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Analyzing Trade Agreements and Their Impact on Pakistan's Economy

School
Islamia University of Bahawalpur**We aren't endorsed by this school
Course
MANAGEMENT BUSINESS C
Subject
Economics
Date
Dec 11, 2024
Pages
7
Uploaded by aamirshahzadahmad7
Understanding the impact of trade agreement on Pakistan’s economyIntroductionTrade agreements play a crucial role in shaping the economic landscape of countries, particularly for developing economies like Pakistan. As globalization continues to influence trade dynamics, understanding how trade agreements affect economic performance is vital for policymakers and stakeholders (Hayat et al., 2021).This research proposal aims to explore the impact of trade agreements on Pakistan's economy, specifically focusing on the relationship between trade policy changes, foreign direct investment (FDI), export and import levels, and the GDP growth rate.Problem StatementDespite Pakistan's strategic location and potential for economic growth, the country has struggled to achieve sustainable development. The implementation of various trade agreements has raised questions about their effectiveness in promoting economic growth. While some argue that these agreements enhance market access and attract foreign investment, others contend that they may lead to adverse effects on local industries and employment (Butt, 2021). Thus, it is essential to systematically analyze the impact of trade agreements on Pakistan's GDP growth rate to provide evidence-based insights for future trade policies.Research GapExisting literature on trade agreements often focuses on broader regional impacts or specific sectors without adequately addressing the unique context of Pakistan's economy (Rehman et al., 2021).There is a lack of empirical studies that quantitatively assess the direct relationship between trade policy changes, FDI, export and import levels, and GDP growth in Pakistan (Kakar & Khan, 2020).This research seeks to fill this gap by employing econometric analysis to evaluate how these factors interact and contribute to economic performance. By doing so, it will provide a clearer understanding of the implications of trade agreements for Pakistan's economic development.BackgroundPakistan has entered several trade agreements over the years, including Free Trade Agreements (FTAs) with China and Malaysia, as well as
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participation in regional initiatives such as the South Asian Free Trade Area (SAFTA). These agreements aim to enhance trade relations and stimulate economic growth by reducing tariffs and promoting exports. However, the effectiveness of these policies remains contentious (Ahmad et al., 2021). The country's GDP growth rate has experienced fluctuations due to various internal and external challenges, including political instability, energy crises, and global economic conditions. Given this backdrop, analyzing the impact oftrade agreements on key economic indicators such as GDP growth rate is critical for understanding their role in shaping Pakistan's economic trajectory(Ahmed & Jafri, 2024).This research will utilize econometric models to investigate how changes in trade policy influence FDI inflows, export and import levels, and ultimately affect GDP growth. The findings will contribute valuable insights for policymakers seeking to enhance Pakistan's economic performance through effective trade strategies.In conclusion, this study aims to provide a comprehensive analysis of the impact of trade agreements on Pakistan's economy by focusing on relevant variables that influence GDP growth. By addressing the existing research gapand offering empirical evidence, this research will support informed decision-making in formulating future trade policies that foster sustainable economic development in Pakistan.Research Questions:Q1: Does policy changes strengthen the economic growth? Q2: Does FDI has a positive impact on economic growth? Q3: Does export and import levels has significant impact on economic growth? Objectives:1.To identify the relationship between trade policy changes and economic growth2.To identify the Impact of FDI on economic growth3.To identify the impact of import and export levels on economic growthResearch Hypothesis:H1: Trade policy has a relationship with economic growthH2: FDI has a positive relationship with economic growthH3: Export and import level has a positive relationship with economic growth
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Conceptual Framework:Methodology3.1. Data Source and Methods of Data AnalysisTo conduct this study, annual time series data will be collected from various secondary sources. The data for Gross Domestic Product (GDP) growth rate, trade policy changes, foreign direct investment (FDI), and export and import levels will besourced from the Pakistan Bureau of Statistics (PBS) and the State Bank of Pakistan (SBP). Additionally, data on international trade agreements will be obtained from the Ministry of Commerce, Government of Pakistan, and relevant publications from the World Bank and International Monetary Fund (IMF). The collected data will be systematically analyzed using EViews 10 and Stata 15 software to ensure robust econometric analysis.3.2. Research DesignThe study will employ a time series design that incorporates both descriptive and inferential statistics to illustrate patterns of change over time and establish causal relationships between trade agreements and economic indicators in Pakistan. This design allows for precise comparisons of economic performance before and after the implementation of trade agreements, facilitating a comprehensive understanding of their impacts.Definition of Variables:Trade PolicyChangesForeign DirectInvestment (FDI)GDP Growth RateExport andImport Levels
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Dependent VariableGDP Growth Rate:This variable measures the annual percentage increase in the Gross Domestic Product (GDP) of Pakistan. It reflects the overall economic performance and health of the economy, indicating how much the economy is growing or contracting over a specific period. A higher GDP growth rate signifies a robust economy, while a lower or negative growth rate may indicate economic stagnation or recession (Wang et al., 2023).Independent Variables1.Trade Policy Changes:This variable encompasses modifications to trade agreements, tariffs, and regulations that affect international trade. It includes both the introduction of new trade agreements and amendments to existing policies that can facilitate or restricttrade flows. Trade policy changes are expected to influence economic growth by altering market access and competitive dynamics (Chunling et al., 2021).2.Foreign Direct Investment (FDI):FDI refers to investments made by foreign entities in domestic businesses or assets in Pakistan. This variable is measured by the total amount of foreign investment inflows into the country, which can lead to capital formation, technology transfer, and job creation, thereby contributing positively to economic growth (Ahakwa et al., 2023).3.Export Levels:This variable represents the total value of goods and services exported from Pakistan to other countries over a specific period. Higher export levels are generallyassociated with increased production, job creation, and improved trade balances, which can stimulate GDP growth (Dau et al., 2021).4.Import Levels:This variable indicates the total value of goods and services imported into Pakistan from other countries. While high import levels can reflect strong domestic demand, they can also lead to trade deficits if they exceed export levels. The relationship between imports and GDP growth is complex, as imports can provide necessary inputs for production but may also affect local industries (Hayat et al., 2021).These definitions provide a clear understanding of how each variable relates to yourresearch topic on the impact of trade agreements on Pakistan's economy.Estimation Strategy
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The estimation strategy will involve several econometric tests:1.Stationarity Test:The first step will be to test for stationarity among the time series variables using the Augmented Dickey-Fuller (ADF) test to determine their order of integration.2.ARDL Bound Test for Cointegration:Following stationarity testing, the Autoregressive Distributed Lag (ARDL) bound approach will be employed to examine long-run relationships among the variables. This method allows for variables integrated at different orders (I(0) or I(1)).3.Model Specification:The ARDL model can be specified as follows:∆GDP=β0+∑i=1pβ0∆GDPt−i+∑j=0rγj∆TPCt−j+∑l=0rδl∆ EXt−l+∑m=0r∅m∆ℑt−m+λ(GDPt−1−a1TPCt−1−a2FDwhereutrepresents the error term.4.Long-Run Linear Regression Model:A long-run linear regression model will be estimated to show the relationshipbetween GDP growth rate and independent variables using a log-log transformation based on the Cobb-Douglas production function framework:¿(GDP)=a0+a1∈(TPC)+a2∈(FDI)+a3∈(EX)+a4∈(ℑ)+vt5.Causality Tests:A Toda-Yamamoto causality test will be performed to determine the directionality of relationships between FDI and GDP growth, among other variables.6.Diagnostic Tests:Diagnostic tests will be conducted to ensure that there are no issues with multicollinearity, heteroscedasticity, or autocorrelation in the regression model.7.Stability Tests:Finally, stability tests such as CUSUM or CUSUMSQ tests will be applied to check for structural breaks in the model parameters over time.SignificanceThis study on the impact of trade agreements on Pakistan's economy is significant as it addresses critical issues such as low GDP growth rates and a substantial trade deficit. By examining the relationships between trade policychanges, foreign direct investment (FDI), and export/import levels with economic growth, the research aims to provide valuable insights for policymakers. Understanding how trade policy changes affect GDP growth willfacilitate informed decision-making and guide adjustments to existing
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agreements. Additionally, assessing the role of FDI as a potential driver of economic growth will underscore the importance of attracting foreign investment. Furthermore, analyzing the effects of export and import levels oneconomic growth will help optimize trade balances, protecting local industrieswhile enhancing competitiveness in global markets. Ultimately, this research will fill existing gaps in literature and offer empirical evidence to inform effective trade policies in Pakistan, contributing to improved economic performance and growth.ReferencesAhmad, M., Jabeen, G., Shah, S. a. A., Rehman, A., Ahmad, F., & Işik, C. (2021). Assessing long- and short-run dynamic interplay among balance of trade, aggregate economic output, real exchange rate, and CO2 emissions in Pakistan. Environment Development and Sustainability, 24(5), 7283–7323. https://doi.org/10.1007/s10668-021-01747-9Ahmed, F., & Jafri, S. W. A. (2024). A critical assessment of the State Bank of Pakistan’s Vision2020 in shaping the financial landscape. In Advances in finance, accounting, and economics book series(pp. 169–195). https://doi.org/10.4018/979-8-3693-0835-6.ch012Ahakwa, I., Tackie, E. A., Sarpong, F. A., Korankye, B., Ofori, E. K., Odai, L. A., & Musah, M. (2023). RETRACTED ARTICLE: Revisiting the impact of trade openness on environmental sustainability in Belt and Road countries: a heterogeneous panel approach.Environmental Science and Pollution Research, 30(36), 86025–86046. https://doi.org/10.1007/s11356-023-28366-3Butt, A. S. (2021). Understanding the implications of pandemic outbreaks on supply chains: an exploratory study of the effects caused by the COVID-19 across four South Asian countries and steps taken by firms to address the disruptions. International Journal of Physical Distribution & Logistics Management, 52(4), 370–392. https://doi.org/10.1108/ijpdlm-08-2020-0281Chunling, L., Memon, J. A., Thanh, T. L., Ali, M., & Kirikkaleli, D. (2021). The impact of Public-Private partnership investment in energy and technological innovation on ecological footprint: the case of Pakistan. Sustainability, 13(18), 10085. https://doi.org/10.3390/su131810085Dau, L. A., Moore, E. M., Doh, J. P., & Soto, M. A. (2021). Does global integration stimulate corporate citizenship? The effect of international trade agreements and regulatory quality
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on state and private firm adoption of CSR standards. Journal of International Business Policy, 5(3), 328–352. https://doi.org/10.1057/s42214-021-00104-xHayat, M. A., Ghulam, H., Batool, M., Naeem, M. Z., Ejaz, A., Spulbar, C., & Birau, R. (2021). Investigating the Causal Linkages among Inflation, Interest Rate, and Economic Growth in Pakistan under the Influence of COVID-19 Pandemic: A Wavelet Transformation Approach. Journal of Risk and Financial Management, 14(6), 277. https://doi.org/10.3390/jrfm14060277Kakar, A., & Khan, A. N. (2020). The impacts of economic and environmental factors on sustainable mega project development: role of community satisfaction and social media. Environmental Science and Pollution Research, 28(3), 2753–2764. https://doi.org/10.1007/s11356-020-10661-yRehman, A., Ma, H., Ozturk, I., Murshed, M., & Dagar, V. (2021). The dynamic impacts of CO2emissions from different sources on Pakistan’s economic progress: a roadmap to sustainable development. Environment Development and Sustainability, 23(12), 17857–17880. https://doi.org/10.1007/s10668-021-01418-9Wang, Q., Wang, L., & Li, R. (2023). Trade openness helps move towards carbon neutrality—Insight from 114 countries. Sustainable Development. https://doi.org/10.1002/sd.2720
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