Economically developed countries have been able to reduce their poverty level, strengthen their social and political institutions, improve their quality of life, preserve natural environments and achieve political stability [Barro (1996); Easterly (1999); Dollar and Kraay (2002a); Fajnzylber, Lederman, et al. (2002)]. After the World War II, most of the countries adopted aggressive economic policies to improve the growth rate of real gross domestic product (GDP). The neoclassical growth models imply that during the evolution between steady states; technology, exogenous rate of savings, population growth and technical progress generate higher growth levels [Solow (1956)]. Endogenous growth model developed by Romer (1986) and Lucas (1988) argue that permanent increase in growth rate depends on the assumption of constant and increasing returns to capital.1 Similarly, Barro and Lee (1994) investigate the empirical association between human capital and economic growth. They seem to support endogenous growth model by Romer (1990) that highlight the role of human capital in economic activity. Fischer (1993) argues that long-term growth is negatively linked with inflation and positively correlated with better fiscal performance and factual foreign exchange markets. In the context of developing countries, investment both in capital and human capital, labour force, ability to adapt technological changes, open trade polices and low inflation are necessary for economic growth.

Results of previous studies on the correlation between exchange rate changes and trade balance are unpersuasive. The present endeavor tries to understand the direction of changes between trade balance and exchange rate and how the depreciation in exchange rate takes place by incorporating the absorption and monetary approaches including Marshal Lerner condition. Our results reveal that existence of long run relationship between exchange rate, income and money supply on trade balance examined through ARDL bounds testing approach. The lag of dependent variable i.e. trade balance has significant impact on the current year trade balance due to pervious year trade policy. At the same time, depreciation in exchange rate deteriorates the trade balance thus adoption of such trade policies that boost the trade balance in future are desirable. The results have also been indicated that beneficial impact of trade policies on trade balance is nullifying by the exchange rate depreciation. Low level of money supply rather than income plays an important role to improve the trade balance in Pakistan. The prevalence of Keynesian postulation exists in Pakistan that states "income increase will encourage general public to purchase more imported goods and thus deteriorates the trade balance". This paper would highlight some new insights for policy formulation regarding trade, exchange rate, and economic growth. JEL Classifications: F11, F10, C4

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The economic status of a country plays an important role in the lives of the citizens of both developed and developing countries. With the rapid increase in population, every country is trying to find new ways to boost its growth rate so that it may elicit the maximum number of people from poverty and can compare other countries in the form of improvement. The main objective of the study is to empirically investigate the impact of political stability and financial innovations on economic growth. Furthermore, the study also analyzes the impact of subsectors (Agricultural, Industry, and Services) of the economy on growth. A time-series co-integration autoregressive distributed lag (ARDL) model is used to investigate the general to specific sector's growth. The key empirical finding shows that political stability and financial development has a positive and significant impact on economic growth as well as its sub-sectors in the long-run. Trade liberalization has a positive impact on economic growth but most surprising results have been witnessed in agriculture growth for Pakistan.