Testing for Marshall-Lerner Condition: Bilateral Trade between Pakistan and its Major Trading Partners

Javed Iqbal, Misbah Nosheen, Rabbia Tariq and Samia Manan

Abstract

Marshall Lerner condition is an important phenomenon that determines the correlation between the exchange rate and the balance of trade. In this study, we test the Marshall Lerner condition for Pakistan against her ten major trade partners - the US, UK, Saudi Arabia, China, Canada, France, Japan Germany, UAE and Kuwait. The study covers a period from 1980-2013 while for estimation purpose; we apply Johansen Juselius Co-integration technique. We find evidence of the long run cointegration relationship between the variables of the exchange rate and the balance of trade for Pakistan against her all ten trade partners. However, empirical findings confirm Marshall Lerner condition only for six countries, i.e. the US, UK, Saudi Arabia, China, Canada and France, while there is no evidence of Marshall Lerner condition, in case of the remaining countries Japan, Germany, UAE and Kuwait.