Muhammad Mussa 14436

1. Trade is one of the integral components of ending global poverty. Countries that are
more liberal with its policies regarding international trade tend to grow faster, innovate,
improve productivity and provide higher income and more opportunities to their people.
International Trade is essential for smaller economies countries as it opens up gates for
the country helps develop their economy and raise their GDP. Integrating your economy
with global economy through trade helps promote economic growth and reduce poverty
locally and globally. Trade brings jobs and opportunities in a country and helps drive
competition which ensures that the best product is being offered to its consumers, it
injects global competitiveness and hence the local businesses become very efficient due
to being exposed to international competition. Open trade benefits lower tier
households by offering them cheaper goods and services. Countries like Bosnia,
Macedonia and Herzegovina are very dependent on their trade and is the driving factor
of their economy. Bangladesh trades globally as it has a comparative advantage on the
production of apparel clothing and due to this it engages in about 32,000-million-dollar
worth of exports. This activity boosts their economy and drives growth and innovation.
India was a closed economy in the 1960s and 70s, there has not even 1% decline in the
poverty level however since India opened its doors to trade there has been a drastic drop
in poverty level and a rapid growth in economy.

2. The EU is Pakistan’s most important trading partner, accounting to about 12.8% of

Pakistan’s total trade and absorbing about 23.7% of Pakistan’s totals exports. Pakistan’s
exports to the EU are dominated by textiles and clothing accounting for a chunk of total
exports of Pakistan. The GSP Plus status allows almost 20 percent of Pakistan’s import to
enter EU market at zero tariff and 70 percent at preferential rates. As a result of the GSP
Plus status more than 78% of Pakistan’s exports will enter the EU at preferential rate,
which will help penetrate the market more efficiently and yield more profits as well. The
most recent data confirms that the GSP plus status had positively impacted Pakistan’s
garments exports to the EU to its exports to the rest of the world. In the first two years of
GSP plus, garments exports to the EU grew much faster at 11 percent per year than
garments exports to the rest of the world 1.5 percent per year. Between 2013 and 2015,
the EU’s share in Pakistan’s total garment exports has also increased from 50 to 54
percent.
3. The gravity equation in international trade is one of the most important elements of
empirical findings in economics. The trade between two countries is proportional to size,
measured by GDP and inversely proportional to the geographic distance between them.
Gravity model estimates the trend and pattern of international trade, if we compare the
distance between the both countries, we can fairly assume that it would be very
beneficial for both countries to trade as the distance between them is very less which
means the cost associated with that product is reduced and thus making the products
cheaper and competitive, furthermore we see that both countries share a similar
preference on consumption of foods and commodities and a very similar spending and
living pattern. However, if we compare the GDP of both the countries then we see a
significance difference between the both countries which hampers the trade willingness
however the other benefits weigh more than the drawbacks and thus it is always
considered that trade between India and Pakistan is always very beneficial.
Muhammad Mussa 14436

4. A. China has absolute advantage in production of cloth. China has absolute advantage in
production of wheat.
B. Pakistan has comparative advantage in production of cloth. China has comparative
advantage in production of wheat.
C. If Pakistan and China trade, China would produce more of Wheat in which it has a
comparative advantage and has a better unit labor productivity of, this would lead to
maximum amount of goods being produced in the lowest amount of cost giving china a
comparative advantage against the world. Pakistan would also invest more labor in the
manufacturing of cloth in which it has comparative advantage which would lead to more
cloth being manufactured.

5. A. Home: Laptops – 75 laptops, Bedsheets – 750 bedsheets

Foreign: Laptops – 50 laptops, Bedsheets – 300 bedsheets
B. Home should produce bedsheets and foreign should produce laptops.

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