TAF PUBLISHING

Exchange Rate (ER) stability is an important factor in determining the economic position of an economy. Speculation in the exchange rate shows the poor performance of a country. A change in the exchange rate may affect the inflation as well as interest rate in the country, and Pakistan is not an exception to this relationship. In this paper, we have tried to examine the impact of the exchange rate on the trade balance. We used the data for 30 years and tested the relationship with the help of correlation and regression. The findings show that Pakistan is continuously facing a trade balance deficit, and the correlation is highly negative. This means that the small open economy of Pakistan has a low saving rate, and thus, NX (the trade balance) is negative. This is due to the continuous depreciation of currency or, in other words, due to an increase in the exchange rate. Continuously increasing in the exchange rate causes the increase in the interest rate, and this cause less saving in which import increase to fulfill the investment gap and thus our trade balance goes to negative.