A comparative study on determinants of trade balance in South Asian countries: Nepal and Pakistan

Abstract

The main objective of this study is to analyze the determinants of trade balance in Nepal and Pakistan. The study is based on the secondary data obtained from the World Development indicator for the period 1992 to 2023 A.D covering 32 years. ARDL and ECM test have been applied to measure the degree of long and short run dynamics between the variables. Based on ARDL estimation, the study found real exchange rate being statistically significant and positive while government consumption expenditure, economic growth rate and foreign direct investment were found negative with respect to trade balance in context of Pakistan. Through the estimation the model found that long relation could not be established among the variables in the context of Nepal. Further, the study concludes that both Nepal and Pakistan should adopt tighten fiscal policy measures to reduce government spending for controlling import demand and promoting domestic production through subsidies, infrastructural development, and other incentives are crucial. The overall findings boons the complexity of these interactions, suggesting the need for tailored economic strategies in both countries to achieve a more favorable trade balance.