Unit 10 # Trade
1. How does Pakistan benefit from foreign trade?
Ans: Pakistan is largely an agro-based economy, therefore it mainly exports
agricultural products, such as wheat, rice, vegetables and fruits, and pulses.
International trade in Pakistan therefore comprises of exports of agricultural
products, and imports of machinery and finished products.
Being a major cotton producer, Pakistan exported USD 2.64 billion worth of cotton
and cotton products throughout the world during Fiscal Year 2020-2021. Recently,
Pakistan witnessed double-digit growth in exports to China, Germany, Netherlands,
and Poland.
Under international trade, employment greatly increases. An important example of
this can be Pakistan under the China Pakistan Economic Corridor’s (CPEC) Phase II
which has positively contributed towards Pakistan’s employment numbers. As the
Chinese government invests in Pakistan’s industries under key sectors such as
energy, infrastructure, agriculture, and IT, more jobs are created for work.
Moreover, Pakistan has emerged as the biggest international market for freelancers
(e.g. writers, graphic designers, web developers, etc.) which is also calculated as an
exported service. In the coming years, it is expected that Pakistan will emerge as a
top destination for most of the South Asian region’s agricultural produce, and IT-
based services.
2. Describe the advantages of the location of Karachi for its development as the
main centre for Pakistan's overseas trade.
Ans: Much of the country’s economic, manufacturing, services and other value
addition takes place in Karachi. It has the advantage of being a port city, as well as
housing head offices of major financial institutions. Most companies have their
head offices in Karachi where they pay their income tax but earn their income from
the entire country.
Karachi is linked by rail to the rest of the country by Pakistan Railways. The Karachi
City Station and Karachi Cantonment Railway Station are the city's two major
railway stations. The railway system handles a large amount of freight to and from
the Karachi port.
The Jinnah International Airport is located in Karachi. It handles 10 million
passengers a year. The airport receives the largest number of foreign airlines, a
total of 35 airlines and cargo operators fly to Jinnah International predominantly
from the Middle East and Southeast Asia.
The largest shipping ports in Pakistan are the Port of Karachi and the nearby Port
Qasim. These seaports have modern facilities and not only handle trade for
Pakistan but serve as ports for Afghanistan and the landlocked Central Asian
countries.
3. With reference to 'Balance of Payments';
a) explain the difference between 'Balance of Payments' and 'Balance of Trade'.
Ans: Balance of trade is the difference that is obtained from the export and import
of goods whereas Balance of payments is the difference between the inflow and
outflow of foreign exchange.
b) why does Pakistan have a negative Balance of Payments?
Ans: Import of large amount of consumer goods due to lack of industry. Lack of
quality of manufactured goods of Pakistani industry, so cannot compete in
international market. Import of consumer goods is a burden on economy. Large
amount of foreign exchange is spent on import of oil. Pakistan is not a member of
any major trading organization like European Union. Child labor is a cause of
restrictions (ban) on exports from Pakistan. Import edible oil and wheat is a burden.
c) what are the disadvantages of a negative Balance of Payments to Pakistan?
Ans: A balance of payments deficit may cause a loss of confidence by foreign
investors to Pakistan. Therefore, there is a risk, which may cause investors to
remove investments causing a huge fall in value of the Pakistan’s currency.
The biggest component of Pakistan’s current account is the trade balance, so if
Pakistan has current account deficit then they probably have a negative trade
balance. A current account deficit may imply that the government of Pakistan is
replying on consumer spending and are becoming uncompetitive.
d) with reference to the government's policies, suggest measures to improve
Pakistan's Balance of Payments.
Ans: There were three basic issues that needed to be addressed. First, the
government should have taken advantage of low oil prices by building up foreign
currency reserves to offset the impact of future increase in oil prices.
Second, Pakistan should regulate strong financial system that stops tax evasion and
launder money out of Pakistan. The lack of financial supervision by the government
creates the twin problem of fiscal and current account deficits that are directly
responsible for the balance of payment crisis.
Third, and most importantly, Pakistan should improve their performance in the
export sector because it is directly responsible for its perpetual balance of payment
concerns.
4. a) From the list below state two imports and two exports.
COTTON MACHINERY WHEAT IRON ORE LEATHER
CRICKET BATS SURGICAL EQUIPMENT COMPUTERS
Ans: Imports: 1. Machinery 2. Iron ore
Exports: 1. Cotton 2. Surgical instruments.
b) The European Union (EU) is a major trading partner of Pakistan. Name two
countries in this trading community.
Ans: 1. France 2. Germany
c) Why it is important that Pakistan trades both imports and exports with the EU?
Ans: EU (European Union) includes about a dozen European countries.
Pakistan needs to diversify its foreign trade to improve its foreign exchange
earnings. Trade links to be developed with more countries and more items should
be exported. Improved trade relations will result in more trade agreements.
5. Which do you think is the most important advantage and the most important
disadvantage of trade barriers for Pakistan? Explain your answer.
Ans: The following are some of the advantages and disadvantages of trade barriers.
Advantages
• Give rise to greater self-sufficiency, thereby reducing foreign dependency.
• Protect local industries and create employment opportunities.
• Improve the balance of payments position.
• Create domestic demand that leads to greater exploitation of local resources.
Disadvantages:
• Consumer choice is limited to domestically produced goods.
• Local industries become complacent due to lack of international competition,
and thus lose efficiency.
• Even those goods which the country produces inefficiently and at high cost
would need to be produced.
6. Study the given figure which is a graph showing changes in the exchange rate
between the US dollar and the Pakistan rupee (PKR).
a) In August 2018, one dollar was worth 124 PKR. Calculate how many more
rupees one dollar was worth by May 2019.
Ans: In May 2019, one dollar was worth 141.6 Pakistani rupees with respect to this
graph.
b) Using the graph and your own knowledge, explain how changes in exchange
rates can encourage trade between countries.
Ans: Pakistan is a consumption-based economy, relying on imports of commodities
such as plastic, steel and chemicals for its manufacturing industry.
The major exports of Pakistan include textiles, leather and sports goods, chemicals,
carpets, and rugs.
When US Dollar's exchange rate increases relative to Pakistani rupees, the price of
goods and services in Pakistan increases. Imports become cheaper for America.
Ultimately, this can decrease Pakistan’s exports and increase imports.
For example, In August 2018, one dollar was worth 124 PKR while the exchange
rate of one dollar In May 2019 was 141.6 Pakistani rupees according to this graph.
As the relative prices of goods and services between United States and Pakistan are
different because of changes in currency exchange rates. Imports and Exports
become cheaper for America because Pakistan rupees are depreciated in terms of
US Dollars. For Pakistan case, imports which consists of raw materials and capital
goods which are used for producing exportable goods.
As the result, Pakistan purchase less US dollars while sell more Pakistani rupees to
its foreign exchange reserves which cause devaluation of Pakistani rupees because
of supply and demand of currency at international market.
7. Study the given map. Which two of the world's blocs do you think are most
significant, and why?
Ans: Nowadays, the two most significant blocs of the world are The European
Union (EU) and The North American Free Trade Agreement (NAFTA). The reasons
why they are most prominent regional trading blocs of the world.
The European Union: The EU is the world's largest trading bloc. The EU is the
world’s largest trader of manufactured goods and services. The EU ranks first in
both inbound and outbound international investments. The EU is the top trading
partner for 80 countries. By comparison, the US is the top trading partner for a little
over 20 countries. The EU’s services markets are highly open and we have arguably
the most open investment regime in the world.
The North American Free Trade Agreement (NAFTA): The NAFTA is the
world’s largest free trade area and has a combined population and GNP greater
than 15 EU member states. It was initially a bilateral trade agreement between
Canada and the United States, but Mexico joined on 1 January 1994. The
agreement aimed to reduce trading costs and make North America a competitive
trading bloc in the global market place.
8. Imagine you work for TDAP. With all you now know about trade and Pakistan's
economy, would you advise the government to remove barriers to trade or
increase protection of Pakistan's developing industries? Explain the reasons for
your advice.
Ans: Although increasing trade barriers leads to protection of domestic industries
but Pakistan is need to promote exports so that balance of trade and exchange rate
can be improved. Pakistan’s economy remains dependent on the export of cotton
textiles, with little investment in diversification.
This is because access to foreign exchange enables Pakistan to finance its imports,
stabilize its currency devaluation, service its debts, and resolve the issue of balance
of payment deficit. However, the trade imbalance that has been continuing for
decades cannot be reduced without an effective import substitution strategy. To
encourage import substitution, the government is pursuing its "Make in Pakistan"
policy. The objectives of this policy are to create jobs, generate value‐added
exports, and encourage import substitution.
Pakistan should design such Trade Policies with measures to diversify exports from
traditional sectors to high-quality and globally competitive engineering products.
In this way, Pakistani exports should be appreciated at international level which will
benefit Pakistan economy and our domestic industries.
