Acta Universitatis Danubius. Œconomica, Vol 10, No 2 (2014)

Abstract

The instability in exchange rate (appreciation and depreciation in home currency) is an important factor indetermination of trade balance of a country. Fluctuating  exchange  rates  impacts  the  decision  making  of  investors  and  traders,  it shatters  their  confidence  which ultimately  leads  to the slowness of trade process. In this research paper the effect of exchange rate instability is measured on imports and exports of Pakistan. For this purpose Regression analysis is used and  it  is calculated that if instability is created due to depreciation in  home  currency  ( Pak rupee )then it  has  positive  impact on Pakistan’s  exports, while it has absolutely  no effect on imports of Pakistan. Since Pak rupee has very limited appreciation during last 20 years so appreciation effect of home currency can not be calculated on Imports and exports of Pakistan.  

In theoretical prospective the devaluation of home currency should decrease the volume of imports, because it will cost more for Pakistan to import goods from other countries. But our empirical findings show that, this is not the case between exchange rate and imports of Pakistan.  The imports of Pakistan grew even in large figure as the home currency depreciated against other currencies. So this shows that depreciation of home currency do not effect the imports in of Pakistan. Our findings through regression analysis show that by decrease in value of home currency imports of Pakistan increase. So depreciation in home currency has no effect on imports volume.