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1.
and accept the alternate hypothesis, although the value of adjusted R-Square
is only 0.365 means the exchange rate predict trade balance with only 36.5
% accuracy which is moderate. The scatter plot does not follow any pattern
which shows the adequacy of the fitted model. The other two dependant
variables have found insignificant relationship with exchange rate.
2. LITRETURE REVIEW
A few numbers of studies have reviewed to determine and analyze the
relationship between the independent & dependent variables.
Waliullah, Mehmood Khan Kakar, Rehmatullah Kakar & Wakeel Khan (2010).
This article is an attempt to examine the short and long-run relationship
between the trade balance, income, money supply, and real exchange rate in
the case of Pakistans economy. Income and money variables are included in
the model in order to examine the monetary and absorption approaches to
the balance of payments, while the real exchange rate is used to evaluate
the conventional approach of elasticity (Marshall Lerner condition). The
bounds testing approach to co-integration and error correction models,
developed within an autoregressive distributed lag (ARDL) framework is
applied to annual data for the period 1970 to 2005 in order to investigate
whether a long-run equilibrium relationship exists between the trade balance
and its determinants. The result of the bounds test indicates that there is a
stable long-run relationship between the trade balance and income, money
supply, and exchange rate variables. The estimated results show that
exchange rate depreciation is positively related to the trade balance in the
long and short run. The results provide strong evidence that money supply
and income play a strong role in determining the behavior of the trade
balance.
exerts
negative
impact
on
output
growth;
however
Ehsan U. Choudhri and Mohsin S. Khan (2002). This paper challenges the
popular view that devaluation of the rupee is inflationary and re-examine the
evidence for Pakistan and present new results, which demonstrated that
rupee devaluations have had little impact on inflation. The data gathered
from Pakistan during the period 1982 to 2001 to examine whether inflation is
systematically related to changes in the exchange rate. The empirical tests
are conducted to find out whether or not devaluation leads to an increase in
prices and finds no association between rupee devaluations and inflation in
Pakistan. The paper finds no evidence of a significant pass-through of rupee
depreciations to consumer prices in the short run. It would appear, therefore,
that concerns about the inflationary consequences of devaluation in Pakistan
are somewhat misplaced. It appears, therefore, that concerns about the
inflationary consequences of rupee devaluation are unsupported by the
facts.
Eduardo Borensztein & Jos De Gregorio (1999). This paper has examined
the response of inflation after currency crisis for Asian countries and
construct a sample of currency crises that ended with a large depreciation of
the domestic currency in the 1970-1996 period. This paper does not address
the devaluations, and its effects on inflation.
3. METHODOLOGY
To test the relationship between independent variable which is Pakistani
Rupee against the US dollar and dependents variable that are Trade balance,
GDP & Inflation I have used Linear Regression Analysis by the help of 30
observation for each variable.
4. ANALYSIS
First of all I have taken Exchange rate as a Independent variable and Trade
Balance as dependent variable and run regression test and found that there
is significant relationship between them and that is why I have reject the
Null hypothesis and accept the Alternative hypothesis. The R-value,
which represents the correlation between the observed values and predicted
values of the dependent variable. R-Square is called the coefficient of
determination and it gives the adequacy of the model. Here the value of RSquare is 0.365 that means the independent variable in the model can
predict 36.5% of the variance in dependent variable because there are also
many other factors which can affect the values of Trade Balance. Adjusted RSquare gives the more accurate information about the model fitness. The
histogram of standardized residuals shows the value of mean and standard
deviation of the residual in the model. The mean and standard deviation is
approximately 0 and 1 respectively, which shows that the fitted model is best
and the chances of error is minimum. The Normal probability plot of
regression standardized residual shows the regression line which touches
maximum number of points presents in the model and it also shows the
accuracy of the fitted model and the scatter plot also shows the adequacy of
the fitted model as we can see that the data is scattered and it does not
follow any particular pattern, so we can say that the fitted model has
minimum chances of error. The other two independent variables have found
insignificant relationship.
Model Summary(b)
Adjusted R
Model
R
R Square
Square
1
.622(a)
.387
.365
a Predictors: (Constant), Dollor Rate
b Dependent Variable: Trade Balance
Std. Error of
the Estimate
4.06069
ANOVA(b)
Sum of
Squares
df
Regression 291.598
1
Residual
461.697
28
Total
753.294
29
a Predictors: (Constant), Dollor Rate
b Dependent Variable: Trade Balance.
Model
1
Mean
Square
291.598
16.489
F
17.684
Sig.
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4. CONCLUSION
Devaluing currency is not the way to improve the economy for developing
countries like Pakistan whose imports are very crucial to run the country and
whos exports are inelastic. Devaluation is not a stable way to improve the
economy, unless the Government revises its method of economic planning
and execution of plans, no amount of devaluation will stabilize the external
value of our currency. We must give highest priority to the consolidation of
our economy via expansion. A strong discipline should be exercised over all
the unproductive expenditure whether it is in public or private sector.
The devaluation may also hurt the many companies that have heavy debts
denominated in foreign money. It can make the economy slower, with growth
falling and people may become worried. Exports may go down sharply and
the nation may face budget deficit. The stock market may dip to low, the
trade deficit may rise and bad property loans may bring crises to financial
institution. Accompanying the currency devaluation, the bank has to raise a
key lending rate by some percentage to guard against a surge in inflation
which can be a threat for the economy. By requiring more currency to buy a
dollar, a weaker currency could raise the cost of imports. Devaluing currency
means devaluing the price of labor and talent in the international market
that send foreign exchange through home remittance. Devaluation will make
lose Pakistan heavily both as seller and as a buyer and will make no good
substitute for remedial changes in economic policies and developmental
planning.
5. RECOMMENDATIONS.
Developing Countries including Pakistan should first find out the factors that
jeopardize its economy. Some factors can easily identifiable in case of our
country Pakistan we should improve our tax collection system and imposes
taxes on landlords rather that general public. Electricity is also the major
bottleneck which prevents our economy to flourish, due to shortage of
electricity our industries are facing production problem we can not produce
export quality goods which result in negative balance of payment and lower
GDP. Encourage people to
6. REFERENCES.
7
empirical
evidence
from
OECD
countries,
International
Ehsan U. Choudhri and Mohsin S. Khan (2002). The exchange rate and
consumer price in Pakistan: Is rupee devaluation inflationary. The
Pakistan Development Review.