The Exchange Rate, Gdp and Kse, a Relationship Anlysis
Exchange rates, Pakistan’s GDP and KSE’s prices:
A relationship analysis
I. Introduction
Exchange rates, GDP and KSE index 2.1 Exchange rates (ER) are not autonomous in nature, these are determined by the forces of demand for and supply of major medium of currency (mostly US dollar in Pakistan) used in imports and exports trade. Whereas the volumes of imports and changes therein seem to be the major source to determine demand for US dollar in Pakistan, the value and changes in exports appear to be the major determinants of supply of dollar. In addition, workers’ remittances, foreign direct investment (FDI), foreign portfolio investment (FPI), and government foreign borrowing (and its payments) are some other factors that affect the volumes of supply and demand of foreign currencies, and hence the exchange rates. Studies by Ahmed, Ara and Hyder (2005). Xiaopu (2002), and MacDonald and Ricci (2003) reveal that openness of economy, capital flows and terms of trade are the major factors affecting the real exchange rate in long term. Ejaz, Abbas and Saeed (2002) find budget deficit as an important factor in determining real exchange rate in Pakistan.
2.2 The changes in the exchange rates – depreciation and appreciation - in turn affect the home country’s import and export trade. Appreciation of the country’s currency makes exports expensive and imports cheap, and depreciation makes exports cheap and imports expensive. Consequently, the volumes of exports and imports change, which further affect the consumption and production at national level, the GDP of the country, and its all major related components – the primary sector, secondary/ manufacturing sector and tertiary/services sector. Hussain and Farooq’s (2009) study shows that exchange rate volatility, exports of country and reserve money affect the long term growth of the economy. 2.3 Of the three major components of GDP - the primary sector, secondary/ manufacturing sector and
A relationship analysis
I. Introduction
Exchange rates, GDP and KSE index 2.1 Exchange rates (ER) are not autonomous in nature, these are determined by the forces of demand for and supply of major medium of currency (mostly US dollar in Pakistan) used in imports and exports trade. Whereas the volumes of imports and changes therein seem to be the major source to determine demand for US dollar in Pakistan, the value and changes in exports appear to be the major determinants of supply of dollar. In addition, workers’ remittances, foreign direct investment (FDI), foreign portfolio investment (FPI), and government foreign borrowing (and its payments) are some other factors that affect the volumes of supply and demand of foreign currencies, and hence the exchange rates. Studies by Ahmed, Ara and Hyder (2005). Xiaopu (2002), and MacDonald and Ricci (2003) reveal that openness of economy, capital flows and terms of trade are the major factors affecting the real exchange rate in long term. Ejaz, Abbas and Saeed (2002) find budget deficit as an important factor in determining real exchange rate in Pakistan.
2.2 The changes in the exchange rates – depreciation and appreciation - in turn affect the home country’s import and export trade. Appreciation of the country’s currency makes exports expensive and imports cheap, and depreciation makes exports cheap and imports expensive. Consequently, the volumes of exports and imports change, which further affect the consumption and production at national level, the GDP of the country, and its all major related components – the primary sector, secondary/ manufacturing sector and tertiary/services sector. Hussain and Farooq’s (2009) study shows that exchange rate volatility, exports of country and reserve money affect the long term growth of the economy. 2.3 Of the three major components of GDP - the primary sector, secondary/ manufacturing sector and