Role of domestic demand in development of export supply from Pakistan : an ARDL approach

Traditionally, export supply is modelled as a function of production capacity, cost and prices.These factors are not able to fully explain the export performance. The present study includes the domestic demand pressure as an additional explanatory variable in the traditional export supply model to evaluate its empirical importance for modelling export supply for Pakistan. Using the Autoregressive Distributed Lag (ARDL) model (bound testing) on annual data over the period of 1971 to 2014; the results confirm that domestic demand pressure has a negative and significant effect on the supply of aggregate, primary and manufactured exports in both the long- and short-run periods. However, the short-run coefficients of domestic demand are much greater in magnitude in all three cases, implying that changes in domestic demand have a larger effect on export growth in the short-run. Finally, the study concludes that along with the traditional factors, domestic demand pressure is also relevant for modelling the export performance of Pakistan at both the aggregate and disaggregated levels.