International trade is considered as a catalyst of economic development and growth in any country. Increase in exports helps in growth in factors of production which affects the demand for inputs. The pressure resulting from increased demand of inputs stimulates the technological change and creates avenues for investment. This growth in exports is contagious and stipulates the growth in other sectors of the economy.Export performance is an essential tool of job creation, strengthening of balance of payment position, accelerated economic growth and enhancement in level of income and living standards of the citizen of any country. Emery (1967) empirically proved that higher rates of exports growth lead to higher economic growth
Countries indulge in import from other countries owning to the reason that countries are not self sufficient in production of all the goods and commodities. In order to meet the domestic demands and needs and feed the industry to stir its growth objectives countries import raw material for industry, technology, agricultural and consumer goods from the countries which are efficient in production of the said items. Exports and imports together play an integral role in determining the trade balance of a country. In this respect the dynamics of relationship between these variables hold significant importance and attract the researchers for testing the nature of relationship between exports and imports (Mukhtar & Rasheed, 2010).
In the area of international trade, the long-run equilibrium relationship between imports and exports has received some attention; see, for example, Fountas and Wu (1999), Granger (1986), Gould and Ruffin (1996), and Husted (1992) among others. The previous inquiries have yielded conflicting empirical evidence about the relationship between imports and exports (Arize, 2002).
Husted (1992) had conducted a study on exports and imports of USA and their relationship using quarterly data for the period of 1967-1989, have shown that there is a long-run relationship between imports and exports and that the sign on the estimated cointegrating coefficient is positive. Put differently, it is an indication that the USA's imports and exports have been brought into a long-run equilibrium through the combined effects of all macroeconomic policies on the trade balance.
Arize (2002) had studied the evidence of long-run convergence between imports and exports in 50 countries from Asia, Middle East, Africa, Europe, Pacific USA and Canada, Latin America and Caribbean. The evidence he found in favor of cointegration in 35 countries of the sample. The findings had indicated that macroeconomic policies of the studied 35 countries out of 50 have been effective in the long run and these countries are not in violation of their international budget constraint.
Kumar and Seema (2004) had investigated the long run relationship between exports and imports for two Pacific Island countries - Fiji and Papua New Guinea using bound testing approach to cointegration and found that imports and exports for the two countries show a long term relationship (cointegrated). Bahmani-Oskooee (1994) had tested the effectiveness of macroeconomic policies by investigating the long-run convergence between Australian imports and exports. The application of cointegration technique revealed that Australian imports and exports are cointegrated with cointegrating coefficient very close to unity indicating that indeed Australia's macroeconomic policies have been effective in the long-run.
Herzer and Felictas (2005) had examined the long-run relationship between Chilean exports and imports using the data from 1975-2004. The results of the study had indicated the existence of a long run equilibrium between exports and imports in Chile.Irandoust and Ericsson (2004) studied behavior of trade flows in France, Germany, Italy, Sweden, UK and USA by applying cointegration and time series techniques, results of the study indicated that trade flows are cointegrated for Germany, Sweden and USA implying that trade policies have been effective in bring imports and exports into an equilibrium.
Tang (2006) studied relationship between exports and imports for OIC member countries. The results of the study indicated cointegration (long term equilibrium relationship) for 9 of the 27 selected OIC member countries (Banglasesh, Cameroon, Chad, Guyana, Indonesia, Mali, Morocco, Niger and Senegal).Rhee and Oskooee (1997) had investigated the Korean imports and exports relationship using quarterly data from 1963 - 1991 and found that Korea's imports and exports are cointegrated.
Rahman (2011) had studied the long-run relationship between export and import of two Southeast Asian nations, Indonesia and Malaysia covering data of over 45 years from each country including pre and post-financial crisis period in Asia. The study concluded that cointegration was found between import and export of Malaysia but for Indonesia such relationship could not be found.
Tiwari (2011) had analyzed the nature of the long-run relationship between exports and imports for theChinese and Indian economy from the period January -1992 to February-2010. It employed recenttime series econometric methods like unit root test in the presence of endogenous structuralbreaks and seasonal adjustments and cointegration techniques that allow for structural breaks andseasonal adjustments for the analysis. Cointegration analysis based on Gregory-Hansencointegration test reveals that exports and imports of India are cointegrated while that of China isnot.
Konya and Singh (2008) empirically examined the effectiveness of India's macroeconomic policies in achieving equilibrium between exports and imports using logarithms of Indian exports and imports between 1949-50 and 2004-05. The results indicated absence of cointegration relationship between export and import data implying that ineffective macroeconomic policies to bring exports and imports into long-run equilibrium.
Celik (2011) had tested the long run relationship between exports and imports of Turkey for the period of 1990-2010 using monthly data. According to the results of the Engle Granger cointegration test there exists a long term relationship between export and import in Turkey the mentioned period.
Keong, Choo and Yusop (2004) had investigated the long run relationship between Malaysian exports and imports by applying multivariate cointegration techniques. Study showed that the short-run fluctuations between exports and imports are notsustainable since in the long run; exports and imports will eventually converge towards anequilibrium state.
Alias and Cheong (2000) had examined the long-run relationship between Malaysian aggregate imports and the components of final demand expenditure and relative prices using Johansen multivariate cointegration analysis using annual data for the period of 1970 to 1998.
Jalil (2008) empirically tested Bangladeshi import and export data from year 1967 to 2006 for the existence of long-run relationship by applying econometric techniques. The empirical results of the study showed no cointegration relationship between the two parameters.
Woahid (2012) had applied Johansen-Juselius cointegration approach to examine the proof of long-run relationship among the variables of bilateral export and import between Bangladesh and its six trading partners namely USA, UK, Germany, India, Hong Kong and Japan and found them cointegrating.
Dumitriu, Stefanescu and Nistor (2009) analyzed the cointegration and causality between Romanian exports and imports using monthly figures from January 2005 to March 2009. The results of Johansen Trace Test, Engle-Granger Test and Breitung Test proved no cointegration relation between exports and imports. Granger Casuality test applied on the data at integration level I(1) showed a bidirectional causality between exports and imports of Romania.
Jain and Sami (2011) had examined the evidence of sustainability of trade imbalance using co-integration analysis using time series data from Singapore from 1976 - 2009. Results of the study concluded that Singaporean exports and imports are cointegrated.
Khadaroo and Ramlall (2012) explored sustainability of current account deficit in Mauritius by using quarterly data over the period of 1999Q1 - 2011Q3, by applying cointegration and error correction modeling. Econometric test proved that total exports, and total imports of Mauritius do not converge in the long-run.
Bineau (2007) tested Bulgarian exports in imports over the period of 1967 -2004. The empirical analysis provided evidence of long-run relationship between exports and imports; implying that current account deficit of Bulgaria is not sustainable.
Jashim Uddin (2009) found the existence of cointegration between Bangladesh's exports and imports over the period of 1972-73 to 2007-08. The results of the study corroborated that Bangladesh is not in violation of its international budget constraints which is in congruent with results of Irondoust and Ericsson (2004)
In case of Pakistan, some of the recent studies that have shown a significant equilibrium relationship between exports and imports include Kemal and Qadir (2005), Naqvi and Kimio (2005) and Bader (2006).
Kemal and Qadir (2005) using monthly data from December 1981 to January 2003 concluded that there exists a long-run relationship between exports and imports of Pakistan.
Naqvi and Kimio (2005) studied quarterly data trade data covering a period of 1972:1 to 2004:4 and employed cointegration. The results proved that coefficient is close to unity, implying that one unit of export is equivalent to one unit of imports and thus resulting in a long run convergence of the trade data implying that Pakistan is not in violation of its international budget constraint.
Bader (2006) studied annual data from 1973 to 2005 and got evidence of cointegration between exports and imports of Pakistan.
Mukhtar and Rasheed (2010) had empirically examined the long run relationship between exports and imports for Pakistan using quarterly data for the period 1972-2006. The findings confirm the stability of the long run equilibrium relationship between exports and imports. The study also proved bidirectional causality between exports and import data.
