Effect of Trade Deficit and Its Dynamics on Output of Bangladesh: An ARDL Bound Testing Approach

Abstract

Trade deficit is one of the debatable macroeconomic phenomena which is also a concerning issue in most of underdeveloped, developing, and emerging economies around the world. The policymakers of an economy are always concerned about the level of trade deficit over the period and its fluctuation around the real output. Trade deficit reflects the deficit on the current account which implies the merchandise trade deficit i.e. physical imports are greater than exports. The impact of trade deficit has contemporary and long run impact on the GDP of a country. Many literatures illustrate, the impact of trade deficit on the economic growth is negative but there are also some studies showing that the relationship is positive. Actually, it depends on the country’s economic policy, the absorptive capacity and the impact of trade dynamics of the real output. In this empirical investigation, a time series approach is used to investigate the relationship between the trade deficit and real GDP on the economy of Bangladesh. The data has been collected from the year 1985 to 2024 and in this analysis the real GDP (Yt ) considered regressand and trade deficit ( TDt), capital formation (Kt ), labor force (Lt ), nominal exchange rate (EXt ) and inflation rate (INFt ) are used as regressors. To estimate the dynamics of the variables, in this paper the Bound test approach (ARDL) is used which is develop by Pesaran and this approach provides effective result when the variables are different order of integration. The estimated model shows that TDt has a positive long-run and contemporary impact of economic growth, which reflects country’s policy to emphasis imports of capital and investment goods rather than luxury and unnecessary consumption goods.