product rather than the industrial product, if

Pakistan gain the specialize the agriculture region than the production of the

agriculture goods increase in this way countries able to fulfill the domestic use and

also bright to the export a huge amount of agriculture of the foreign reserve. Pakistan

used the reserve on the imported goods like heavy equipment and enhances the term

of trade.

27272727

The Gravity model have to do trade among the two countries depend the

size of their economies, this model relate the distance and border of the countries. The

model was first used by Tinbergen in 1962. The world trade is record the relative size

of countries which can lessen the amount of pay for transport cost and communication

cost. The model of an economy direct has to do the volume of import and export, the

huge economy production the more goods and services so that these countries have

more to sell in export. The effect of distance in gravity model forecast that if increase

the distance 1% than the volume of trade diminishes at 0.7% to 1%, so we can say

that there are negative relationship among the trade and distance regarding this

model.1

Swedish Economists, Hecksher and Ohlin introduced a theory named as

Hecksher-Ohlin Model. Theory was concerned with the distribution of resources for

their best use and their prices among countries are the key elements of trade.

According to Heckscher–Ohlin model a country is predicated to export those goods

which are the intensive in abundant of dynamic of production. This model abundant

of factor of production caucuses for the gain for trade, so change the trade pattern

relatively price of goods and service has large effect on the distribution of income in

every country which can get the benefits from the trade on the owner of the factor but

on the other side get lose form trade on the owner of the limited factor of production.2

1 The model was first used by Tinbergen in 1962. The basic model for trade between two countries (iand j) takes the form of:

2 Ohlin, Bertil (1967). Interregional and International Trade.Harvard Economic Studies 39. Cambridge,MA: Harvard University Press

28282828

CHAPTERCHAPTERCHAPTERCHAPTER IVIVIVIV

DataDataDataData andandandandMethodologyMethodologyMethodologyMethodology

In this chapter, we will identify the model of the study and elaborate the

methodology that has been use to spot the export model in the case of Pakistan. We

will construct model and also focus on the statistical techniques as well as dimension

of study.

4.14.14.14.1 Methodology:Methodology:Methodology:Methodology:

In this section we express a structure of analysis to establish effect of the

different variable on export in case of Pakistan, which we get in our sample. The

countries export promotes have very important part play like liberalization of the

government system. On the other side the developing nation are facing two deficits

that is say, fiscal deficit and trade deficit. The debt crises make the great extent the

financial difficulty; so that in such financial problem the influence of foreign direct

investment is not sufficient.

The export execution of our country depend many factor and these issue

can be classified in term of demand and supply. The ability of the trading partner

which can usually indentified the GDP of these country ,however the political factor

play a very important role in this stage . The other side in supply feature which can

measure gross domestic product, wage rate, exchange rate and import input in the

country.

29292929

UINDUAGRIGDPFDIEREX ++++++= 54321 ααααααο

Where

EX = total export

ER= exchange rate

FDI = foreign direct investment

GDP= gross domestic product

AGRI= agriculture growth rate

INDU= industrial growth rare

αο = Constant

1α = Coefficient of ER

2α = Coefficient of FDI

3α = Coefficient of GDP

4α = Coefficient of AGRI

5α = Coefficient of INDUST

U = Error term

30303030

4.24.24.24.2 SourcesSourcesSourcesSources ofofofof thethethethe VariablesVariablesVariablesVariables

This graph includes the sources of all variables.

SerialSerialSerialSerial

no.no.no.no.variablevariablevariablevariable Variable.Variable.Variable.Variable. DataDataDataData source.source.source.source.

1 EXP Export Hand book of statistic

2 ER Exchange rateInternational monetary

fund (IMF)

3 FDI Foreign direct investment Hand book of statistic

4 GDP Gross domestic product Economy watch

5 AGRI Agriculture growth rate Hand book of statistic

6 INDUST Industrial growth rate Hand book of statistic

31313131

4.34.34.34.3 VariableVariableVariableVariable description:description:description:description:

Exports of the nation include those goods and services which domestic

country send excess amount of goods and services to the foreign countries and that is

good for the economy growth of the country and improve the balance of trade. If

exports of the nation increased than a country can earn huge amount of foreign

reserve. In 1990 Pakistan export increased 100% and reach 7.5 billion and after this

2006-7 it become 18 billion. In 2009-10 Pakistan has targeted to take export up to US

20 billion dollar and in April 2011 Pakistan export was US 25 billion dollar.

4.44.44.44.4 GrossGrossGrossGross domesticdomesticdomesticdomestic productproductproductproduct (GDP)(GDP)(GDP)(GDP)

The economic growth pilot to the increment in amount of goods and

services produced by and country over the period of time GDP impact the positively

on export. There are direct relationship of the above this variable, high level of GDP

show the cause of high level of export in the country. Therefore the empirically result

(Kumar, 1998) indentify the positive impact of GDP on export. The economic growth

is very important to an economy because it keeps an economy move the positively

dimension and society better off

4.54.54.54.5 ExchangeExchangeExchangeExchange raterateraterate

The exchange rate is factor due to fall the price in domestic market .In

international trade it can negatively influence on export owing to deprecation of

currency in domestic market. The empirically review (Sharma, 2000) describe the

positively effect on export of country. If exchange rate not fully stables the decrease

the international trade activities the exchange rate play the major role for determinant

of the trade balance. In 1982 Pakistan Rs was fixed to the pound but later on

government of General Zia-Ul-Haq take action and convert floating exchange rate.

And as the result Pakistan Rs devalue by 38.5% in1982-83 and many old industries

that established their ancestor have to face huge flow in import cost. In Zulfikar Ali

Buhtoo regime, rupee appreciation but later on despite raise in foreign aid the rupee

depreciated. And in 1980 Pakistan RS value against $ is 12.1 but due to continuously

decreasing the Rs value it reach in 2010 at 85.49 Rs per $.

32323232

4.64.64.64.6 ForeignForeignForeignForeign directdirectdirectdirect investmentinvestmentinvestmentinvestment (FDI)(FDI)(FDI)(FDI)

Foreign direct investment is the direct speculation into the country by a

company situated in a further country either by buying a company in a country or by

growing of accessible business in the country. Foreign direct investment is another

work collection invests which is passive in the other country such as bond, stock and

so on. It is source of investment in economic growth and lead to development it

benefits of both investing country and as well as the home country. The FDI also hurt

the local level of investment.

The empirically role of the FDI in export find the positively effect, the

main propose to the export oriented to promote the export. In case of Pakistan if

foreign direct investment done in the sector of oil, gas, financial, Telecommunication

and media sector than it prove beneficial for the Pakistan economy and promote the

export in Pakistan. Foreign direct investment play vital role to improve and expansion

china’s textile industry and it progress quickly and now china has comparative

advantage in textile industries.

Foreign direct investment increase the investment in the country and

establish new industry hence the production of the country increased as well as export

of the country and that improve the export volume so, it has a positive relationship

with the export . And foreign investor s has full freedom on inflow of capital and

investment. In 2006-7 the foreign direct investment in Pakistan reach 8.4 billion but in

2010 foreign direct investment in Pakistan fall by 34.6% due to political instability.

And in 1995 foreign direct investment in Pakistan was 442.4 million. But now

Pakistan ranked 85th in the list of more foreign direct investment countries

4.74.74.74.7 AgricultureAgricultureAgricultureAgriculture growthgrowthgrowthgrowth raterateraterate

Agriculture is life blood of our country. Agriculture is the largest division

of the financial activity and the stage a vital role in the economic development by

providing food, raw material and employment to a great proportion of the people. It is

the main stay of Pakistan’s economy. More than two third of Pakistan’s population

lives in rural areas and their livelihood continuously depends upon agriculture sector

and its activities. Agriculture in Pakistan is closely linked to rest of the country. It

33333333

supplies a regular flow of workers to non-agricultural sector and provides cheap food

to urban workers.

Pakistan economy agriculture sector plays a very leading role by making a

better contribution to the GDP of the nation. This sector provides raw material for

industry and is a base for foreign trade. Foreign exchange earned from merchandise

exports is 45% of total exports of Pakistan and 67.5% people are living in the rural

areas of Pakistan and are directly involve it.

4.84.84.84.8 IndustrialIndustrialIndustrialIndustrial growthgrowthgrowthgrowth raterateraterate

The industrial growth is based upon agriculture sector. The agriculture

sector is that which can provide manpower for the sake of industrialization. Textile

industry share of Pakistan exports various products together with finished to raw

material in unusual world market however it is in great sustain the economy during

foreign exchange earnings. The government privatization of large-scale units and the

public sector accounts for a reduction section of industrial output, while

administration policy mean to expand the country's industrial support and encourage

export industries.

4.94.94.94.9 DataDataDataData descriptiondescriptiondescriptiondescription

Data taken for study use of secondary type and time series data set .the

whole figures from the empirically testing was taken from on the index mundi, sate

bank of Pakistan, World Bank and economic survey of Pakistan. Annual time data is

used in the present study .The time period from 1981-2010 is used in the study to the

export. Keep in observation the study and modern techniques.

4.104.104.104.10 FactFactFactFact andandandand figurefigurefigurefigure ofofofof PakistanPakistanPakistanPakistan

We will discuss some fact and figures, and also discuss graphical from of

our variable and their trend with respect to year in Pakistan.

34343434

4.10.14.10.14.10.14.10.1 ExportExportExportExport

According to the export figure show that export increased the trend from

1981-2010. Pakistan is an agriculture state and its export consists of agriculture product. In

1990 Pakistan export increased at7.5 billion and after this 2006 it become 18 billion

as well as the in year 2007 and 2008.

4.10.24.10.24.10.24.10.2 ExchangeExchangeExchangeExchange raterateraterate

35353535

This figure represents the exchange rate of Pakistan from 1981 to 2010.

Pakistan’s currency is continuously decreasing against the dollar that was not good for

Pakistan economy. In 1985 to 1986 the slightly change of the exchange rate but in year

2007 to 2008 it can large change in exchange rate.

4.10.34.10.34.10.34.10.3 ForeignForeignForeignForeign directdirectdirectdirect investmentinvestmentinvestmentinvestment

Above figure of foreign direct investment is showing different trends of

data set. In 1983 foreign direct investment was on its lower point foreign direct

investment start increasing from 1990 and in 1995 foreign direct investment in

Pakistan was 1.5% of the GDP and it attain highest point in 2007 but after this due to

political instability foreign direct investment start decreasing again. But now Pakistan

ranked 85th in the list of more foreign direct investment countries.

36363636

4.10.44.10.44.10.44.10.4 GrossGrossGrossGross dogmaticdogmaticdogmaticdogmatic productproductproductproduct (GDP)(GDP)(GDP)(GDP)

The above figure is viewing the trends of GDP growth rate and graph is

showing mixed trends from 1980-2010. The facts and figures are not showing

consistent upward or nor consistent downward trend. In year 1992 to 1993 it can huge

decline the GDP in the country on the other side it can large increment in 2003 to

2004.

4.10.54.10.54.10.54.10.5 AgricultureAgricultureAgricultureAgriculture growthgrowthgrowthgrowth raterateraterate

37373737

The graph of Agriculture growth rate show that there are disparity heave

the years in 1983 to 1984 there are so much decline in this sector. After this it can

decline throw to 1991 .In 1992 the rate of growth incased but after this it can decline

the trend.

4.10.64.10.64.10.64.10.6 IndustrialIndustrialIndustrialIndustrial growthgrowthgrowthgrowth raterateraterate

The graph of industrial growth rate shows that there are slightly change

throw the year in 1981.It much important of the growth of the export in the country.

Industrial growth rate percentage increased in 2003 to 2004 much better rates for the

country after this growth rate decline.

4.114.114.114.11 StatisticalStatisticalStatisticalStatistical Techniques:Techniques:Techniques:Techniques:

In the present study the empirically investigate thorough analysis of the

variables using model. The focus of study is in the way of empirical analysis among

endogenous variable and exogenous variable by using modern econometric technique

and empirically data as well. According to requirement of the data and study, and

keeping in view the analysis. In primary test of study the Augmented Dickey-Fuller

(ADF) analysis is engaged to check the stationary property of data on these data types

real export, exchange rate, foreign direct investment, gross domestic product,

agriculture growth rate and industrial growth rate . These chains come into view to be

non- stationary in level shape.

It was necessary to observe co-integration association between variables

all the way through Johansen's (1998) unrestricted co-integration test to classify and

38383838

to illustrate the long term connection among variables. Now, co-integration

investigation is applied to explore any long-term equilibrium.

The Impulse response criteria is an upset to i-th variable not merely in a

straight line influences i-th variable nevertheless is as well broadcasts to all of further

endogenous variables all the way through the lag arrangement of VAR and Granger

Causality trace test .

39393939

6666 CHAPTERCHAPTERCHAPTERCHAPTER VVVV

THETHETHETHE EMPIRICALEMPIRICALEMPIRICALEMPIRICAL ANALYSISANALYSISANALYSISANALYSIS

In this chapter of study discuss the empirical set up by explanation of data

and econometrics techniques use for estimations and the required result. For the

purpose of estimations time series data is collected of 29 years from 1981-2010.

5.15.15.15.1 UnitUnitUnitUnit RootRootRootRoot TestTestTestTest

Unit Root Test The stationary property of the variables is checked by using

Augmented Dickey-Fuller (ADF) unit root test. To resolve the order integration of

time series, unit root test is practical on stage and as well as on first difference.

Stationary of all variables has been tested with intercept and trend. Results point to

the taking of the unit root hypothesis in the level, and then time series become

stationary in first difference.

VariablesVariablesVariablesVariables

AugmentedAugmentedAugmentedAugmented DickeyDickeyDickeyDickey

FullerFullerFullerFuller TestTestTestTest

AugmentedAugmentedAugmentedAugmented DickeyDickeyDickeyDickeyFullerFullerFullerFuller TestTestTestTest1111stststst DifferenceDifferenceDifferenceDifference

ConclusioConclusioConclusioConclusio

nnnnWithoutWithoutWithoutWithout

TrendTrendTrendTrend

WithWithWithWith


WithoutWithoutWithoutWithout


WithWithWithWith


EXP 1.46 2.21 5.32* 3.50 1(1)

E.RATE 0.9 2.45 4.34* 4.4* 1(1)

FDI 3.25 4.36* 4.04* 4.32 1(0)

GDP 3.75* 3.67 7.18* 7.04* 1(0)

AGRI 1.26 1.99 5.17* 5.20* 1(0)

INDS 1.79 2.09 5.32* 5.28* 1(1)

40404040

5.1.15.1.15.1.15.1.1 AugmentedAugmentedAugmentedAugmented DickeyDickeyDickeyDickey FullerFullerFullerFuller TestTestTestTest (ADF)(ADF)(ADF)(ADF) (table(table(table(table #3)#3)#3)#3)

Note:Note:Note:Note: 1%, 5% and 10% critical standards for Augmented Dickey Fuller Test (ADF) level are 3.67, 2.96and 2.62 for without trend, on the other hand critical worth of with trend as 1%, 5% and 10 are 4.39,3.61 and 3.24 respectively. In first difference the critical value for Augment Dickey Fuller Test are 1%,5% and 10% for without trend are 3.68, 2.97 and 2.62, at the same time 1%, 5% and 10% criticalvalues with trend are 4.41, 3.62 and 3.24 respectively.

Augment Dickey Fuller Test result show that foreign direct investment

(FDI) and gross dogmatic product (GDP) both are stationery in level but on the other

side the Export, Exchange rate, Agriculture growth rate and industry growth rate these

variable non stationery when variable defend in level, by taking the first difference the

data become the stationery. . The null hypothesis of non stationary factor was clearly

discarded at the 5% level of significance and this suggest that all used variables are

integrated of order one.

5.25.25.25.2 JohansenJohansenJohansenJohansen CoCoCoCo Integration:Integration:Integration:Integration:

The Johansen approach can conclude the number of co-integrated vectors

for any pre-described number of non-stationary variables of the same order. This test

may be observed as a long run equilibrium relationship between the variables. The

objective of the Co-integration tests is to define the co-integration of a group of non –

stationary series. Engle and Granger (1987) introduced the concept of co-integration.

Toda and Philips (1993) have revealed that, when co-integration exists and it is

ignored, than it brings the model towards serious model misspecification. We use the

extreme likelihood technique of Johansen (1991, 1995).

41414141


(R=0 we not see this value we check the value of R1 if the value of R1 Eigen

(likelihood) value is greater than the critical value than we will reject the null

hypotheses Ho). And just we see the R1 value if this value is accepted than we not

move to the other R values.

If the values of trace statistics (based on likelihood ratio) and values of

max-Eigen values are greater than their critical values than we reject null hypothesis.

The Johansan co-integration test illustrate that, at R=0 the value of

likelihood ratio and max Eigen value are greater than their critical values so we not

found the long run co-integrating vector mean, thus we will reject null hypothesis. At

R ≤ 1 the t-statistics likelihood ratio and max Eigen value is also greater than the

critical value and prob. value so we reject the null hypothesis. At R ≤ 2 the results

shows that the t-statistics and Eigen value is greater than the critical value and prob.

value than we also reject the null hypothesis and shows there is no long run vector

mean, the economics behind the test is that there is no long run vector mean among

the variables. Moving towards R ≤ 3, interprets that there is long run co-integrating

vector mean exists so, we will accept null hypothesis here at R≤ 3. Johansan trace test

5.2.15.2.15.2.15.2.1 JohansenJohansenJohansenJohansen andandandand JuseliusJuseliusJuseliusJuselius (1990)(1990)(1990)(1990) MaximumMaximumMaximumMaximum LikelihoodLikelihoodLikelihoodLikelihood TestTestTestTest ForForForFor CoCoCoCo integrationintegrationintegrationintegration

NullNullNullNull

HypothesisHypothesisHypothesisHypothesis

TraceTraceTraceTrace StatisticStatisticStatisticStatistic

basedbasedbasedbased onononon

LikelihoodLikelihoodLikelihoodLikelihood

RationRationRationRation

CriticalCriticalCriticalCritical

ValueValueValueValue atatatat

5%*5%*5%*5%*

Prob.Prob.Prob.Prob.

Value*Value*Value*Value*

MaxMaxMaxMax

EigenEigenEigenEigen

ValueValueValueValue ****

CriticalCriticalCriticalCritical

ValueValueValueValue atatatat

5%*5%*5%*5%*

Prob.Prob.Prob.Prob.

ValueValueValueValue

atatatat ****

R=o 144.8431 95.75366 0.0000 52.47646 40.07757 0.0013

R≤1 92.36669 69.81889 0.0003 40.45454 33.87687 0.0071

R≤2 51.91214 47.85613 0.0198 29.26576 27.58434 0.0301

R≤3 22.64638 29.79707 0.2639 17.45986 21.13162 0.1514

R≤4 5.186520 15.49471 0.7887 4.847571 14.26460 0.7610

R≤5 0.338949 3.841466 0.5604 0.338949 3.841466 0.5604

42424242

indicates that there are three co-integration equations at the 0.05 level. In these

equations our null hypothesis is accepted. In our case three equations does not show

the co-integration, so that there is long run relation exist in our model. This mean here

we have found three integrated vector in this case this means co-integration is found

among the variables (GDP ,FDI, exchange rate ,agriculture growth rate and industrial

growth rate ) co-integrated among each other.

5.35.35.35.3 VARVARVARVAR (vector(vector(vector(vector autoautoautoauto regression)regression)regression)regression)

VAR is a statistical method that is used to find out the linear relationship

among variables in a time series. Christopher Sims (1980) first time introduced the

frame work of VAR in which present value is expressed as its own lagged value.

VAR is an important technique for forecasting, data description and policy analysis.

One important advantage of VAR is impulse response that shows a shock in one

variable would continue in future.

5.3.15.3.15.3.15.3.1 ImpulseImpulseImpulseImpulse ResponseResponseResponseResponse AnalysisAnalysisAnalysisAnalysis

Impulse response purpose were execute in order to illustrate the how a

shock in one variable would persist in the future period .the forecasting was made the

considering a trend period. This examination will portray the impulse response

function for the main endogenous variables of the model in the direction of exogenous

variables. We investigate the GDP, exchange rate, agriculture growth rate, industry

growth rate and foreign direct investment and used the dependent variable export

shock with all variables. The conditions that minimize the information criteria give

the optimal selection of lags. The smaller these value the better the model, after

running Chelosky test.

43434343

5.3.1.15.3.1.15.3.1.15.3.1.1 FigureFigureFigureFigure 1111:::: AAAA

We adopted the vector Auto regression (VAR) model to indentified the

impulse of variable under the Chelosky method on differenced series in the case of

Pakistan figure.1, graph (A) showed the response of export to the exchange rate. The

economics behind that export gives positive response to exchange rate when we give

shock to exchange rate toward the response of the export. In the start of the period the

export gave the negatively response toward the exchange rate and approximately at

4.5th lag export increase throws the 10th lags.

5.3.1.2Figure5.3.1.2Figure5.3.1.2Figure5.3.1.2Figure 1111 BBBB

44444444

Graph (B) shows the response of exchange rate what the shock is given to

export. Change in export effects on exchange rate. At the second leg the exchange rate

increase while it decline and reach at the 8.5th lag the exchange rate increase.

5.3.1.35.3.1.35.3.1.35.3.1.3 FigureFigureFigureFigure:::: 2222 AAAA

In figure, 2 graphs (A) illustrate for response of export toward the GDP in

the start of the diagram the export increase and it can positively response of the export

up to 10th lag. The economic behind this there are the positive relationship between

the gross domestic product and export as the increase of the export the GDP will also

increase.

5.3.1.45.3.1.45.3.1.45.3.1.4 FigureFigureFigureFigure 2222 BBBB

45454545

Figure 2, diagram (B) show that result of the GDP response the export in

the initiate of the 1st of the lag GDP show the positively reaction wile 3.3 lag period

the GDP show the negatively response. After this GDP showed the positive trend with

response to the export, and the end of the 9th lag the GDP show the negatively

reaction.


In figure, 3 graph (A) demonstrate for response of export toward the

agriculture in the first of the lag the export show the negatively response throw the

10th lag .It can show that there are negatively response of export response of the

agriculture in case of Pakistan.


46464646

Figure 3, graph (B) show the response of the agriculture in the direction of

the export and it can show the negatively trend heave at the first lag on ward the 6.5th

lag and after this period of time it can show the negatively trend illustrate the

negatively response of agriculture toward the export.


Figure.4, graph (A) expressing the reaction foreign direct investment to the

export .in the 1st of the lag of the period that the FDI show the passively response

throw the export element while at the point of 5th lag it show the negatively trend in

above diagram.


In the figure 4.graph (B) is stating the responsiveness of the export when

gave the shock on foreign direct investment, in the start of the lag the export show the

47474747

negatively response to the foreign direct investment on the other hand at the 6.8th lag

the show the positively response and end of the 9th lag show the again negatively

response.


Figure.5, graph (A) showed the response of export toward the industrial

growth rate .The increased industrial growth have a positive relationship with the

export .In the first lag the export show the positively response and at the 4th lag it can

illustrate the negatively response of the export.


Figure.5, graph (B) the response of the industry growth toward the export

in the start of the lag the industry growth rate show the positively response throw the

48484848

export and it can become the negatively at 5.5th lag than industry growth rate show the

positively growth rate in above diagram.

5.3.1.115.3.1.115.3.1.115.3.1.11 FigureFigureFigureFigure 6666 AAAA

Figure6, graph (A) is expressing the reaction of GDP toward the

agriculture growth rate in the start of the period the first the GDP negative trend and

after the reach at 2.1th lag the show the positive trend, And the stage of the 4th lag

GDP show the again the negative trend.


Figure.6, graph (B) demonstrate the reaction of the agriculture growth rate

toward GDP in the first lag period the trend show the negatively flexibility. But at the

reach at the 7.8th lag the showing the positive response of the agriculture growth rate

toward the GDP.

49494949

5.3.1.135.3.1.135.3.1.135.3.1.13 FigureFigureFigureFigure 7777 AAAA

Figure7, graph (A) showed the response of agriculture growth rate toward

the foreign direct investment start of the lag agriculture growth rate show the positive

response but at the 6.5th lag it show the decline throw the 9.8th lag and after this it

show the again positive response .


Figure6, graph (B) show the response of foreign direct investment when

gave the shock of the agriculture growth rate in the start of the lag period foreign

50505050

direct investment show at equilibrium. While at the 3.2th lag it show the negative

response .In the 8th lag period the foreign direct investment at again equilibrium stage.

5.3.25.3.25.3.25.3.2 VarianceVarianceVarianceVariance decompositiondecompositiondecompositiondecomposition

Variance decomposition is an alternative technique of the impulse

response function for investigates the reaction of dependent variables due to the

effects of shocks by explanatory variables. This method explains that the size of

prediction error variance or any variable is described by innovations of each

independent variable is a system over the horizons. The shocks also affect the

variables in the system due to shocks explained by error variance. From the test, it can

be concluded that each time series describes the prevalence of its own values

5.3.2.15.3.2.15.3.2.15.3.2.1 EquationsEquationsEquationsEquations

titi

iti

iti

iti

iti

iti

tttttt

UINDAGRiFDIERGDP

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UINDAGRiFDIEREXPGDP

INDUAGRIFDIEREXPGDP

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−−−−−− 262524232221

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UINDAGRiFDIEXPGDPER

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UINDAGRiEXPERGDPFDI

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UINDEXPFDIERGDPAGRI

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−−−−−=

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665664362606 _

51515151

5.3.2.25.3.2.25.3.2.25.3.2.2 VarianceVarianceVarianceVariance decompositiondecompositiondecompositiondecomposition ofofofof thethethethe ExportExportExportExport

TableTableTableTable 5:5:5:5:

PeriodPeriodPeriodPeriod S.ES.ES.ES.E EXPORTEXPORTEXPORTEXPORT ERERERER FDIFDIFDIFDI GDPGDPGDPGDP AGRIAGRIAGRIAGRI INDUSTINDUSTINDUSTINDUST

1626.2977 100.0000 0.000000 0.000000 0.000000 0.000000 0.000000

2835.2043 78.62365 7.499834 0.729687 7.257425 2.433289 3.456114

31185.891 79.03190 9.649420 2.217702 3.609339 3.633046 1.858590

41534.470 55.88635 12.79821 16.02820 7.613093 6.341640 1.332506

51843.233 52.16389 9.035586 19.41795 6.905222 11.35435 1.122998

62030.341 48.42665 7.470483 18.93498 9.420804 14.79612 0.950967

72191.545 51.09415 7.058332 16.68237 9.032442 15.30603 0.826673

82304.976 52.92941 6.381715 15.66923 9.804791 14.40692 0.807945

92424.067 56.42599 5.780018 14.17449 9.591176 13.20161 0.826719

102534.648 56.17709 5.402545 15.31452 9.941479 12.38110 0.783267

In the first of the period the export explains the 100% of its own forecast

error variance or Explain through its own innovative shocks. In second lag period the

exchange rate 7.4%, foreign direct investment 0.72%, gross domestic product 7.25%,

agriculture growth rate 2.43% and industrial growth rate show the 3.45% so the

according to the second time period here we conclude that the exchange rate is the

most significant .In the 10th time period the export explain the over the 56% error

variance or explain the its own innovative shocks. While the exchange rate 5.4%,

foreign direct investment 15.3%, gross domestic product 9.94%, agriculture growth

rate 12.38, and industrial growth rate show the 0.78% .Here the 10th lag period

foreign direct investment is the most significant.

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5.45.45.45.4 GrangerGrangerGrangerGranger CausalityCausalityCausalityCausality TraceTraceTraceTrace TestsTestsTestsTests

Granger causality test is used to check that how one variable cause the

other variable in the short term and also in long term. If one variable cause the second

variable but in response second variable not cause the first variable it is known as

unidirectional causality. On the other hand both variables cause each other it is known

as bi directional causality.

• If F-statistics 4 or greater than 4 and probability value is 0.05 or less than 0.05,

than one variable cause the other variable.

• If F-statistics is 4 and probability value is 0.05, than one variable nearly

causing the other variable.

• If F-statistics is nearly 4 and probability value also near to 0.05, than one

variable weakly causing the other variable.

5.4.15.4.15.4.15.4.1 HYPOTHESIS:HYPOTHESIS:HYPOTHESIS:HYPOTHESIS:

1.1.1.1. Ho:Ho:Ho:Ho: GDP does not Granger Cause INDUST and vice versa.

Ha:Ha:Ha:Ha: GDP does Granger Cause INDUST and vice versa.

2. Ho:Ho:Ho:Ho: FDI does not Granger Cause INDUST and vice versa.

Ha:Ha:Ha:Ha: FDI does Granger Cause INDUST and vice versa.

3.3.3.3. Ho:Ho:Ho:Ho: EXPORT does not Granger Cause INDUST and vice versa.

Ha:Ha:Ha:Ha: EXPORT does Granger Cause INDUST and vice versa.

4. Ho:Ho:Ho:Ho: ER does not Granger Cause INDUST and vice versa.

Ha:Ha:Ha:Ha: ER does Granger Cause INDUST and vice versa.

5. Ho:Ho:Ho:Ho: AGRI does not Granger Cause INDUST and vice versa

Ha:Ha:Ha:Ha: AGRI does Granger Cause INDUST and vice versa.

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6.6.6.6. Ho:Ho:Ho:Ho: FDI does not Granger Cause GDP and vice versa.

Ha:Ha:Ha:Ha: FDI does Granger Cause GDP and vice versa.

7. Ho:Ho:Ho:Ho: EXPORT does not Granger Cause GDP and vice versa.

Ha:Ha:Ha:Ha: EXPORT does Granger Cause GDP and vice versa.

8. Ho:Ho:Ho:Ho: ER does not Granger Cause GDP and vice versa.

Ha:Ha:Ha:Ha: ER does Granger Cause GDP and vice versa.

9. Ho:Ho:Ho:Ho: AGRI does not Granger Cause GDP and vice versa

Ha:Ha:Ha:Ha: AGRI does Granger Cause GDP and vice versa

10. Ho:Ho:Ho:Ho: EXPORT does not Granger Cause FDI and vice versa

Ha:Ha:Ha:Ha: EXPORT does Granger Cause FDI and vice versa

11. Ho:Ho:Ho:Ho: ER does not Granger Cause FDI and vice versa

Ha:Ha:Ha:Ha: ER does Granger Cause FDI and vice versa

12. Ho:Ho:Ho:Ho: AGRI does not Granger Cause FDI and vice versa

Ha:Ha:Ha:Ha: AGRI does Granger Cause FDI and vice versa

13. Ho:Ho:Ho:Ho: ER does not Granger Cause EXPORT and vice versa

Ha:Ha:Ha:Ha: ER does Granger Cause EXPORT and vice versa

14. Ho:Ho:Ho:Ho: AGRI does Granger Cause EXPORT and vice versa

Ha:Ha:Ha:Ha: AGRI does Granger Cause EXPORT and vice versa

15. Ho:Ho:Ho:Ho: AGRI does Granger Cause ER and vice versa

Ha:Ha:Ha:Ha: AGRI does Granger Cause ER and vice versa

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5.4.1.15.4.1.15.4.1.15.4.1.1 PairPairPairPair wisewisewisewise GrangerGrangerGrangerGranger CausalityCausalityCausalityCausality TestsTestsTestsTests


Lags: 2

Null Hypothesis: Obs F-Statistic Prob.

GDP does not Granger Cause INDUST 28 1.31993 0.2866

INDUST does not Granger Cause GDP 3.27693 0.0560

FDI does not Granger Cause INDUST 28 0.43509 0.6524

INDUST does not Granger Cause FDI 2.87761 0.0767

EXPORT does not Granger Cause INDUST 28 0.53371 0.5935

INDUST does not Granger Cause EXPORT 1.88941 0.1739

ER does not Granger Cause INDUST 28 4.09409 0.0301

INDUST does not Granger Cause ER 2.01272 0.1565

AGRI does not Granger Cause INDUST 28 2.44891 0.1086

INDUST does not Granger Cause AGRI 0.21867 0.8052

FDI does not Granger Cause GDP 28 0.44243 0.6478

GDP does not Granger Cause FDI 2.10012 0.1453

EXPORT does not Granger Cause GDP 28 1.16711 0.3290

GDP does not Granger Cause EXPORT 5.58336 0.0106

ER does not Granger Cause GDP 28 1.31265 0.2885

GDP does not Granger Cause ER 0.15350 0.8586

AGRI does not Granger Cause GDP 28 1.12063 0.3432

GDP does not Granger Cause AGRI 2.80420 0.0813

EXPORT does not Granger Cause FDI 28 8.78015 0.0015

FDI does not Granger Cause EXPORT 4.01866 0.0319

ER does not Granger Cause FDI 28 4.28142 0.0263

FDI does not Granger Cause ER 9.29000 0.0011

AGRI does not Granger Cause FDI 28 4.40843 0.0240

FDI does not Granger Cause AGRI 0.12267 0.8851

ER does not Granger Cause EXPORT 28 8.19775 0.0021

EXPORT does not Granger Cause ER 4.73413 0.0190

55555555

AGRI does not Granger Cause EXPORT 28 3.60438 0.0435

EXPORT does not Granger Cause AGRI 1.45483 0.2541

AGRI does not Granger Cause ER 28 1.86517 0.1775

ER does not Granger Cause AGRI 1.75447 0.1954

We applied Granger Causality Trace Tests (1969) approach with lag

specification of 2 .In first observation GDP does not cause the industrial growth rate.

The values of F-statistics and probability helps us whether to reject Ho or not. Here F-

statistics value is less than 4 and probability value is greater than 0.05 so we will

accept Ho that means GDP does not cause the industrial growth and reject the Ha .On

the other side industrial growth rate cause the weakly on the GDP. In second

observation foreign direct investment does not granger cause industrial growth rate.

The value of F-statistics is less than 4 and probability value is greater than 0.05 so we

will accept Ho that means it is true that foreign direct investment does not cause the

industrial growth rate .On the other hand the industrial growth also does not cause the

foreign direct investment as F-statistics value is less than 4 and probability value is

greater than 0.05 and we are accept Ho and reject the Ha. In third observation export

does not granger cause the industrial growth rate? Here F-statistics is less than four

and probability value is greater than 0.05 so we accept the Ho and reject the Ha .while

on the other hand the industrial growth also does not cause the export because the

both F-statistic less than four and probability value greater than 0.05.So both the

variable does not cause.

In fourth observation exchange rate cause the industrial growth

rate .Because the value of the F-statistic greater than four and probability value less

than 0.05 so we accept the Ha and reject the Ho. While on the other hand industrial

growth rate does not granger cause the exchange rate for the reason that the value of

F-statistic (2.01272) that is less than four and value of the probability (0.1565) that is

greater than 0.05 so relation cause in the fourth observation is unidirectional

causality .In tenth observation export does granger cause the foreign direct

investment .F –statistic (8.78015) that is greater than four and value of the probability

(0.0015) that is less than 0.05 so in this case we reject the null hypothesis (Ho) and

accept the alternative hypothesis (Ha) .On the other way foreign direct investment

granger cause the export because the value of the F-statistic (4.01866) that is greater

56565656

than four and probability value (0.0319) less than 0.05 so we reject the Ho and accept

Ha.

5.55.55.55.5 FullyFullyFullyFully ModifiedModifiedModifiedModified LeastLeastLeastLeast SquaresSquaresSquaresSquares (FMOLS):(FMOLS):(FMOLS):(FMOLS):

FMOLS was introduced first time by Philips and Hansen in 1990 to

provide the estimation of co-integration regression .this method was used to the

circumstance parameter effect the asymptotic allocation of the OLS estimator. In

this why this method used to achieve the asymptotic and serial correlation effect the

test for the endogenous in regression that result from subsistence for co-integression.

5.5.15.5.15.5.15.5.1 ResultResultResultResult ofofofof FMOLSFMOLSFMOLSFMOLS

TableTableTableTable 7777 DependedDependedDependedDepended variable:variable:variable:variable: ExportExportExportExport

VariableVariableVariableVariable CoefficientCoefficientCoefficientCoefficient Std.Std.Std.Std. ErrorErrorErrorError t-Statistict-Statistict-Statistict-Statistic Prob.Prob.Prob.Prob.

ERERERER 329.2252 51.88908 6.344787 0.0000

FDIFDIFDIFDI 1451.736 279.5093 5.193874 0.0000

GDPGDPGDPGDP 221.7293 99.99314 2.217445 0.0372

AGRIAGRIAGRIAGRI -373.7161 183.5522 -2.036021 0.0540

INDUSTINDUSTINDUSTINDUST 629.4765 264.3619 2.381117 0.0263

CCCC -5471.624 10104.60 -0.541498 0.5936

TRENDTRENDTRENDTREND -536.9140 155.4418 -3.454115 0.0023

RRRR squaredsquaredsquaredsquared ==== 0.9698700.9698700.9698700.969870 Durbin-WatsonDurbin-WatsonDurbin-WatsonDurbin-Watson stat=1.633120stat=1.633120stat=1.633120stat=1.633120

We adopted fully Modified Least Squares (FMOLS) on choice of series

after this result show that these variables. The R-square shows significant subject of

the model because here R.2show the 0.969870 which show the endogenous

considerable depended on the endogenous variable. While on the other side Durban

Watson statistic are showing the minor problem of the autocorrelation. In addition the

economics behind above results is that if our exogenous variables stay constant at

57575757

zero than our value of export decline at 5471.62. while increase the one unit exchange

rate than our value of increase of export at 339.22 unit ,if GDP increase by one unit

according to the data set of the Pakistan and consequence the export will increase at

221.72 unit and if increase the one unit of foreign direct investment than our export

increase by 1451.76 unit while if increase the one unit of the agriculture growth rate

and our export decline at 337.71 unit ,at the same time as if increase the one unit of

the industry growth rate and increment at 629.47 unit in export in Pakistan.

.

58585858

7777 CHAPTER:CHAPTER:CHAPTER:CHAPTER: VIVIVIVI

6.16.16.16.1 Conclusion:Conclusion:Conclusion:Conclusion:

Export is a main source of the providing the foreign exchange to perform

the economic activity in the general and economic growth, so that export is the part of

the need of developing nation for the assets equipment. The fundamental principle of

this study was to find out relation between export and different variables in case of

Pakistan form 1981-2010 under time series data set type.

In this study through an econometrics analysis it has been made to exam

the association with different factors and exports performance of the country .Demand

of both developing and developed markets has positive effect of Pakistani exports .In

this way competitiveness of exports leads to increased the exports of Pakistan .

In economic growth the demand of the export performance positively

effect on the both developing and developed market in our study the main object to

assessment the behavior of the export in relation with GDP, exchange rate, agriculture

growth rate industry growth rate and foreign direct investment .As it verify when use

the non stationery time series data than it is not possible apply the econometric

technique, therefore the first step to apply the ADF test to confirm the stationery date.

Furthermore it finding that our date become stationery in first difference.

After the concern of ADF test to verify the co integration between the

variables, so on the basis of this outcome we find that the variable are co integrated

therefore the long run relationship exist in it.Finaly apply the FMOLS test to

indentified the relationship between the dependent variable either the positively affect

or negatively.

The estimation result shows that GDP has the positive impact on the

Export. When the GDP increased the progress of a country and increased the

production. While the agriculture growth rate has negatively impact on the Export of

59595959

the country .Industry growth rate and foreign direct investment has significant result

and when both of these are increased the export increases. Exchange rate has positive

coefficient that shows when exchange rate increased in other word domestic country

devalue that give raise to export in the country.

6.26.26.26.2 PolicyPolicyPolicyPolicy implications:implications:implications:implications:

The main object of the study to find that important in determinates of

export in Pakistan. The consequence of the GDP is significant with the positive sign

in explaining the export in Pakistan .High the production level mean to main source of

export growth.

The policy implication of the study as following;

� A stable or depreciate exchange rate policy has ensured in order

to enhance the export volume in the country.

� This study suggest that, to enhance the industry growth and

improve the productivity of regarding this sector because the industry sector is

the backbone of the export in country

� Study also suggests that, the foreign direct investment in export

oriented industry can be very important part play to boosting the export in the

country.

� In our country need to replace the agriculture export into to

industry export which can domination the stable price in the world market.

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inThe 1970s”, Weltwirtschaftliches Archive, 120(1): 40-63.

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Siddiqui, S., Zehra, S., Majeed, S., & Butt, M. (2008). Export-Led Growth Hypothesis

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Saqib, N., & Sana, I. (2012). Exchange Rate Volatility and its Effect on pakistan,s

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