TESTING OF MARSHALL-LERNER CONDITION: EVIDENCE FROM PAKISTAN

Abstract

To empirically assess the Marshall Lerner condition, our study examined bilateral trade data of Pakistan's export and import with ten key trading partners in terms of the disaggregated model. Prior studies used the aggregated model to evaluate the Marshall Lerner condition, however the aggregated model frequently produces mixed results due to aggregation bias. The Marshall-Lerner condition only holds in a disaggregated method for seven countries: Japan, China, Kuwait, Germany, the United States, Saudi Arabia, and Italy. Except for the UK, France, and Turkey, the competitive real effective exchange rate or depreciated value of Pakistan currency (PKR) improved the bilateral trade balance on average with mentioned trading partners. Additionally, the PKR devaluation alone will not improve the bilateral trade deficit with three European nations, including France, the UK, and Turkey. To maintain a favourable bilateral trade balance with these European countries, the authorities should implement supply-side and preventative measures.