Modeling the Effects of Macroeconomic Expenditure Components on Pakistan's Import from China

By Majeed, Sadaf | Journal of Economic Cooperation & Development, January 1, 2019 | Go to article overview

Modeling the Effects of Macroeconomic Expenditure Components on Pakistan's Import from China


Majeed, Sadaf, Journal of Economic Cooperation & Development


(ProQuest: ... denotes formulae omitted.)

1.Introduction

The research over international trade has become an important key policy task in the global economy. Imports become a major discussion part of international trade in the current scenario due to its importance to stimulate economic growth and on the other side its negative effects on trade balance of the economy.

Many researchers estimated the import demand function more in depth to resolve the problem of trade deficit and provided useful policy implications in this regard. Pakistan facing same trade deficit problem like other developing countries. The export penetration ratio was about 10.5% in 2011-12 while it has been declined up to 7.4% in 2015-16 as this decline was mainly associated with low global demand and domestic energy crisis, on the other hand the import penetration ratio was 20.0% in 2011-12 but in 2015-162 it decreased by 16% and this decline was due to low oil prices. Pakistan's economy is highly reliant on imports of petroleum products, capital goods, industrial raw material, automobile and machinery, etc. These facts indicate that the economy of Pakistan is highly dependent on import demand and thus, facing trade deficit.

However, a meaningful research is essential from the macroeconomic perspective because country's reliance on imports is increasing consistently. The previous studies were mainly based on traditional approach, but later on traditional approach has been converted into expenditure approach in which import demand is estimated with expenditure components, this analysis give depth analysis of import demand over traditional approach. There exist a number of research that has received more attention to discuss the issue of import demand and expenditure components such as Alias and Cheong (2000), Xu (2002), Abbott and Seddighi (1996), Funke and Nickel (2006) and Fukmoto (2012) found the import demand elasticities with expenditure components (private and government consumption, investment and export).

As a matter of fact, the close proximity due to political and geo-social and economic relations has resulted Pakistan's high trade association with China. Given the structural changes by raising the performance of the services sector and spread the volume of remittances, Pakistan's import from China provided the evidence for high trade growth in recent year. In this perspective the role of expenditure components and relative price on Pakistan's import from China is required strong policy implication. The estimation of import elasticities with respect to China in macroeconomic policy formulation is important, the research work in this context in Pakistan is lacking. Thus, the objective of this study is to capture the responsiveness of Pakistan's import from China with respect to macroeconomic expenditure components (investment expenditure, export expenditure, household consumption expenditure, and general government expenditure) and relative price. The ARDL bound technique of cointegration is used by using annual time series data from 1972-2016. The remainder of the study is organized in five sections. Section 2 highlights Pakistan - China trade overviews Section 3 sets out the empirical literature. Section 4 describes the model specification, methodology and data source. Section 5 comprises the empirical findings and interpretation of the results finally section 6 provides concluding comments.

2.Pakistan- China Trade Overview

From the last decades the volume of trade has been rising between Pakistan and China; however the percentage of export growth to China on yearly basis has been reducing. The following table shows an expansion of bilateral trade, but balance of trade is constantly rising in favor of China.

Pakistan's exports are mainly based on raw material, cotton and copper etc. On the other hand, the imports are consist of value added manufactured goods and machineries. Consequently, China's export to Pakistan constitutes more than 20% of its imports, while Pakistan's exports to China only 0. …

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