Trade

Safia Karim
• Trade: Exchange of goods and services
between countries.
• Export: Selling locally manufactured goods to
other country.
• Import: Buying goods from other country.
 Importance of Trade
• Usage of domestic resources.
• Employment opportunities.
• Increase in rate of economic development.
• Foreign exchange used for industrialization.
• Increase in national income (GDP and GNP).
• Transfer of Information Technology.
• Economies of Scale ( Large-scale production).
• Production of Value-added goods.
• Specialization of goods & service
 EXPORT
Major Exports:-
• Primary commodities ( e.g. raw cotton, fruits, vegetable, fish)
• Processed goods ( e.g. cotton yarn)
• Manufactured goods (e.g. ready made garment, sports goods,
surgical instruments etc.).

• Export Trend: Increase in %age of manufactured goods in total

exports whereas decrease in % age of primary goods in total exports.

• Dependency on Few Export Items; Few items such as cotton,

leather, rice, synthetic textiles and sports goods account for 69.6% of
total exports in 2008-9.
• Dependence of few items is dangerous as poor production of a Single
item can cause major loss.

• Major Exporters (33.6%) are; USA, Germany, Japan, UK, China

and Saudi Arabia.
 Economic Classification of Exports
(1974-5, 2008-9)
80% 74%
70%

60%

50% 48%
39% 1974-5
40%
2008-9
30%

20% 17%
13%
9%
10%

0%
Primary Goods Processed Goods Manufactured Goods
• Describe three main export trend of Pakistan
between1974-75 and 2008-9. [3]
• Compare the export trend of Pakistan between
1991-2 and 2008-9. [3]
• Explain the advantages to Pakistan of the trend
you have identified in part (i) [2]
• Explain the reasons for the change in export
trend between 1974-5 and 2008-9. [4]
 IMPORT
Major Imports;
a) Capital goods: Machinery
b) Raw materials:
i. for capital goods
ii. for consumer goods
c) Consumer goods: Petroleum, food e.g. wheat, oil,
sugar.
• Import Trend: Increase in import of capital goods
and raw materials and decrease of consumer goods.

• Major Importers (39.9%) are; Saudi Arabia,

Kuwait, USA, Germany, Japan, Malaysia and UK.
 Economic Classification of Imports
(1974-5, 2008-9)
60%
51%
50%
40%
40%
29%27%
30%
23% 1974-5
20% 2008-9
14%
9% 8%
10%

0%
Capital Goods Raw Material for Raw Material for Consumer
Capital Goods Consumer Goods
Goods
 Difference Between GDP and GNP
GDP
Gross Domestic Product
Stands for
Definition An estimated value of the total worth of a country’s
1 production and services, within its boundary, by its
nationals and foreigners, calculated over the course on
one year.
2 GDP is defined as the total value of all the goods and
services produced within a country in a given period of
time which is usually taken a calendar year.
GNP
Gross National Product
An estimated value of the total worth of
production and services, by citizens of a country,
on its land or on foreign land, calculated over the
course on one year.
GNP on the other hand is the gross national
product which is a figure obtained by adding all
the income generated by nationals of the country
made within or outside the country to the GDP.
 Difference Between BOT and BOP
Basis For Comparison Balance Of Trade Balance Of Payment

Meaning Statement that captures the country's Statement that keeps track of all economic
export and import of goods with the transactions done by the country with the
remaining world. remaining world.

Defination Difference between the values of exports
and imports of only physical items (goods)
of a country during a given period of time
(usually one year)
Records Transactions related to goods only.
Difference between the values of exports
and imports of both visible and invisible
items(goods and services) of a country
during a given period of time (usually one
year)
Transactions related to both goods and
services are recorded.

Capital Transfers Are not included in the Balance of Trade. Are included in Balance of Payment.

Which is better? It gives a partial view of the country's It gives a clear view of the economic
economic status. position of the country.
BOP (Balance of Payment)
• The balance of payments is the record of all international financial transactions made by a
country's residents.
Or
• BOP is the difference between the values of exports and imports of both visible and invisible
items (goods and services) of a country during a given period of time(usually one yea)
• A balance of payments deficit means the country imports more goods, services and capital
than it exports. It must borrow from other countries to pay for its imports.
• A balance of payments surplus means the country exports more than it imports.

BOT ( Balance of Trade)

• BOT is the difference between the values of exports and imports of only physical items
(goods) of a country during a given period of time (usually one year)
• The balance of trade compares the value of a country's exports of goods and services against
its imports.
• When exports are greater than imports, that's a trade surplus or favorable trade balance.
• When the value of imports outweighs the value of exports, is a trade deficit or an unfavorable
trade balance.

• The balance of trade is one component of the balance of payments.

 FACTORS / REASONS FOR NEGATIVE
BALACNE OF PAYMENTS
• Import of Expensive Capital Goods for Industrialization.
• Inability of Pakistani goods to compete in quality and price in the
highly competitive World Market.
• Consumption oriented society.
• Liberal Import policy which makes it possible to import non-
essential goods.
• Increase in Oil Prices and bulk import of petroleum.
• Affect on export due to dependency on few items.
• Demand for wheat, tea, edible oil or other items due to shortage.
• International criticism; trade embargo due to child labour.
• Not being part of major Regional Organizations.
• Import of raw material as not sufficient in the country.
 Measures to Correct Balance of Trade
and Balance of Payment
BOP and BOT can be corrected in three ways
• Increasing Exports
• Restricting Imports
• Curtailing imports related to Tertiary sector
 Increasing Exports
• Encourage Export of High value-added goods.
• Development of small-scale and cottage industries especially those
which use local raw materials.
• Increase the variety of export items.
• Offering Incentive like Reduced taxes to attract investors and
encouraging exporters to increase Export.
• Development of Organizations like Export Promotion Bureau to
organize Export activities.
• Setting up of Export Processing Zones in different parts of the
country to promote export by attracting local and foreign investors.
• Continuous provision of electricity at cheaper rate
• Strict control on quality of products.
• Creating organizations and agencies such as EPB (Export Promotion
Bureau) to increase exports and organize export activities
 Decreasing Imports
• BOP and BOT can also be corrected by decreasing imports.
• Decrease the Imports of Consumer goods as some are just
luxurious goods and some could easily be manufactured in
Pakistan.
• Reduce the imports of Raw material, government should try
to produce raw material in the country.
• Try to cut / reduce import of petroleum by exploring new
reserves in the country and by using alternative energy
resources.
• In long term, government should make plans to manufacture
capital goods within country to reduce imports
 Curtailing imports related to
Tertiary sector
• By discouraging the trend of hiring skilled
personnel’s from other countries on high
salaries / pays.
• Training of locals according to the standards
required by companies and institution
operating in the Tertiary sector.
• Starting of comprehensive Human Resources
Development Program to meet different job
requirement
 EXPORT PROCESSING ZONE
(EPZ)
• EPZ is the area reserved for export oriented
industries only. Like KEPZ (Karachi Export
Processing Zone).
• EPZA (Export Processing Zones Authority) is
responsible for developing and operating
export processing zones in Pakistan
 OBJECTIVES OF EPZ
• Boosting industrialization.
• Encouraging investors (locals and foreign) to setup export
oriented units.
• Create job opportunities.
• Transfer Hi-Tech from developed to developing countries.
• Attract foreign capital and multinational companies.
• increase export of value added or capital goods
• To increase the variety of exports
• Encourage competition or creating competitive environment
• Reduce import by manufacturing quality goods
 Incentives for investors to set up a
unit in EPZs of Pakistan
• Duty-free imports of machinery, equipment and raw
materials.
• No sales tax on input goods and services including
electricity and gas bills
• Exemption from import duties and freedom from
national import restrictions.
• 100% ownership rights
• No minimum or maximum limit for investment.
• Marketing event or Trade fairs by Government
• Domestic market of Pakistan to be available on the
same conditions as for imports from other countries.
Infrastructure required for the EPZs
• Should established near the seaport to facilitate
export and import of goods and import of the
required machinery.
• Consistent Government policies help to bring
stability in the investment climate of a country.
• Adequate Air Transport facilities
• Efficient Transport links and facilities for the
marketing of finished goods and access to raw
material
TRADE BARRIES / EMBARGO
• Sets of restrictions that make it difficult for countries to trade their
goods and services easily.
or
• Any government policy that limits the free flow of goods and
services across borders.

Ways to imposing Trade embargo / barrier

• It can be taken in many forms like

• Tariffs/ Tax/ Duty (tax on imports)
• Import quotas (Caps / limit on the amount of a product that can be
imported)
• Embargo (ban on certain imported products)
• Currency devaluation
• Trade restriction
 Advantages / Benefits of Trade
Barrier
• Protect local industry, jobs of locals and create
job opportunities.
• Save foreign exchange and improve BOP
• Create demand of domestic products that leads
to greater exploitation of local resources
• Helps to achieve self sufficiency
• Reduce foreign dependency
• Help to achieve Economies of scale.
 Disadvantages of Trade Barrier
• Local industries become complacent due to
lack of competition thus lose efficiency
(reduce consumer satisfaction)
• Limited consumer choice (domestically
produced goods
• Low quality goods are sold on high prices
 CLASS WORK
• What is meant by the term ‘balance of trade’?
[1]

• What are the reasons for having a negative

balance of trade? [3]

• Suggest two effects of a negative balance of

trade on the national economy. [2]
What is meant by the term ‘balance of trade’? [1]
• The difference between the value of goods imported and exported by a country/the value of imports
subtracted from exports/the value of exports minus imports.
1 @ 1 mark
What are the reasons for having a negative balance of trade? [3]
• Value of goods imported is more than the value of goods exported;
• Uncompetitive quality/low quality of exports;
• Unable to fulfil domestic needs of population;
• Import tariffs/quotas in other countries;
• Dependency on import of capital goods/machinery/ oil/high value
• added goods;
• Dependency on importing/exporting agricultural
• products/food/named examples;
• Depreciating own currency/rupee against dollar;
• Trade embargoes imposed by other countries.
3 @ 1 mark
Suggest two effects of a negative balance of trade on the national economy. [2]
• Foreign debt;
• Dependence on foreign aid;
• Need to use country’s cash reserves/assets/loss of foreign
• exchange;
• Development projects cancelled/delayed;
• Rise in taxation;
• Strategies to increase exports/high value exports/ Government
• encourages local industry to export;
• Country’s currency depreciates, so imports become expensive.
2 @ 1 mark
 Exchange Rate
• An exchange rate is the price of a nation’s currency in terms of another
currency.
• Or
• Conversion rate of one currency into another e.g. one US dollar is equal to
139 Pakistani Rupees.

Depreciation
• If the foreign currency is strengthening (becoming more valuable) than the
exchange rate number increases and home currency is depreciating.
• It refers to a decrease in the value of that country’s currency.
• 1 US $ = 139 PKR
Appreciation
• If the home currency is strengthening (becoming more valuable) than the
exchange rate number decreases.
 TRADING BLOCS
• In economics, trading blocs are a formal agreement between two or
more regional countries that remove trade barriers between the
countries in the agreement while keeping trade barriers for other
countries.
or
• An agreement between states, regions, or countries, to reduce
barriers to trade between the participating regions.

• Pakistan is a member of several international organizations such as

• ECO (Economic Cooperation Organization)
• SAARC (South Asian Association for Regional Cooperation)
• SAFTA (South Asian Free Trade Area)
• ASEAN (Association of Southeast Asian Nations)
• WIPO (World Intellectual Property Organization)
• SCO (Shanghai Cooperation Organization)
• WTO (World Trade Organization)
 Advantages
• More exports and more foreign exchange which
will improve trade balance and boost the
economy of Pakistan.
• Pay off debt
• Cheaper Imports
• Good quality imported goods
• Will boost industrialisation
• Attract local and foreign investors
• Reduce unemployment
• Fewer Trade barriers e.g. Lower Taxes etc
 Disadvantages
• Terrorism and social issues can stopped export
• Conditions can be imposed because of health issues like
unhygienic farming and processing methods
• Goods can be ban due to child labour issues
• Low quality goods can’t meet International standards
• Unreliable production due to political instability and
energy crisis.
• Imports compete local production which collapse local
industries.
• May affect other agreements e.g. Iran, China
• Fluctuating currency rate
 Remittance
• A remittance is a transfer of money by a foreign worker to an
individual in his / her home country.

• They are the private savings of workers and families that are spent
in the home country for food, clothing and other expenditures, and
which drive the home economy.

• Remittances can be sent through wire transfer businesses, they can

also be sent to banks and other financial institutions. Depending on
restrictions on the movement of capital around the country, these
funds can not only help individuals pay for the consumption of
goods and services, but can also be used to make loans to businesses
if they are saved rather than spent.
 HOME WORK
(d) ‘There are more factors that hinder trade between Pakistan and other countries than factors that help trade.’
To what extent do you agree with this view? Give reasons and use examples you have studied to support your answer.
[6]
Hinder
• Lack of security/internal civil and tribal unrest/terrorism
• Political instability/inconsistent government policies
• Debt/imbalance of trade (leads to need for loans/foreign economic assistance and possible trade embargo if default)
• International tension (e.g. with India, historically since partition 1947 and periodically over
• Kashmir so no significant trade with India has developed).
• Mountainous terrain to NW. (Passes to Afghanistan e.g. Khyber, Kurram, and Khojak subject
• to border tensions, landslides, and avalanches.)
• Trade barriers/embargoes from industrialised countries (which express concerns about child
• labour/health and safety/hygiene/environmental standards such as excessive use of pesticides on cotton).
• Membership of regional organisations (e.g. ECO/SAARC/WTO in 2004) (involves removing import tariffs causing
inflow of cheap imports)
• Devaluing Pakistan rupee (makes imports, which are more than exports, more expensive)
Help
• Improvements to transport infrastructure, (e.g. Karakoram Highway/new road Quetta to
• Chaman, Afghanistan/upgrade to RCD Highway to open a route to Iran and Turkey)
• Development of ports (particularly Karachi/Bin Qasim port for containers and bulk cargo/
• Gwadar port/Makran Coast)
• Membership of regional organisations (e.g. ECO/SAARC/WTO in 2004) (in which member
• countries benefit from access to major world markets)
• Tax incentives for exporters