Trade DeficitIs it good for Economy!!

BY DR.AHMED SOHAIBCLASS OF SPRING 2008MAHUMMAD ALI J INNAH UNIVERSITYKARACHI – PAKISTAN.

Trade

TRADE- Process of buying & selling

FOREIGN

IMPORT EXPORT

DOMESTIC

WHOLE SELLER

RETAILER

OR

TRADE

FAVOURABLE

MORE EXPORTLESS IMPORT

( TRADE SURPLUS )

UNFAVOURABLE

MORE IMPORTLESS EXPORT

An export is any good or commodity, transported from one country ( home country ) to another country in a legitimate fashion, typically for use in trade.

AN IMPORT IS ANY GOOD OR COMMODITY, BROUGHT INTO ONE COUNTRY FROM ANOTHER COUNTRY IN A LEGITIMATE FASHION, TYPICALLY FOR USE IN TRADE. IMPORT GOODS OR SERVICES ARE PROVIDED TO DOMESTIC CONSUMER BY FOREIGN PRODUCER.

Trade Balance (or net exports)The value of a country’s exports less the value of its imports in a particular period (quarter or year)

Export – Import & Trade Balance

Trade Deficit…..A NEGATIVE BALANCE OF TRADE IS KNOWN AS A TRADE DEFICIT OR, INFORMALLY, A TRADE GAP

the difference between the monetary value of export and IMPORTS in an economy over a certain period of time. A NEGATIVE balance of

trade is known as a TRADE DEFICIT and consists of IMPORTING More than is EXPORTED.

Deficit In terms of Economy, Deficit refer to More expenditure and

less revenue.

Disadvantages of a Bigger Trade Deficit

• Loss of manufacturing jobs• industries may be completely shutdown.• The country to depend entirely on foreign

sources. • Most serious, if the trade deficit becomes

so large that the value of the currency falls below equilibrium, then the

advantages of vigorous productivity growth and low inflation start to

disappear.

Benefits of a Bigger Trade Deficit• Consumers gets…

• A larger variety. • Better quality.

• lower prices for traded goods. also apply to capital goods.

• Vigorous foreign competition boosts….• productivity. • reduces inflation.

• also keeps interest rates low

• Increase in foreign saving helps to fund capital spending and boosts financial market prices

PAKISTANWHAT DO YOU THINK ABOUT PAKISTAN

TRADE OVER DECADES

?TRADE

SURPLUS

TRADE DEFICIT

Factors Effecting Trade DeficitThe reasons of TRADE DEFICIT in

Pakistan…..• Failed Trade Policy.

• Less Production against high Demand.• Instability of the Government Structure.

• Less adaptation of the Modern Technology.

• Prices of goods manufactured at home• Exchange Rates

• Trade agreements & barriers• Other Taxes & tariff and trade measures• Business Cycle @ home & abroad.

Exchange rates: Pakistani rupee (PKR) per US$1

60.50 (01/11/07)60.75 (05/08/2007)58 (2004)57.752 (2003)59.7238 (2002)61.9272 (2001)53.6482 (2000)51.90 (1999)44.550 (1998)40.185 (1997)35.266 (1996)30.930 (1995)

Macro Economy of Pakistan

162797000 population

7.5% GDP

4.2% Fiscal Deficit 7.9% Inflation

Tax-GDP ratio:10.5%

Saving: 18%

Public debt 53.4%

External Liab. 27.1%

Trade deficit: 9%

Current account: 5%

Banking spread:6.4-7.8%

Per Capita Income US$ 925.

Economic Survey of Pakistan 2005-06

Investments: 23% Trade

Export : $10.15B

Import : $20.48B

Stable exchange rate:.7% dep. last year

Forex covers almost 6 months of imports

20 million banking clients with less then 6m borrowers

Low level of investments in the social sectorRaising capital both

debt and equity from international markets

Ultimate Objective:

1) Create jobs, 2) Raise incomes and 3) Reduce poverty

An Over View of Pakistan Imports & Exports (1998-2007)

9,613 9,602 10,2029,434

11,333

13,604

18,724

23,629

26,655

16,724

14,371

16,993

8,9338,1907,528

12,396

10,889

9,140

6,0008,00010,00012,00014,00016,00018,00020,00022,00024,00026,00028,000

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06(T)

2006-07

Imports Exports

Imports and Exports (US$ million)

Source: SBP

Major Export Pattern of Pakistan 2005-2007

Major Export Pattern of Pakistan 1996-2007

16

MACHINERY 23.1%

PETROLEUM PRODUCTS 19%

CHEMICALS 13.4%

TRANSPORT EQ. 4.7%

EDIBLE OIL 5.1%

IRON & STEEL 3.9%

FERTILIZER 3.2%

TEA 1.1%

OTHERS 26.5%

Pakistan Imports 1996-1997 (% Shares )

17

Pakistan Imports 2006-2007 (% Shares )

MACHINERY 22.5%

PETROLEUM PRODUCTS 22.5%

CHEMICALS 12.7%

TRANSPORT EQ. 8%

EDIBLE OIL 2.9%

IRON & STEEL 5%

FERTILIZER 1.2%

TEA 0.7%

OTHERS 24.5%

Major Import Pattern of Pakistan 2005-2007

Major Import Pattern of Pakistan 1990-2007

JAPAN..• Japan has continued to produce a trade

surplus since 1981.• In terms of Japan's international trade

exports showed an annual increase of 14.6 percent to 75.25 trillion yen,

marking the fifth consecutive year of increase.

• Imports grew by 18.3 percent to 67.34 trillion yen, thus increasing for the fourth

consecutive year.

A SURPLUS STATE.

Japan….• Major reasons JAPAN is a historical surplus

state.– Advancement of Technology– High skilled Labor.– Effective trade Policy.– Strong government support.– Productions meet the demands.

FOREIGN TRADE AND COMPONENT RATIO OF F.T.

References• www.wikipedia.org• www.Accountancy.com.pk• www.sbp.gov.pk• www.statpak.com.pk• www.pakboi.gov.pk• www.stat.go.jp/english

THANK YOU &ALLAH HAFIZ