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Role of international trade in economic

growth of pakistan



Professor Muhammad Farooq

Superior University Lahore

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Table of contents

Areas Page No.

Serial No.
1 Preface 3

2 Acknowledgment 4

3 Introduction 5

4 Literature Review 8

5 Data And Methodology 14

6 Hypothesis Development 14

7 Empirical Findings 15

8 Conclusion 21

9 References 22

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This study was assigned to me to apply the basic concepts of business research and find
out the result by using different methodology and finding results by applying different
patterns of research which I choose to conduct the study to find out the impact of
international trade in economic growth of Pakistan.
I am very grateful to superior university & respectable Sir Muhammad Farooq who has
given the opportunity to disclose my worth.

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In the name of Allah the most merciful and most Gracious Lord of the Day of Judgment.
Without his will this would not have been possible.
I would especially like to give my thanks to Sir Muhammad Farooq who helped me hard
and it is because of his guidance that get motivated and completed my research work in a
very fine manner.
But more especially I want to thank our parents and friends without whom i would not be
able to complete thisprojec factly.

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International trade means import and export activities from all countries of the world.
trade exits difference in tastes or demand. If costs were increasing in two countries trade
might take place between the countries. Foreign trade signifies the inflow or out flow of
goods and services from one country to another country or countries of the world.
Economic growth has been main driver of poverty reduction.
Countries that have opened themselves up to trade and investment have grown much
faster than those which have not. There is little evidence to support the views that open
foreign trade policies boost economic growth. Foreign trade plays vital role in economic
development of any country especially in developing countries. Through foreign trade
developing countries can earn foreign exchange by exporting surplus and use this foreign
exchange for import of those goods which promote economic development. Foreign trade
not only produces import substitutes but also reduces deficit in balance of trade and
balance of payments of their country besides this countries can benefit from modern
technology through foreign trade. A country can specialize in the production of those
goods for which its resources are more suitable and there fore precious foreign exchange
can be earned. Foreign trade helps in agriculture and industrial development because in
developing countries like Pakistan where there is a need of modern technology and
industrial raw material .these can import these through foreign trade and can promote and
develop these sectors. Foreign trade helps to improve quality of local products and
extends market through changes in demand and supply. Foreign trade can create
competition with the rest of the world. Foreign trade helps to bring stability in price
level .All those things which are short and prices are increasing can be imported so there
by stopping fluctuation in price. Foreign trade provides incentives for foreign investors to
invest in foreign those countries where there is a shortage of investment. It also helps to
increase local investment.
Foreign trade helps to increase the production capacity and to produce on large scale and
therefore to reap economic of large scale. foreign trade helps in developing agricultural,
industrial mineral and services sectors and development of those sectors which increases

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thee level of national income, per capita income, standard of living and employment
opportunities which in turn accelerate the rate of economic development. Through
international trade the productivity of labor and capital entrepreneur increases and makes
them mobile on national as well as international level which helps underdeveloped
countries to develop and maintain a high level of growth of developed countries. In 1948
to1950 the trend volume and value of trade of Pakistan was devaluation of pound sterling
in 1948, decrease in external value of Indian rupee a major exporter of Pakistan’s jute
non devaluation of Pakistani rupee, decrease in volume of trade open general license
scheme, Korean War. Pakistan just after the independence faced problem of shortage of
essential commodities.in1948, Government of Pakistan lifted ban on imports which
resulted in increase in volume of imports. In September 1949 British Government
devalued her currency by 30% to correct her balance of payments position. In response to
Devaluation common wealth member countries including India devalued their currency
but Pakistani did not devalue its currency because of greater demand of exports. India
who was the bigger importer of Pakistani jute and cotton ceased to import and also
restricted exports to Pakistan. Pakistan had to face a difficult situation because Pakistan’s
60% foreign trade was with India however Pakistan successfully faced this challenge and
efforts were made to divert its trade with other countries of the world. it reduces
dependence on India .in mid 1950 Korean war started .the demand for our exports
increased sharply. Pakistan earned a lot of foreign exchange due to increased quantity of
exports of jute and cotton in 1951 to 1955 import policy was liberalized. Reduction of
imports by advanced countries. The import policy was liberalized through open general
licence.therefore the balance of payments position again became unfavorable.
Government of Pakistan again adopted the import control policy and abolished open
general licence scheme. Under stringent conditions all imports were made licensable
from 1983 to 1991 sugar and food grain shortage appeared. Foreign remittances
started declining and foreign debt was short up to 16 billion dollars so in 1990
Government announced foreign exchange reforms free out flow and inflow of foreign
exchange, opening of foreign currency accounts without deduction of Zakat and income
tax and deposits are unquestionable.in1992 to 2006 many political changes appeared in
the country. There was a fall of Government by Nawaz sharief, their Benzir Bhutto and

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again nawaz sharief government in 1999 and General Muusharraf took over the
government there were economic sanctions in1999 because of nuclear explosion test.
Total exports which are 17 billion dollars reached in 2005-6006. % age share of exports
of primary commodities .total imports in are 20.7 billion dollars in 2005-6.the % share of
imports of capital declined to 19.2 in 2005 -6, while % age of import of raw material for
capital goods is 22.7%.after Korean war there was a sharp decline in exports.
Government of Pakistan in order to increase exports set up a committee to suggest
measures to promote exports besides this Government of Pakistan has undertaken various
measures to promote exports from time to time such as export bonus scheume,export
credit guarantee scheme ,the export promotion bureau ,export market development
found ,trading corporation of Pakistan, compulsory grading of exports, design centers,
international trade fair and exhibitions, trade delegations and agreements ,cotton export
corporation. These measures have played a very important role in increasing the exports
of Pakistan.
The first objective of this study is to explore the effect of international trade in economic
growth in respect of panel of developed and developing countries .the study would also
use the sub samples of developed and developing countries for sensitivity analysis .the
second objective of this study is to test the absolute and conditional convergence
hypothesis of volume of imports on economic growth.
This research analyzes the impact of trade in economic growth of Pakistan for the period
ranging from1976 to2005.this research consists of five sections. The next section reviews
the literature role of international trade in economic growth. Section 3 describes the data
and methodology .section 4 reports the empirical findings. Final section 5 concludes the

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. Literature Review

Mckinnon and Shaw (1973) that steps related to financial and trade
liberalization were taken by many developing countries including Pakistan
to achieve a higher level of growtr.this is an empirical search is needed to
determine the effectiveness of financial and trade liberalization policies
with regard to growth in a developing country like Pakistan which followed
restrictive policies till early 1990.the costs of these restrictive policies
have been enormous and reflected in a low level of financial savings
investment and economic growth.
Aziz and Duenwaald (2002) explored that financial development can
affect growth through three main channels. It can increase the marginal
productivity of capital by collecting information to evaluate alternative
investment projects. It can raise the proportion of savings channeled to
investment which results from financial development means by reducing
the resources absorbed by the financial intermediary and this increasing
the efficiency of financial intermediation. It can raise the private saving
rate .when savings are high there will be economic development in the
Ansari (2002) explored that financial development contribute to economic
growth in the following ways. When there are savings in the banks the
funds are available to small investors through which they start business
which results from economic growth. He explored that efficient allocation
of capital is achieved as the proportion of saving in total wealth raises.
More wealth is created as financial intermediaries redirect savings and
slow growing sectors to fast growing sectors. He also explored that
economic development can be achieved when financial markets
encourages specialization in production, development of entrepreneurship
and adopting new technology. He explored that if trade restrictions are
removed the development process is stabilize by improving efficiency. if

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trade is open no restrictions are imposed there will be improve in
domestic technology production process will be more efficient increase in
Jin (2002) explored that trade liberalization and growth relations may
occur through investment and trade openness provide greater access to
investment goods. By trade openness we get the necessities of life easily.
people do not face any difficulty such as all the underdeveloped countries
get the medicines which saves human life import from developed
countries through trade openness. We get the large scale production
which results economic development besides this through trade openness
the overproduction export to another country and then earn foreign
exchange.Barro et:,al explored that joint impact of financial and economic
growth jointly increase economic growth. Their testable hypothesis says
that both financial development and trade liberalizations jointly increase
economic growth. Through reducing inefficiency in investment by
providing better means of investment.
Andersen et:, al explored that economic growth of developing countries is
based on credit allocation. They explored the more is credit allocation in
the country the more is economic development in the country. When
financial sector of any country is strong means more loans are available
for entrepreneur to start their business the rate of investment increases in
the country because financial sector has greater impact on economic
growth.Fase et::,al explored that trade and financial policies started
Government for rapid economic growth. In Pakistan the banking sector
reforms was started in early 1990.through these reforms the Government
of Pakistan has been able to make financial industry more effective
competitive means to face problems of other competitors by privatizing
the commercial banks reasonable interest rates and by standardized
accounting and auditing.
Limi (2004) explored in 1990 the financial sector in Pakistan was not
controlled. Interest rates were poor or negative. Monetary policy was also
not good. And money market was underdeveloped and commercial banks

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have little share in firms profitability and status of financial institutions
were precious overstaffing increasing in banks and these banks incur
losses means low quality banking services and accommodation of none
performing loans. These inefficiencies cause macroeconomic difficulties at
the late 1970 and remove these difficulties the government of
Pakistan taken a big action in the early 1990 to provide strength to its
financial system. The objective of these reforms to prepare their industry
in such a way that it faces the problems of their competitors adopting a
market based indirect system. in these reforms all banks were privatized
reducing corporate burden and by providing means opening up provision
of credit for agriculture small and medium enterprises and promoting
technology in banking.
Bhagwati and Krueger (1978) explored that trade policy import
substitution and export promotion plays a big role in economic growth of
Pakistan. in 1950 and 1960 most of developing countries followed import
substitution policies for their economic growth. This policy stress upon the
need for developing countries to evaluate their own style of development.
Tardo and Smith (2003) explored that in most developing countries the
export promotion strategy is very high means most developing countries
have high economic growth because their exports are in high level. And
high export promotion strategy particularly in globalization level. Export
promotion strategy leads to efficient resources allocation economies of
large scale production and efficiency in technological development.
Capital formation provides opportunities of employment which increase
economic growth. He explored that due to export growth the four
countries Hong Kong Taiwan Singapore and republic of Korea the four
tigers means the countries have been successful with high economic
growth because of their free market outward oriented economics and this
is possible to carefully planned intervention by the Government.
Balassa (1980) explored that the countries which followed inward oriented
policies under import substitution strategy have poor economic growth.
Therefore many LCD,S were focused to stimulate their exported oriented

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orientation because most of them rely on multilateral or organization to
adjust their economic in balances because promotion of exports helps
LCD,S in balances in external sector and also helps them in their recovery.
Riveria-Batiz and Romer (1991) explored that three potential effects op
openness upon rates of producing growth in an economy the
technological frontier. They explored firstly an increase in the degree if
international openness may affect rates of domestic innovation in the less
developed economy. Secondly an increase in the openness may mean a
greater amount of technological knowledge in the frontier economy may
be transferred to its less advanced counter part. Thirdly an increase n the
openness may change the rates oat which knowledge may be transferred
between the two economies. He explored the greater openness may
reduce costs of technology adoption.
Bernard and Jones (1996) explored that openness increase the
productivity and productivity increases the economic growth.. He explored
productivity in a manufacturing sector may rise as a result of either
innovation or technology transfer from the leading economy. They
explored that openness may affect domestic rates of innovation, the
quality of technological know how, in the leading economy that may be
transferred to its more backward counterpart the rate at which this
technology transfer occurs. They estimated the economic relationship
between international openness and rates of productivity growth .they
consider a variety of measures of international openness, the import
output ratio, trade weighted stock and ratios of both inward and outward
foreign direct investment, flows to output and test the hypothesis that
openness affects the rate of productivity convergence against th
alternative that it affects either the domestic rate of innovation or the
quality of technological know how. they explored that certain type of
openness in particular the ratios of either exports imports to output are
found to be specially important others .particularly the flows of inward and
outward FDI less so. They found that it is the rate of productivity
convergence that is primary affected by international openness. by raising

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the rate at which knowledge from a leading economy openness increases
both rates of productivity growth.
Marshal (1890) pointed out the causes which determine the economic
progress of nations belong to study of international trade. Expansion of
market leads to increase of global production and this increase of internal
and external economies which resulted in increasing income for the
economy means when trade is open material or machinery are available
to factories. When things are produced and trade is open atomically
expansion of market occurs which leads to global production internal or
external economies developed which results increase of income for the
economy which has a positive effect on economic growth. Young (1928)
explored that technological progress leads to economic growth when new
machines are imported from abroad productivity automatically increases.
he explored dimensions of market limited the labor division and therefore
the productivity means when no things are produced and market is not
efficient then unemployment increases which results poor economic
growth. He also examined the inter relation between industries in the
process of economic growth. The creation of new industries due to
specialization and standardization in a vast market and the influence of
this market on the technological process.
Schumpeter (1912, 1942 and 1954) explored that economic growth and
profit depends on capital accumulation. He also explored that
advancement of useful knowledge to production from innovation means
technological staff for production process increase productivity which
increase economic growth. He explored economic activity exploring new
knowledge and adopting new challenges. He also considered useful
knowledge to producing and exploring knowledge for economic growth.
Feder (1982) explored that economic growth produced from the affects of
traditional sources and from the exporter sector performance. We
considered that economies have two distinct productive sectors exporter
and non exporter. Differing in the final destination of productions and in
the superiority of the productivity of the traditional factors in the exporter

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sector. He also explored that the rate of economic growth was explained
by the rates of investment, labour growth and exporter growth. he also
presents a way of comparing the relative benefits of allocation of
resources to the both sectors.
Little et al:,(1970) explored that the strategy of substitution of imports to
be responsible for the existence of firms with high costs charging, high
prices for their products which can only be purchased by high income
customer means under developed countries import material or machinery
from other countries which have high costs due to which firms carry their
business .the firms who made products charging high costs for their
products which can only be purchased by high income consumers .He also
explored that entrepreneurs are bound to compromise with Government
policies or decisions .Therefore they defend the promotion of exports.
Balasa (1978) compared the strategies of promotion of exports with
substitution of imports. He considered a sample of 10 LCD,S with different
grades of use of those strategies .He use the neoclassical production
function. He also uses different exporting performances. From the results
means when results are found it was appear the countries which have
higher export growth the economic growth will be higher mean if exports
are higher in any country there will be higher the economic growth
because due to exports the countries earn the foreign exchange and this
foreign exchange helps in purchasing the machinery and raw material
from countries. So the cost purchasing this raw material is cheaper. when
material is provided to firms in less prices .the things which can be
produced are made available to consumers on less prices so necessities of
life are made available to every person and there will be employment in
the country when necessities of life are available there will be economic
development in the country. Kruger (1985) explored that many LCD,S
reduced commercial barriers and other controls of economic activity. They
obtained a significant increase in rate of economic growth. He explored
that technological factors of economic behavior and political and
economic consideration that involved dynamic effects can helped to

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explain the differences of performance among economies .He explored if
political if political condition of the country is effective there will be
economic growth in such a way the traders have no any fear to deal in
goods or services. if political conditions are not good the traders or
entrepreneurs fear to deal because they have a fear to lost their money
due to poor political conditions. so we decided if political conditions are
good there will be economic growth in the economy.Rajatirana (1987)
explored that technology allowed for dynamic gains’ is co responsible for
the world development. report 1987 claimed again kurger aruguments
and explain that information technology allowed for dynamic gains when
subjecting to internal production to international competition and also
made it possible for countries to specialize in different branches of
industry and production stages. He explored that if internal production
can be achieved then you compete with international market and internal
production can be achieved through specialize in different branches of
industry and production stages. He also explored if the countries access to
the DCS technology along with expansion of exports it stimulated internal
Lucas (1988) explored relation between IT and economic growth In this
study he considered the function of aggregate production with two
consumption goods and only one production function. He explored that
human capital means labour workforce whose rate of accumulation
depend on the quantity of labour connected with production .he explored
that with the help of IT country would specialize in the goods for which the
human capital gives a positive result. he explored that IT specialization
tended to be reinforced because the learning took place in specialized
sector. he explored if the rate of learning differ from sector to sector the
rate of economic growth would be differ from country to country.(1989)
analyzed the consequences of the big market of 1992 in the European
union taking the endogenous mechanisms of economic growth into
account. he explored that it lead to an increase of global rate of economic
growth .in view of the midterm effects it had on savings and investment
or in long term on rates and consumption growth. And on determinants of

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innovation profitability.Feche (1992) explored that the activity of
innovation or abilities to imitate technologies of leader countries be vital
factors for productivity growth. He analyzed this situation in eight
industrial sectors of OECD countries. In the period 1970-1986 in order to
undertake this task he divided the total factor production in to technical
progress and increase of technical efficiency. He noted the explanatory
power with positive influence on technical efficiency and rand with
positive influence on technical progress in relation to total factor
production as well as the benefit deriving from the separation of its
elements in to technical progress and increase of technical efficiency. he
also consider the hypothesis relate to international atmosphere stressing
that rand sectors can efficiency prevent others national and foreign
sectors from taking advantage of their projects .He includes a measure of
international and intra sector that would have a positive and significant
effect on technical progress. he also consider two additional variable that
reflect changes in terms of trade and in growth of world demand. which
had a positive statistically significant impact on technical efficiency.

Data and Methodology

Annual data from to 1976 to 2005 on volume of imports and on volume of exports are
retrieved from IMF international Financial Statistics. two variables are used. Volume of
imports and volume of exports. Economic growth is dependent variable while imports
volume and exports volume are independent variables.

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Hypothesis Development

After this we have set the following hypothesis to check the effect of independent
variable on the dependent variable

Hypothesis 1.
Ho = Imports does not affect the economic growth.
H1 = Imports does affect the economic growth.

Hypothesis 2.
Ho = Exports does not affect the economic growth.
H1 = Exports does affect economic growth.

Empirical Findings.

We have selected these variables for the study one is dependent variable and other is
independent variables. In order to find the relationship between economic growth and
volume of imports and volume of exports SPSS software is used. The tests applied by us

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are the descriptive statistics correlation and regression .the findings of these tests
interpreted blew

Table 1.1:

Descriptive Statistics

Descriptive statistics

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

economic growth 31 111.18 6581.10 1.7029E3 1818.63245

volume of imports 31 30.81 164.98 80.9040 30.29492

volume of exports 31 19.85 109.92 66.0027 29.34430

Valid N (listwise) 31

The table 1.1 provides necessary information about the selected variables.i.e, mean
values maximum values, minimum values and standard deviation. In this table maximum
represents higher values and minimum represents lower values.
In this study number of cases is 30 and data for all these cases is valid and there are no
missing values.
The lowest value of economic growth is 111.18 and higher value is 6581.100 and average
value is 1.702 while its standard deviation is about 1818.6325 to which it can deviate.
similarly the lowest value of export 19.85 and highest value is 109.92and average is and
66.0027 its standard deviation is about 29.34430 and lowest value of import is 30.81 and
highest value is 80.9040 while its standard deviation 30.29492 to which it can deviate .

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Table no 1.2


volume of volume of
economic growth imports exports

economic growth Pearson Correlation 1 .950** .867**

Sig. (2-tailed) .000 .000

N 31 31 31

volume of imports Pearson Correlation .950** 1 .931**

Sig. (2-tailed) .000 .000

N 31 31 31

volume of exports Pearson Correlation .867** .931** 1

Sig. (2-tailed) .000 .000

N 31 31 31

**. Correlation is significant at the 0.01 level (2-tailed).

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Table 1.2 presents the value of parsons correlation I e r = .950, r =.867 of value of
exports and value of imports respectively with economic growth and their level
significance are .000,.000 respectively.
Value of Pearson correlation is greater than 0.67 which means that relationship between
economic growth and volume of imports and volume of exports is strong. so we accepted
H1 and rejected Ho because level of significance of two variables is less than 0.05



Unstandardized Coefficients Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) -2979.585 316.091 -9.426 .000

volume of imports 64.118 9.642 1.068 6.650 .000

volume of exports -7.564 9.546 -.127 -.792 .435

a. Dependent Variable: economic growth

Volume of exports shows negative relationship because it shows negative effect on your
dependable variable and the level of significance is higher. So we reject H1and accept Ho
and volume of imports shows positive relationship on your dependable variable and level
of significance 0.05 is low so we accept H1and reject Ho

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Regression Equation

Now we predict our dependable through the value of independent variable as like this
regression equation
Y= α + βx + β y
Where Y represents dependent variable economic growth α, represents constant value βx
and βy represents volume of exports and volume of imports.

By putting values, we have

. Y= α + βx + βy

-2979.585 + -7.564+64.118

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The study has investigated the impact of International trade on economic growth for the
period of 1976 to 2005 .for this purpose regression and regression and correlation are
Economic growth is dependent variable the empirical results finds strong relationship
between exports volume imports volume and economic growth. Our results also find
feedback effect between exports volume imports volume and economic growth. Results
also show evidence of a strong feedback effects between volume of imports and volume
of exports and economic growth.. This study will be very fruitful for the future concerns
as it consists of valuable information regarding the economy of the Pakistan.

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