WORLD TRADE ORGANIZATION &

GLOBALIZATION OF ECONOMIES

SUBMITTED TO:
DR. QASIM MANZOOR
SUBMITTED BY:
MUHAMMAD BIN MAHBOOB
REGISTRATION NO:
2021-MBA-513
TOPIC:
SIZE MATTERS: GRAVITY MODEL
DATE:
03-10-2021

INSTITUTE OF BUSINESS ADMINISTRATION, UET LAHORE

 Table of Contents
IMPLICATION & ANOMALIES OF GRAVITY MODEL IN CONTEXT TO PAKISTAN:.....3
Trade in Pakistan:...........................................................................................................................3
Major Exports and Imports of Pakistan:.......................................................................................4
Major Trading Partners of Pakistan:............................................................................................4
SAARC:............................................................................................................................................5
Gravity Model (Size Matters):........................................................................................................7
Does Gravity Model stand correct in case of Pakistan?................................................................9
Anomalies in Gravity Model in context to Pakistan:..................................................................11

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LIST OF ILLUSTRATIONS

Figure 1 MAJOR TRADING PARTNER OF PAKISTAN.............................................................................5

Figure 2 SAARC COUNTRIES GDP................................................................................................6
Figure 3 GRAVITY MODEL ANALYSIS........................................................................................8
Figure 4 ANOMALIES.....................................................................................................................10
Figure 5 MAIN FACTORS THAT AFFECT GRAVITY MODEL...............................................12
Y

Table 1 MAJOR EXPORTS & IMPORTS OF PAKISTAN............................................................4

Table 2 MAJOR TRADING PARTNERS OF PAKISTAN.............................................................4
Table 3 SAARC COUNTRIES GDP..................................................................................................5
Table 4 GRAVITY MODEL COMPUTATION...............................................................................7
Table 5 ANOMALIES.........................................................................................................................9

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IMPLICATION & ANOMALIES OF GRAVITY MODEL IN
CONTEXT TO PAKISTAN:
In this project we will understand the gravity model and evaluate this model in context to
Pakistan. At first, we will discuss a brief overview of this model that what is depicts and the
findings of this model and in next part we will go for the evaluation for which we will discuss
the Pakistan trade activities with SAARC members and then we will measure the finding of
total trade GDP of Pakistan by using gravity model. In last section we will discuss the
anomalies of this model with reference to different economical factors that better suit or
justify trade of Pakistan with other members of SAARC and major trading partners.

Trade in Pakistan:
With population over 220.9 million and overall GDP of 263.7 billion USD, Pakistan is
considered as the seventh largest market in South-Asian region based on the measuring
indicator of Purchasing Power Parity. Based on GDP, Pakistan has growth rate of 4% every
year since 2015 but now it has slowed down because of the bad economic and different geo-
political factors. Still Pakistan has an attitude that makes it an attractive market in terms of
trade, investment, etc. for the other countries in the world. Based on World Bank record,
Pakistan is considered as the 136th most attractive country in trade point of view in the world.
Pakistan is an attractive market is defined based on the investments done by other sovereign
countries of the world such as USA that has almost 80 wholly or partially owned subsidiaries
in Pakistan registered with Karachi based American Business Council. Another example if of
CPEC a huge investment venture between China and Pakistan.
The land route orientation that is an important factor for trade shows an increasing trade
opportunities with the countries that are located at a closer distance with Pakistan i.e.,
Bangladesh, China, India, etc. However due to political factors and other conflicts there not
many trade activities with India but recent development in trade routes has lowered the
barriers to trade with different countries such as China. This development in land routes has
created the opportunities with trade and promoted East-West Liberalization that has led to the
expansion in imports and exports which will contribute to the total GDP of Pakistan.

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Major Exports and Imports of Pakistan:
The presence of higher trade tariffs and other geo-political factors between countries in Asian
region still there are many commodities that are either the part of import and export are
traded with Pakistan. Some of them are listed below:
Table MAJOR EXPORTS & IMPORTS OF PAKISTAN

Major Exports Major Imports

Cotton Nickel
Fish Iron & Steel
Salt & Stone Electronic Equipment
Plastic & Resins Medical & Technical Equipment
Sports Wear Machines & Engines
Textile Floor coverings Oil
Fruits & Nuts Aluminum

The above table enlist few of the major commodities that are traded in Pakistan, major
exports entities define or highlight a better climate condition that results in rich production of
agriculture goods which shows the size of the overall production that highlights the reason for
trading these agricultural commodities with other countries around the world.

Major Trading Partners of Pakistan:

Major trading member countries are enlisted in the table below. Trade volume is displayed in
million dollars USD. Here is a thing that is significant which is our trade with countries that
are at a closer distance are only two countries i.e., China and Afghanistan, on the other hand
our major trade volume is comprised of the percent contributed by USA, UK and Germany
that are at a longer distance. We will discuss the reason behind this in the anomalies section.

Table MAJOR TRADING PARTNERS OF PAKISTAN

MAJOR TRADING PARTNERS

Trade (US) Million
Country Dollars
USA 4030
China 2037
UK 1677
Germany 1341
Afghanista
n 1180

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 Pakistan Trading Partners

Afghanistan Afghanistan; 1180

Major Trades members of Pakistan

Germany Germany; 1341

UK UK; 1677

China China; 2037

USA USA; 4030

0 500 1000 1500 2000 2500 3000 3500 4000 4500

Figure MAJOR TRADING PARTNER OF PAKISTAN

The above graph illustrates that our major trade volume is with USA specially because of
larger economic size and higher GDP as Pakistan is a significant import member of USA due
to massive production in USA. Similarly, is the case with China as it is a larger economy in
terms of production volume so most of our imports resides with China.

SAARC:
SAARC is defined as South Asian Association for Regional Cooperation is an economic and
geo-political organization founded in 1985. The fundamental aim of this organization was to
promote socio-economic development within its Asian member countries. Countries that are
part of this organization are

Table SAARC COUNTRIES GDP

SAARC COUNTRIES GDP

GDP (Million
Country USD) PERCENT CONTRIBUTION
Afghanista 18,8 0.
n 76 55
329,1 9.
Bangladesh 20 56
2,5 0.
Bhutan 03 07
2,708,77 78.6
India 0 5

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 3,7 0.
Maldives 55 11
34,4 1.
Nepal 65 00
262,7 7.
Pakistan 99 63
83,9 2.
Sri Lanka 78 44
3,444,26
  6  

Above table shows the member of SAARC organization as well as their Annual GDP along
with their contribution in SAARC overall GDP. India has highest GDP in all of SAARC
member due to attractive economy in terms of production and consumption. These
characteristics makes India the most attractive economy among the SAARC members. Some
other factors such as geo-politics and being a part of international unions makes India an
important player as well as a powerful player due to favorable agreements with other
countries.

GDP (Million USD)

GDP (Million USD)
3,000,000
2,708,770
2,500,000

2,000,000
GDP (MILLION USD)

1,500,000

1,000,000

500,000
329,120 262,799
34,465 83,978
- 18,876 2,503 3,755
Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

Figure SAARC COUNTRIES GDP

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Gravity Model (Size Matters):
Gravity model is defined as:
A × Yi ×Yj
Tij¿ Dij

In the above expression T is the value of trade between two countries, Yi is the GDP of
country ‘i’ and Yj is the GDP of country ‘j’, A is a constant term and finally Dij is the
distance between two countries. This is known as gravity model as according to this model,
The trade value between two countries is based on the size of their economy based on their
total GDP and the distance between the two trading countries.
Value of trade between two countries is proportional to their product of GDP and inversely
proportional to the distance between them.
Table GRAVITY MODEL COMPUTATION

Trade with
Trade within SAARC Percent Pakistan (USD Percent
Countries (USD Million) Contribution Million) Contribution

Afghanistan 18,876 0.59 870.86 31.2

Bangladesh 329,120 10.34 583.44 20.9

Bhutan 2,503 0.08 0.2 0.0

India 2,708,770 85.14 816.62 29.3

Maldives 3,755 0.12 7.22 0.3

Nepal 34,465 1.08 1.631 0.1

Sri Lanka 83,978 2.64 508 18.2

  3,181,467   2787.971  

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 PERCENATGE OF PAKISTAN WITH TRADE WITH SAARC MEMBERS PERCENT OF PAKISTAN TRADE WITH SAARC MEMBERS
35.0
31.2
29.3
30.0

25.0
20.9
20.0 18.2

15.0

10.0

5.0
0.3
0.1
0.0
0.0
- 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00
PERCENT OF SAARC GDP

PERCENT OF PAKISTAN TRADE WITH SAARC MEMBERS

Linear (PERCENT OF PAKISTAN TRADE WITH SAARC MEMBERS)

Figure GRAVITY MODEL ANALYSIS

PERCENTAGE OF PAKISTAN WITH SAARC MEMBERS

35.0
PERCENATGE OF PAKISTAN WITH TRADEWITH SAARC MEMBERS

31.2
30.0 29.3

25.0

20.9
20.0
18.2

15.0

10.0

5.0

0.0 0.3 0.1

0.0
0.59 10.34 0.08 85.14 0.12 1.08 2.64

PERCENT OF SAARC GDP

PERCENTAGE OF PAKISTAN WITH SAARC MEMBERS

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If we observe the above graphs and tables then the percentage trade of members countries
GDP is different among the trade between Pakistan and total SAARC GDP it is because of
different reason and factors such as distance, diplomacy stance and international relations
such as our diplomatic relations with India are not good due to border and certain other
conflicts, in fact based on World Trade Organization reports the tariffs between Asian
countries are higher as compared to if Asian countries trade with European countries.

Does Gravity Model stand correct in case of Pakistan?

No, because if we observe Pakistan’s major trade partners then three of them are not Asian
countries in fact, they are European countries i.e., USA, UK & Germany. Only one country is
in Asian region which is China so distance is not a major factor to decide whether the trade
between two countries is high or not but yes it does stand correct somewhat in terms of GDP
more precisely Country’s size because this term is associated with resources and production
volume.

Table ANOMALIES

Trade with
Trade within SAARC Percent Pakistan (USD Percent
Countries (USD Million) Contribution Million) Contribution

USA 0 - 6600 22.2

UK 0 - 2900 9.7

China 0 - 17490 58.7

18,8 0.
Afghanistan 76 59 870.86 2.9
329,1 10.
Bangladesh 20 34 583.44 2.0
2,5 0.
Bhutan 03 08 0.2 0.0
2,708,7 85.
India 70 14 816.62 2.7
3,7 0.
Maldives 55 12 7.22 0.0
34,4 1.
Nepal 65 08 1.631 0.0
83,9 2.
Sri Lanka 78 64 508 1.7
3,181,4
  67   29777.971  

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 PERCENATGE OF PAKISTAN WITH TRADE WITH SAARC MEMBERS
COMPARED WITH CHINA,USA & UK
70.0

58.7
60.0

50.0

40.0

30.0
22.2
20.0

9.7
10.0
2.91.7 2.0 2.7
0.0
0.0
0.0
- 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00

PERCENT OF SAARC GDP

COMPARED WITH CHINA,USA & UK Linear (COMPARED WITH CHINA,USA & UK)

Figure ANOMALIES

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 COMPARE WITH CHINA,USA &UK
70.0
PERCENATGE OF PAKISTAN WITH TRADE WITH SAARC MEMBERS

60.0 58.7

50.0

40.0

30.0

22.2
20.0

9.7
10.0

2.9 2.0 2.7 1.7

0.0 0.0 0.0
0.0
0.59 10.34 0.08 85.14 0.12 1.08 2.64

PERCENT OF SAARC GDP

PERCENTAGE OF PAKISTAN WITH SAARC MEMBERS

Anomalies in Gravity Model in context to Pakistan:

The above illustrated graphs show that gravity model might be fit for the data between
Pakistan and SAARC countries and it doesn’t fit properly as we can observe that USA and
UK trade considerably more as compare to the members of SAARC organization even the
distance between them is huge but still Pakistan trade more with USA and UK. For USA and
UK there are more favorable trade agreements. USA and Pakistan have strong economic and
commercial relationships. Over the year large peaceful political transitions have led Pakistan
into favorable agreements with European countries as well such as UK and Germany.
In case of China recent developments have present opportunities for Pakistan to lower their
barriers which will serve a huge purpose in trade between China and Pakistan. Other
developments such as CPEC (China-Pakistan Economic Corridor) plays an important role in
expanding trade with China by reducing the cost of land transportation which will connect
large industries and markets with different provinces of Pakistan. So major anomalies and
impediments are:

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 TRANSPORTATIIO
N COST & TRADE
TARIFFS

PERSONAL INTERNATIONAL
RELATIONS AGREEMENTS

TRADE

Figure MAIN FACTORS THAT AFFECT GRAVITY MODEL

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