The Role of Balance of Trade in Economic Development 1

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THE ROLE OF BALANCE

OF TRADE IN ECONOMIC

DEVELOPMENT


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PREFACE

We have put together this collection of facts about history,

present and future prospects of Pakistani economic growth in

relation with balance of trade. Pakistan is in a state of flux.Socio-economic parameters are constantly changing and theeconomy is assuming a new shape. There are many imbalances

in our economy which creates hurdles in the way of economicdevelopment.

We have tackled this comprehensive topic by first discussing

the history of international trade within Pakistan, then talkingabout present situation and finally tackling the issues with our

recommendations for better future prospects. We hope people find this report helpful to get a better understanding of the

balance of trade and how important it is for the growth of theeconomy of any country.


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ACKNOWLEDGEMENT

We students of IMS would like to acknowledge the sub-editor Mr. Shaukat of THE NEWS for their help providing

facts and figures regarding our topic without which we wouldnever have been able to gather the data in time. Similarly the

internet and books has been our savior when we needed helpunderstanding difficult problems. Last, but certainly not the

least, we would like to thank Sir Imran as he has been a great source of inspiration as he made us learn the fundamentals

of economics in such a way that we never got tired and kept

waiting for the next lecture.

Thank you Sir!


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TABLE OF CONTENTS

INTRODUCTION

WHAT IS BALANCE OF TRADE?

THE TWO PILLARS OF BALANCE OF TRADE

1. Imports (2) Exports

HISTORY 2004---2008)

PRESENT SITUATION OF PAKISTAN

ECONOMIC REVIEWS

IMPORTANCE OF BALANCE OF TRADE

CAUSES OF DISEQUILIBRIUM

SUGGESTIONS

CONCLUSION REFERENCES


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INTRODUCTION OF

BALANCE OF TRADE


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INTRODUCTION

WHAT IS BALANCE OF TRADE?

The balance of trade (or net exports, sometimes symbolized as NX) is the

difference between the monetary value of exports and imports in an economy overa certain period of time. A positive balance of trade is known as a trade surplusand consists of exporting more than is imported; a negative balance of trade

is known as a trade deficit or, informally, a trade gap. The balance of trade issometimes divided into a goods and a services balance; especially in the United

Kingdom the terms visible and invisible balance are used.

DEFINITION

Balance of trade refers only to visible (which can be seen) items of exports and

imports. Visible items are the commodities traded which are recorded at ports or

custom ports. For example, cotton and rice exported from Pakistan and machineryimported into Pakistan will be included as visible items. If the value of goodsexported by a country exceeds the value of goods imported, then the balance of

trade of the country is called favorable or surplus, while in the opposite case, it is

known as adverse or deficit.

Measuring the balance of payments can be problematic because of problems withrecording and collecting data. As an illustration of this problem, when official

data for the entire worlds countries are added up, exports exceed imports by afew percent; it appears the world is running a positive balance of trade with itself.

This cannot be true, because all transactions involve an equal credit or debit inthe account of each nation. The discrepancy is widely believed to be explainedby transactions intended to launder money or evade taxes, smuggling and other

visibility problems. However, especially for developed countries, accuracy is likely

to be good.

Factors that can affect the balance of trade figures include:


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Prices of goods manufactured at home (influenced by the responsiveness of

supply) Exchange rates Trade agreements or barriers Other tax, tariff and trade measures Business cycle at home or abroad.


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THE TWO PILLARS OF BALANCE OF TRADE

IMPORTS

EXPORTS

A. IMPORTS:

In economics, an import is any good or commodity, brought into

one country from another country in a legitimate fashion, typically

for use in trade. Import goods or services are provided to domestic

consumers by foreign producers. Import of commercial quantities of goods normally requires involvement of the Customs authorities in

both the country of import and the country of export.

Major Imports Of Pakistan:

Petroleum, Petroleum products, Machinery, Plastics,

Transportation equipment, Edible oils, Paper and paperboard,

Iron and steel, Tea.

B. EXPORTS:

In economics, an export is any good or commodity, transported from

one country to another country in a legitimate fashion, typically foruse in trade. Export is an important part of international trade. Its

counterpart is import. Export goods or services are provided to foreign consumers by

domestic producers. Export of commercial quantities of goods

normally requires involvement of the Customs authorities in both the

country of export and the country of import.

Major Exports Of Pakistan:

Textile goods (garments, bed linen, cotton cloths, and yarn), rice,leather goods, sports goods, chemicals manufactures, carpets and

rugs.


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HISTORY OF BALANCE

OF TRADE IN PAKISTAN


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HISTORY

The foreign trade of Pakistan, during the past half century, has undergone manychanges regarding volume, direction and composition. We give below a brief

description of these changes in different periods.

1947-1950 (Initial Phase)

1. Devaluation of British pound to which our rupee was linked.2. Indian economic pressure and blackmailing.3. Low volume of trade.

In 1947, when Pakistan came into being its foreign trade was completelydisorganized. Unfortunately 60% of our trade was with India and it did not spareany opportunity to create difficulties for Pakistan. In 1949, an event further

worsened the situation. Our second most important trade partner that is England

devalued its currency. India, along with many other common wealth countries, didthe same. They also pressed Pakistan to devalue its rupee but Pakistan refused

to follow. In retaliation, India stopped trading with Pakistan. However, Pakistan

successfully faced this challenge and tried to divert its trade to other countries,thus reducing dependence on India. It also restricted its imports. During this

period, Pakistans imports consisted mainly of consumer goods while exports wereconfined to few agricultural raw materials.

1950-1955

1. Start of industrialization and import substitutes.2. Export boom.3. Balance of trade difficulties started.

In 1950, our trade took a favorable turn. Due to Korean War, the demand for

our exports rose sharply. Pakistan was able to not only increase the quantity ofcotton and wheat exports but also fetch very high prices. Till that time, synthetic

fibers were not in much use. Cotton and jute were main fibers. Pakistan earned

a lot of foreign exchange. Then import policy was liberalized through Open

General License (OGL). This gave a good start to industrial developmentin the country. In the year 1950-1951, our balance of trade was favorable.


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The Korean War soon ended putting Pakistans foreign trade in a difficult situation again. Prices of our main exports cotton and jute fell drastically.

Foreign countries which had already stock piled these commodities, reduced

their demand. Balance of trade became unfavorable and government had toabolish OGL. During this period Pakistan established jute and cotton industries

and became self sufficient in their products. The proportion of machinery and

industrial raw materials in imports increased.

1955-1960(First Five-Year Plan Period)

1. devaluation2. export drive

Due to bad harvests, floods, inflation and poor exports, Pakistan was

compelled to devalue its currency in 1955. This had good effect on exports. However, our balance of trade continued to be unfavorable. Some home

industry had started consuming more and more quantity of jute and cotton, so

exportable surplus of these goods decreased. In the meanwhile first five year plan had started and machinery and raw materials were required in larger

quantities. The government started a number of schemes to increase earning

of foreign exchange. Export incentives scheme and export bonus scheme wasintroduced. In other healthy trend was that Pakistan had started exporting

manufacture goods like cotton and jute textile. In 1958, the martial law

regime took over the country. This regime initiated some new schemes for thepromotion of export.

1960-1965 (Second Five Year Plan Period)

1. Rapid economic development2. Huge foreign aid3. Export incentives

During this period, Pakistans foreign trade continued steady expansion. However, the growth of imports was much faster than that of exports. The

main reason was raid implementation of development schemes under second five year plan. Although the trade deficit was increasing, yet the country was

satisfied because of commendable industrial performance. Many steps were

taken to boost up exports. Export Credit Guarantee Scheme was started and Export Promotion Council was established. The composition of trade was


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changing and the share of manufactured goods was increasing. Pakistan alsoestablished trade relations with many new countries, especially in Eastern

Europe.

1965-70 (Third Plan Period)

1. War with India2. Exports targets not achieved

The period started with Indo-Pak war of 1965. Pakistan had to spend more

on defense. During 1966-67, due to serious shortage of food grains, Pakistanhad to import huge quantity of wheat. Foreign aid also decreased. All these

development had bad effect on our trade. The target for exports could not be

achieved, and deficit in the balance of trade persisted. In 1968-69, the politicaldisturbances in the country also affected export performance.

1970-72 (Unsettled Condition)

1. difficult economic situation2. separation of east Pakistan

During this period, our foreign trade took a new turn. There was a war with

India in 1971. As a result of this, East Pakistan broke away. The structure ofour imports and exports was shattered. Previously, huge quantities of goods

were exchanged between east and West Pakistan. Now West Pakistan had to

find new markets for their exports. To resettle export trade, Pakistan devaluedits currency in 1972. This step proved useful. Exports were so much stimulated

that balance of payments became favorable. After 20 years, Pakistan hada trade surplus. However, this happy situation could not prevail for a long

period.

1973-1978 (New Pakistan)

1. New direction of foreign trade2. Export of manpower3. Nationalization of some shipping lines4. Oil crisis

Pakistan had found new markets. But the position of foreign trade remained

stagnant. Growth in exports was slow and the gap between the exports andimports further widened. In 1973, there was oil crisis. Its prices raised many


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fold. Then there was high inflation, which made our exports non-competitive ininternational markets. The industrial progress also affected trade and deficit

increased. However, later the position started improving.

Some new non-traditional items like carpets, surgical goods, rice etc. gained

importance in exports. Another factor also helped Pakistan to increase itsearning of foreign exchange. Due to economic boom in the Middle East, a large

number of Pakistani workers got job opportunities over there. Pakistan earneda lot of foreign exchange. But in spite of this, trade gap could not be narrowed.

1978-83 (Fifth Plan)

1. Declining of rupee from dollar

2. Economic stability3. Rapid rise in exports.4. Smuggling in Bara markets.

During these five years, past trends continued. Exports grew at a reasonable

rate. Imports also continued upward trend. In 1982, Pakistan delinked its

rupee from dollar. Consequently, the value of rupee is falling. In early 80s, Pakistan showed good agricultural growth and became self sufficient in

wheat for a few years. Due to Afghanistan war, Bara markets appeared in

important towns.

1983-88 (Sixth Plan)

1. Foreign remittances started decreasing2. Wheat shortage reappeared3. Foreign debt increased

In 1985-86, exports rose more sharply than imports, thus decreasing

trade gap foreign exchange earnings. Since price of petroleum had, atthe same time, fallen sharply, Pakistan saved about six billion Rupees on

its import. But the value of rupee against other currencies continued to

fall. Remittances from Pakistanis abroad further decreased. The burdenof foreign debt increased. Instead of one year a three import policy was

declared in 1987.

1988-1993(seventh plan)

1. heavy wheat shortage


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2. debt burden increased3. gulf war and disruption in trade in middle east4. fallen value of rupee5. new trade opportunities in central Asia6. liberalization of foreign trade by reducing many restrictions

Due to bad harvest and floods, wheat shortage appeared. It was

imported in huge quantities. The burden of foreign debt increasedto $20 billion. Efforts to increase exports and to contain imports

continued. The value of rupee against dollar has fallen continuously.

Due to gulf war and stoppage of American aid, the difficulties inbalance of trade increased. However because of permission to keep

foreign currency accounts in Pakistan in free movement of foreign

exchange, our foreign exchange reserves increased although balance indeficit of trade continued.

1993-1998(eight plan)

Wheat imports continued Export of raw cotton decreased because large part was used by local

industry. Burden of external debt servicing rose sharply. Rupee made convertible with other currencies Trade with India opened.

Value of rupee against dollar and other currencies fell continuously. Under instructions of IMF, changes in tariff were made.

1998-2000

Due to atomic explosion, many countries put restrictions on aid toPakistan.

Abnormal rise in dollar price. Foreign debt rises sharply. Service of foreign debt consumes major part

of federal budget.

Gap between exports and imports persists and difficulties in balance oftrade continue.

Influence of IMF increases.

2000-2004

Import duties are lowered under agreement with IMF and World Trade


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Organization (WTO).


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During 2000-2004 export performance improved. Some relief in debt servicing was given by debtor countries. As a result

foreign exchange reserves of Pakistan rose sharply to record high (more

than $12 billion in June 2004).

2005-2008

Pakistans export performance has been impressive in recent years(2002-03 to 2005-06) registering an average growth of 16% per annum.

However, it was dismal in 2006-07, as it witnessed abrupt and sharp

deceleration to less than 4% As compared to last years performance, exports did manage to recover

somewhat this year, but its overall performance has remained far short of

the average growth of 16% achieved before. Pakistans imports grew at an average rate of 29% per annum during

2005-06 on the back of strong economic growth which triggered aconsequential growth in investment and imports.

However, it slowed to a normal level in the fiscal year 2006-07, but

registered a sharp pick up once again in the current fiscal year 2007-08on account of an unprecedented rise in oil import bills and some one-off

elements in the form of imports of wheat and fertilizers.


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PRESENT SITUATION

OF TRADE IN PAKISTAN

(2008)


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PRESENT SITUATION OF TRADE IN PAKISTAN

(2008)

TRADE BALANCE:

During the first ten months (July-April) of the current fiscal year, the merchandise

trade deficit worsened sharply to $17billion as compared to $11billion in the

same period last year. The surge in merchandise trade deficit owes to an outsizedincrease of 28.3% imports that more than offset a modest export growth 10.2%. On

the basis of existing trends, the trade deficit is likely to touch $20.5billion or 12.3%of GDP during 2007-08.

EXPORT PERFORMANCE:

Overall exports recorded a growth of 10.2% during the first ten month (July-April) of the current fiscal year against the growth of 3.6% in the same period last

year. In absolute terms exports have increased from $13.8billion to $15.3billion.

Broad categories of exports suggest that with the exception of textile manufactures,all other categories of exports registered stellar growth. For example, exports

of food groups registered an increase of 38%; exports of other manufactures

(leather, surgical goods, chemicals and pharmaceutical products) and otheritems posted a handsome growth of 33.2% and 59.5% respectively. Textile

manufactures, accounting for almost 57% of total exports, performed poorly as itregistered a decline of 2.5%. Even though the government has provided financial

support to the textile sector through R&D during the current fiscal year, yet the

performance of textile sector has not improved. This point is to the fact that anatural diversification of exports is underway and Pakistan appears to be moving

away from conventional textile products to new non-conventional items such as

other manufactures, petroleum products and food group. However, the pace ofdiversification is painfully slow. The current food hike at the global and national

level provides window of opportunity for Pakistani farmers to grow more wheat

and rice and thus emerge as a major exporter of these agriculture produce.MAJOR EXPORT COMMODITIES AND TRADING COUNTRIES:

Pakistans exports are highly concentrated in a few items namely, cotton (54.7%),

leather (6.1%), rice (7.1%), synthetic textiles (2.9%) and sports goods (1.6%). Thecountrys exports are highly concentrated in only few countries; USA, Germany,

Japan, UK, Hong Kong, Dubai and Saudi Arabia.


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IMPORT PERFORMACE:

Imports during the first ten months (July-April) of the current fiscal year grew

by 28.3% to$32.1 billion on the back of an extraordinary surge in the imports of petroleum products as well as imports of food group and raw material. Non-oil

imports were up by 22.5%. Imports of food group were up by 48.6% in the current year, mainly on account of unanticipated imports of wheat amounting to $819million and an extraordinary surge (70.4%) in the imports of edible oil due to the

sky-rocketing price of palm oil in the international market.

Imports of machinery posted a modest increase of 6.9% in the first ten months of

the current fiscal year reaching to$4.2 billion. Within machines; construction andmining machines and other machinery showed a substantial increase of 38.2%,

33.1% and 9.9% respectively. The rise in the import of these different categories of

machines is attributed to ongoing work on various power and construction projectsin the country.

Unlike previous years, the imports of consumer durables registered a declineof 1.6%. The extraordinary increase in the import of fertilizer was surprising at

a time when the price of fertilizer in the international market was up by almost

50%. The imports of telecom remained more or less at last years level of $1.9billion, suggesting that the expansion phase of cellular companies appears to have

saturated for the time being. Imports of telecom accounts for 5.9% of total imports

but contributed only marginally 0.3% to current years overall imports growth.

It is important to note that the surge in imports during 2003-06 was on theback of strong economic growth which strengthened the domestic demand andconsequently a pickup in investment. In contrast, the surge in this years import is

not because of any structural shift in demand but because of rising internationalcommodity prices such as crude oil and palm oil etc.

MAJOR IMPORT COMMODITIES AND TRADING COUNTRIES:

Like exports, Pakistans imports are also highly concentrated in few items namely,machinery, petroleum products, chemicals, transport equipments, edible oil, iron

& steel, tea and fertilizer. The eight categories of imports accounted for 75.5% oftotal imports during the first nine months (July-March) of the current fiscal year.

Pakistans imports are highly concentrated in few countries. USA, Japan, Kuwait,

Saudi Arabia, Germany, UK and Malaysia have been the major sources ofPakistans imports.


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CURRENT ACCOUNT DEFICIT:

The current account deficit further widened to US $11.6 billion during July-

April FY08 against US $ 6.6 billion in the comparable period of last year. Thedeterioration in the current account deficit mainly emanated from the sharply

rising trade deficit along with the increase in net outflows from the services andincome account.


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ECONOMIC REVIEW OF

BALANCE OF TRADE


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ECONOMIC REVIEWS

CURRENT ACCOUNT DEFICIT

Current account deficit has been on the increase during past three years. Prior

to it, it was positive (3.8 per cent by the end of fiscal year 2002 -03) and thegovernment rightly felt proud of it publicly but the fact is that even then foreign

trade was in deficit. But it was not that large to consume all foreign inflows.

Current account deficit by the end of current FY is likely to swell to around $8.0billion or around 5.4 per cent of GDP primarily to because of swelling of trade

deficit to around $13 billion. It would be the highest during the past seven years.

The figures reveal that during first nine months of current5 FY, current accountdeficit increased to $6.0 billion against $4.3 billion during the corresponding

period of last fiscal year. The increase is because of the trade deficit of $11.0

billion during fist deficit target of $9.6 billion for the last fiscal year. Import of some essential items to keep industry against culture and economy

going is indispensable .it certainly raised import budget particularly when theeconomy is in the expansion mode as has been witnessed during the past four

years. Industry related imports during the first nine months of the current fiscal

year were registered at the tune of $11.0 billion, oil import stood at $5.234 billionwith an increase of 12.0 per cent over last year. Oil import bill is anticipated to be

more than $ 7.0 billion by the end of current fiscal year. Likewise import of otheritems import bill is understandable.

What is surprising is that telecommunication which is fetching perhaps highest

FDI is costing a heavy import bill leaving aside high import bill of other consumerdurables and non durables. During first nine months, import bill related to telecom

has hit $ 1.6 billion mark and by the end of the fiscal year it is expected to be more

than $ 2.0o billion. Import bill of food items has also hit $ 3.4 billion mark duringthe first in months of the current fiscal year and is likely to be around $ 34.0

billion by the end of the year. One should not feel alar5med by these import figures

but for the reason that our exports are not increasing at a pace they should have.This is the crux of the issue.

In order to reduce current account deficit, it is imperative to give boost to exports.

Our exports are faced with a number of problems ranging from textile centricwith least value addition. Comparatively this cost of production, inelasticity in

exports and limited export markets. This obviously necessitates adopting newexport regime to exploit countrys full export potential. The problem of current

account deficit can be squarely addressed by bridging the trade gap. It is the only

have option that should be utilized at the earliest. But, because of certain subtle ground realities such as power crisis high cost of production, low productivity


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and competitiveness in industrial and agriculture sector, it is unlikely if exportscan make real big head way in near future notwithstanding the fact that the

government has laid a very ambitious program of doubling exports during the

next five years. Exports have doubled to more than $ 17 billion during the pastaround seven years. That is why governments department on foreign inflows is

on the increase. The risk of depending on foreign inflows including commercial

borrowing from international money market by floating various bonds will onlyadd to foreign debt that is already swelling in absolute terms. (TheNews)

MACRO-ECONOMIC STABILITY

The change in government in October 1999 did mean a change in the state of

economy. The government had to start afresh, the journey towards achieving

macro-economic stability. The measures included reducing fiscal deficit, lootingrupee in the open market against international currencies, privatization of public

assets, opening of domestic market to global trade players, reducing inflation, public debt and the interest rates. They also included improving financial

governance and providing consistency in the governments fiscal and monetary

policies.

The 9/11 had three positive effects on the economy. One, the formation of Pakistan Development Forum, and Washingtons support has rescheduled more than $

12.0 billion foreign debt on comparatively very easy terms. It reduced the debt

payment burden quite substantially; that would have but difficult to cope withotherwise. Two, foreign environment for the expatriates changed their mindset

(circumstances in USA) that resulted in four times more inflows in the remittances

each year by the expatriates. Around $ 5.0 billion are likely to be sent by theexpatriates by end of current fiscal year. Three, financial assistance by the US and

multilateral financial organizations gave boost to economic growth and helped inbuilding confidence of investors in the economy and the policies pursued by the

government.

The governments economic policies have been the prime factors to give impetus to

economic growth and development.

The macroeconomic indicators are important in this respect and need to beanalyzed. Their current status or sliding down warrants taking immediate

measures to improve them at the earliest and one solid basis. These indicators are:trade and current account deficit, public debt and revenue collection. (12March

sustaining macro-economic stability and achieving targets is the real challenge

By M. Sharif)


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THE REAL POINT IS TO CAST AN OBJECTIVE LOOK

AT OTHER ASPECTS OF THE ECONOMY FROM THE

PERSPECTIVE OF SUSTAINING THIS GROWTH IN FUTURE

There have been few years when the economy had not faced a deficit in foreigntrade but certainly there were many years the trade deficit was at a manageable

level. This year it has reached an unprecedented level of $ 10 billion, showing an

annual increase of 8.4 percent still three months ahead of its close. Disturbingthing in this is conspicuous deceleration in exports, which have grown only by 3.5

percent in contrast to 18.6 percent last year. Imports have risen by 8.37 percent.

Export-import ration is 55 percent, a revival of old story of chronic trade deficitwith serious consequences of increased debt liability, worsening resource gap and

increased vulnerability of rupee. Liberalization of the economy and its integrationinto the world economy being pursued with strong political commitment and great

zeal is intended to realize the gains of export lead development strategy but the

real trends show no proof of that.Over last three years inflationary tendencies have taken firm roots in the

economy. CPI inflation has averaged 8 percent with food price inflation crossing

the double digit in March this year. (April 30by Dr. Mushtaq Ahmed)

NEW EXPORT TARGETS

A COMPREHENSIVE STRATEGY TO INCREASE EXPORTS

Exports strategy: Exports play important role in the economic development

of a country. The countries (China, Singapore, South Korea, Taiwan, Hong

Kong, Singapore, Thailand, Malaysia, France, etc) which have export orientedgrowth are now enjoying the dividends of their strategies. Government is taking

every possible measure to check or fix the declining trends of exports. The

government is taking comprehensive strategy to increase the countrys exports from $16.5-17.5 billion in 2006 to $40-45 billion by 2013. It will be based on

demand driven strategy to enhance exports which have become the lifeline anda major mechanism to drive the economy, earn foreign exchange and generateemployment.

Declining Trends

No doubt, exports have more than doubled in the last seven years from $7.8

billion to about $16.5 billion but declining rations of exports demands diversified


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but integrated policies to increase exports from the present 13 percent to 15 percent of the GDP. Only improved competitiveness and enhanced productivity

will be critical to increase exports. Improvement of skills and improving the

logistics chain trough out the country and with other regional countries of Central Asia, West Asia and Western China would play important role in achieving the

targets of exports in the days to come.

Marketing Accessibility

One of the main pillars of new exports, strategy is to increase efforts to havemore market accessibility.

The growing diplomatic pressures from the US would be dangerous for ourdrive to achieve high volumes of exports in the days to come. Religious extremism

would be fatal for our economic prosperity because it creates fears and

uncertainties among the potential foreign investors. It also discourages thebrighter prospects of domestic investments.


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IMPORTANCE OF

BALANCE OF TRADE

IN ECONOMICDEVELOPMENT


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IMPORTANCE OF BALANCE OF TRADE

Balance of trade is important for every country. BOT account has an important

bearing on the economy of a country. If the BOT is favorable, it enhances the

capacity of the country to import goods and services. There is expansion in the foreign exchange. The tempo of development increases. In case, the balance of

trade is persistently unfavorable, it reduces the capacity of a country to import

goods. The foreign trade is reduced. The rate of growth slows down.

REDUCES DEPENDANCE ON FOREIGN FUNDS:

If BOT are in deficit, one way to finance or reduce the deficit is borrowing fromforeign sources. If we borrow, the BOT will improve for the current year, but the

BOT for the next year will be in deficit because we have to pay interest on theborrowed money. If balance of trade exists, then there is no need for foreign funds

which leads a country to economic development.

SOURCE OF EMPLOYMENT:

BOT helps to reduce unemployment. With the rise in exports, which raise the

demand of goods. The domestic resources are utilized. There is therefore,reduction of unemployment in the developing countries. The expansion the

factories reduced the unemployment

REDUCES INFLATION:

BOT can control the inflation of the country. If we print new notes that areincrease in money supply, inflation will also increase which will result in low

output, low employment and low wage rate.

SOURCE OF NATIONAL INCOME:

The flow of capital goods and technical know-how from the advanced world is

helping in accelerating the rate of economic development of low income countries.The national income of a country increases with the expansion in the scale of

production.

INCREASE IN PRODUCTION:

The industries producing goods on large scale enjoy the economies of scale andthe inflow of foreign capital and investment helps the developing countries to


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produce value added goods.

INCREASE IN GDP:

If BOT exists then capital inflow and capital outflow are equal then there is nouse for labour inflow and outflow because labour will remain the country. When

more is being employed in the country there will be increase in the gross domestic

product of the country.

INCREASE IN INVESTMENT:When the country have favorable balance of trade the demand for its product

increases in the international market, the products price increases which increase

the profits of the producers. Hence new entry takes place in the market and foreigninvestment is also encouraged. Through increased investment the process of

multiplier starts and there is increase in the income of a country.

RESEARCH AND DEVELOPMENT:

The expansion in the size of the market leads to greater division of labor and

reduction in the cost of production. When there is balance of trade, new entriestake place because of more profits. There is increase competition which results in

research and development.

HIGHER STANDARD OF LIVING:

When the country faces balance of trade job opportunities increase which resultsin reduction in unemployment. The income of the people increases and hence the

standard of living increases.

MARKET ACCESSIBILTY:

When a country faces balance of trade, there is inflow and outflow of the goods

and services in the country. There is increase competition in the domestic marketwhich results in research and development. Hence the quality of the products

increases and their cost decreases which extends the market accessibility.

ECONOMIC GROWTH:

As when a country faces balance of trade there is reduced dependence on foreign

funds and the country utilize its resources to attain self sufficiency. There is

increase in employment, increase in production and reduction in cost. There is

controlled inflation in the country. Research and development takes place. Hence


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the process of economic growth starts.

CAUSES OF

DISEQUILIBRIUMCAUSES OFDISEQUILIBRIUM

The permanent problem of deficit in Pakistans balance of payment has two basicroots:

a. limited export capacityb. unrestricted import needs

A. LIMITED EXPORT CAPACITY:

The quantity of exportable goods is so small and their quality is so poor that

enough foreign exchange is not earned. The reasons for poor performance on

export side are:

1.Few export items:

Pakistans export capacity is limited. It has to depend mainly on

cotton and cotton products. Two factors responsible for this situation:

i.Exportable commodities are not produced in large quantities.ii.Their quality is inferior and cannot compete in international markets.


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So only few goods are available for export. In 2002-03, 80% of totalforeign exchange was earned by only 7 items.


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2.Export Of Primary Commodities Or Semi Manufactured Goods

Pakistani exports mainly consist of primary commodities like cotton, rice,cotton yarn and fish or semi manufactured goods. These commodities do

not get very high prices in the international market. In 2002-03, export

of primary commodities or semi manufactured goods contributed 22% oftotal earnings of foreign exchange.

3.Consumption Oriented Society

Pakistanis are mostly consumption oriented people. Due to this attitude,most of the goods produced in the country are consumed locally. So, little

is left for exports. Another defect of our consumption habits is that we are

very fond of imported goods.

4.Unfavorable Terms Of Trade

Terms of trade have been unfavorable to Pakistan. The prices of

imported goods have risen more sharply than prices of exports. This isdue to the fact that we export primary goods or semi manufactured goods

in large quantities while we import manufactured and high technology

goods e.g. electronics.

5. Unfavorable Attitude Of Developed Countries

Developed countries have put many restrictions on imports from

Pakistan e.g. America and Europe have fixed quotas for cloth fromPakistan.

6. Inflation

Due to inflation in the country, the prices of our exportable are veryhigh, so our goods face difficulties to compete in international markets.

Consequently other countries will demand less quantity of its goods and

services. This will reduce the foreign exchange earnings of that country.

7. Decrease in production:

The production of exportable commodities may decrease. There may be

depression, war, floods, draught or strikes etc. which affect agriculturaland industrial production and lowers the production capacity which

disturbs the balance of trade.

8. Technological changes:

Other countries may develop or find cheap substitutes of the commodity


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exported by a country. Thus, the country will be able to sell itscommodity at reasonable prices. For example, during past two or three

decades, synthetic fibers have replaced cotton in many uses. So demand

and prices of cotton are not rising fast enough.

9. Rapid increase in population:

If the population of a country is increasing fast, it will require more and

more quantity of food and other consumer goods. If the home productionis insufficient, it will have to import.

10. Economic Development:

When economic development is going on, the country needs more and

more machinery, equipment and raw materials.

B. UNRESTRICTED IMPORT NEEDS:

This is due to developing and expanding nature of our economy,

Pakistan has to import many kinds of machinery, raw materials andtechnology. The factors, which compel us to keep import bill high, are as

follows:

1.Pakistan is a developing country: Pakistan is undertaking huge programs of development in agriculture,

industry, transport, communications, education, electric power generation,

irrigation etc. for all these projects, imports of various kinds of machineryand raw materials are needed. So Pakistan import bill remains high.

2. Import Oriented Industries:

Many of our newly established industries are import oriented. Industrial

raw materials have to be imported to keep these industries working. A very good example is that of Pakistan Steel Mills for which most of the raw

materials are imported.

3.Oil Bill:

Pakistans imported oil is very high. Home production of oil meets only

20 % of total annual demand. So, Pakistan imports oil in huge quality.

Presently about 25% of our export earnings are used to meet the import ofoil.


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SUGESSTIONS AND

CONCLUSION

SUGGESTIONS

METHODS FOR CORRECTING DISEQUILIBRIUM

The following steps can be taken to correct an unfavorable balance of

trade.

Correcting Balance of Trade:The most important part of balance of payments is usually the balance of

trade. So steps are taken to make it favorable. For this purpose, exports

are encouraged and imports are curtailed.

Exports can be increased through:1. Reducing export duties on important items.


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2. Granting concessions to export industries in the form of lower taxes,

cheaper loans etc.3. Decreasing price of home products and making these cheaper for

foreigners through price controls.4. Devaluation of currency which means that a unit of foreign currency

can buy more quantity of commodities.5. Improve the quality of export products so that they can better compete

with foreign goods.6. Increasing production of exportable goods.7. A more comprehensive and efficient system of export compensation

must be undertaken.8. An improved access to credit for exporters through the establishment

of Export Credit Wing in the State Bank of Pakistan. A greateremphasis on product design and marketing strategies by enhancing

financial resources of the Export Market Development Fund.9. Special steps must be taken to accelerate the development and

modernization of the power loom sector.

10- Establishment of efficient mechanisms for implementing andmonitoring export-specific measures.

Imports are reduced through:1. Increasing import duties on unnecessary items.2. Fixing quotas for certain commodities.3. Banning the import of luxury items.

4. Establishment of import substitution industries which producesubstitutes of imports.

5. Revising the import licensing system to reduce the quantity of

imported goods.\6.The industrial and agricultural production at home should be

expanded, which in turn could decline our imports.


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CONCLUSION

The balance of trade is important for the development of the

economy. It increases employment, increases NI and reducespoverty, any type of deficit in balance of trade is not desirable

i.e. surplus or deficit in balance of trade. However, whether atrade deficit is bad thing or not is relative to the business cycle

and economy. In a recession, countries like to export more,creating jobs and demand. In a strong expansion, countries

like to import more, providing price competition, which limitsinflation and, without increasing prices, provides goods beyond

the economys ability to meet supply. Thus, a trade deficit isnot a good thing during a recession but may help during an

expansion.So in short we can say that the surplus in BOT is not necessarily

a good situation and similarly, deficit in BOT is not necessarilya bad situation.

Hence, balance of trade in any economy is of the highest

importance.


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REFERENCES

THE NEWS. DAWN. ECONOMICS OF PAKISTAN by Sohail Akhtar and Mueen

Afzal. FUNDAMENTALS OF ECONOMICS by Habib Ullah

Vaseer. ECONOMICS OF PAKISTAN by M.Saeed Nasir and Syed

Kamal Hyder. www.nationsencyclopedia.com www.commerce.gov.pk www.wikipedia.com www.answers.com ECONOMIC SURVEY (2007-08)
http://www.nationsencyclopedia.com/http://www.commerce.gov.pk/http://www.wikipedia.com/http://www.answers.com/http://www.answers.com/http://www.answers.com/http://www.answers.com/http://www.answers.com/http://www.answers.com/http://www.wikipedia.com/http://www.wikipedia.com/http://www.wikipedia.com/http://www.wikipedia.com/http://www.wikipedia.com/http://www.commerce.gov.pk/http://www.commerce.gov.pk/http://www.commerce.gov.pk/http://www.commerce.gov.pk/http://www.commerce.gov.pk/http://www.commerce.gov.pk/http://www.commerce.gov.pk/http://www.nationsencyclopedia.com/http://www.nationsencyclopedia.com/http://www.nationsencyclopedia.com/http://www.nationsencyclopedia.com/http://www.nationsencyclopedia.com/

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The Role of Balance of Trade in Economic Development 1

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