International Trade and Exchange Rate Behavior

Exchange rate is one of the factors that affect exports and imports of any country. Current study is an effort to present empirical evidence on the relationship between exchange rate and trade (exports & imports) with reference to Pakistan. Annual data of real exchange rate, imports, and exports has been collected, for the period 1967 to 2014, from World Bank’s and State Bank of Pakistan’s websites. Johannsen Cointegration technique and VECM (Vector Error Correction Model) are applied to find long run relationship among the variables. Study findings indicate significant and long run relationship between real exchange rate and trade (exports & imports). Results reveal that higher the rate of exchange of Pakistani rupee against US dollar, higher would be the exports.