Impact of Trade Liberalization on Trade Balance in Pakistan: Cointegration and Error Correction Mechanism

This study traces out the way trade liberalization process affects the trade balance keeping into view the stationary nature of data used. The cointegration techniques and the error correction mechanism allow us to establish both, the short-run and the long-run relationship among different measures of trade liberalization and trade balance. The fi ndings suggest a signifi cant positive long-run relationship between trade liberalization and real exchange rate with trade balance while a signifi cant negative relationship with GDP for the time period 1970-2008 in Pakistan. Such results stress on to improve the trade balance through a pertinent change in trade composition by diversifying our export contents and enhanced competitiveness.