Economic Growth & International Trade

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Presentation on Economic Growth and International trade

Course: Economic Analysis

Title: Economic Growth and International trade

Submitted to: Mam Mamoona Altaf

Submitted by: Muhammad Amjid Istabrak Illyas Syed Jamshaid Amjad Muhammad Saad Discipline: BBA (4th ) (09040920-104) (09040920-107) (09040920-065) (09040920-067)

Section: B

University of Gujrat (Hafiz Hayat Campus)

PREFACE
―True learning is born out of experience and observation.‖ Practical experience is one of the best types of learning that one can remember the aspects of administration and management. In economic growth and international trade, we got a chance to analyze the economic system of the world and different developed countries and also with the focus of Pakistan and we were fortunate to study the economic growth and international trade of Pakistan. This gives us new knowledge about the various economic growth strategy among which type of the economy is one of the important strategy.

ACKNOWLEDGEMENT
We take this opportunity with great pleasure to present before you this project on ―Economic Growth and International Trade‖ which is a result of co‐operation, hard work and good wishes of many people. No words can adequately express our sincere thanks to all those who have helped us in making this project a success. Also I acknowledge our deep sense of gratitude towards our guide from Mr Usman. We are also grateful to Mam Mamoona Altaf, a distinguish lecturer at the University of Gujrat. Our debt to those who have helped us in one way or the other is heavy indeed. We would like to appreciate contribution of friends who have extended their complete support in completion of this project. Last but not the least; we are thankful to the Almighty for giving us strength, courage and patience to complete this project.

Muhammad Amjid Istabrak Illyas Syed Jamshaid Amjad Muhammad Saad

(09040920-104) (09040920-107) (09040920-065) (09040920-067)

Table of Contents
1: Introduction to economic growth-----------------------------------------------------------------------------------1 2: Types of economic growth----------------------------------------------------------------------------------------1-2 2.1: Balanced economic growth------------------------------------------------------------------------------2 2.2: Unbalanced economic growth---------------------------------------------------------------------------2 3: Determinants of economic growth-------------------------------------------------------------------------------2-4 3.1: Investment-------------------------------------------------------------------------------------------------2 3.2: Human capital---------------------------------------------------------------------------------------------2 3.3: Innovation & R&D---------------------------------------------------------------------------------------2 3.4: Economic policies & macroeconomic conditions----------------------------------------------------3 3.5: Openness to trade---------------------------------------------------------------------------------------3-4 3.6: Political factors and economic growth-----------------------------------------------------------------4 3.7: Socio-cultural factors-------------------------------------------------------------------------------------4 4: Merits of economic growth------------------------------------------------------------------------------------------5 5: Demerits of economic growth---------------------------------------------------------------------------------------6 6: Introduction to international trade--------------------------------------------------------------------------------6-7 7: Present global trade scenario----------------------------------------------------------------------------------------7 8: Regulation of international trade---------------------------------------------------------------------------------7-8 9: Risk in international trade-----------------------------------------------------------------------------------------8-9 10: International trade with Pakistan‘s perspective-------------------------------------------------------------9-11 11: Pakistan‘s trade strategy--------------------------------------------------------------------------------------11-12 12: World Bank operations on international trade for Pakistan--------------------------------------------------12

13: Impact of international trade on economic growth--------------------------------------------------------12-13 14: Impact of export on economic growth----------------------------------------------------------------------13-14 15: impact of imports on economic growth---------------------------------------------------------------------14-15 16: Conclusion----------------------------------------------------------------------------------------------------------15 17: References----------------------------------------------------------------------------------------------------------15

1: Introduction to economic growth: Economic growth is the increase of per capita gross domestic product (GDP) or other measures of aggregate income, typically reported as the annual rate of change in real GDP. Economic growth is primarily driven by improvements in productivity, which involves producing more goods and services with the same inputs of labor, capital, energy and materials. Economists draw a distinction between short-term economic stabilization and long-term economic growth. The topic of economic growth is primarily concerned with the long run. The short-run variation of economic growth is termed the business cycle. The long-run path of economic growth is one of the central questions of economics; despite some problems of measurement, an increase in GDP of a country greater than population growth is generally taken as an increase in the standard of living of its inhabitants. Over long periods of time, even small rates of annual growth can have large effects through compounding (see exponential growth). A growth rate of 2.5% per annum will lead to a doubling of GDP within 29 years, whilst a growth rate of 8% per annum (experienced by some Four Asian Tigers) will lead to a doubling of GDP within 10 years. This exponential characteristic can exacerbate differences across nations. An increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for comparing one country's economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries. 2: Types of economic growth: There are two types of economic growth  Balanced economic growth  Unbalanced economic growth

2.1: Balanced economic growth: All the economic sectors are growing at the same ratio or percentage, this growth is known as balanced economic growth. 2.2: Unbalanced economic growth: When some sectors of the economy are growing faster than others, and their rate of growth is different to each other, this growth is known as un-balanced economic growth. 3: Determinants of economic growth/performance: 3.1: Investment: Investment is the most fundamental determinant of economic growth identified by both neoclassical and endogenous growth models. However, in the neoclassical model investment has impact on the transitional period, while the endogenous growth models argue for more permanent effects. The importance attached to investment by these theories has led to an enormous amount of empirical studies examining the relationship between investment and economic growth. 3. 2: Human capital: Human capital is the main source of growth in several endogenous growth models as well as one of the key extensions of the neoclassical growth model. Since the term ‘human capital’ refers principally to workers’ acquisition of skills and know-how through education and training, the majority of studies have measured the quality of human capital using proxies related to education (e.g. school-enrolment rates, tests of mathematics and scientific skills, etc.). A large number of studies have found evidence suggesting that educated population is key determinant of economic growth. However, there have been other scholars who have questioned these findings and, consequently the importance of human capital as substantial determinant of economic growth. 3.3: Innovation and R&D: Innovation and R&D activities can play a major role in economic progress increasing productivity and growth. This is due to increasing use of technology that enables introduction

of new and superior products and processes. This role has been stressed by various endogenous growth models, and the strong relation between innovation/R&D and economic growth has been empirically affirmed by many studies. 3.4: Economic policies & macroeconomic conditions: Economic policies and macroeconomic conditions have, also, attracted much attention as determinants of economic performance. Since they can set the framework within which economic growth takes place. Economic policies can influence several aspects of an economy through investment in human capital and infrastructure, improvement of political and legal institutions and so on (although there is disagreement in terms of which policies are more conductive to growth). Macroeconomic conditions are regarded as necessary but not sufficient conditions for economic growth. In general, a stable macroeconomic environment may favor growth, especially, through reduction of uncertainty, whereas macroeconomic instability may have a negative impact on growth through its effects on productivity and investment (e.g. higher risk). Several macroeconomic factors with impact on growth have been identified, but considerable attention has been placed on inflation, fiscal policy, budget deficits and tax burdens. 3.5: Openness to trade: Openness to trade has been used extensively as a major determinant of economic growth. There are sound theoretical reasons for believing that there is a strong and positive link between openness and growth. Openness affects economic growth through several channels such as exploitation of comparative advantage, technology transfer and diffusion of knowledge, increasing scale economies and exposure to competition. Openness is usually measured by the ratio of exports to GDP. There is a substantial and growing empirical literature investigating the relationship between openness and growth. On the one hand, it has found that economies that are more open to trade and capital flows have higher GDP per capita and grew faster. Although the important role institutions play in shaping economic growth has been acknowledged long time ago, it is not until recently that such factors have been examined empirically in a more consistent way. Rodrik highlights five key institutions (property rights, regulatory institutions, institutions for macroeconomic stabilization, institutions for social insurance and institutions of

conflict management), which not only exert direct influence on economic growth, but also affect other determinants of growth such as the physical and human capital, investment, technical changes and the economic growth processes. It is on these grounds that Easterly (2001) argued that none of the traditional factors would have any impact on economic performance if there had not been developed a stable and trustworthy institutional environment. The most frequently used measures of the quality of institutions in the empirical literature include government repudiation of contracts, risk of expropriation, corruption, property rights, the rule of law and bureaucratic quality. 3.6: Political factors and economic growth: The relation between political factors and economic growth has come to the fore by the work of Lipset who examined how economic development affects the political regime. At the most basic form, political instability would increase uncertainty, discouraging investment and eventually hindering economic growth. The degree of democracy is also associated with economic growth, though the relation is much more complex, since democracy may both retard and enhance economic growth depending on the various channels that it passes through. In the recent years a number of researchers have made an effort to measure the quality of the political environment using variables such as political instability, political and civil freedom, and political regimes. Brunette distinguishes five categories of relevant political variables: democracy, government stability, political violence, political volatility and subjective perception of politics. 3.7: Socio-cultural factors: Recently there has been a growing interest in how various social-cultural factors may affect growth. Trust is an important variable that belongs to this category. Trusting economies are expected to have stronger incentives to innovate, to accumulate physical capital and to exhibit richer human resources, all of which are conductive to economic growth. Ethnic diversity, in turn, may have a negative impact on growth by reducing trust, increasing

polarization and promoting the adoption of policies that have neutral or even negative effects in terms of growth. Several other socio-cultural factors have been examined, such as ethnic composition and fragmentation, language, religion, beliefs, attitudes and social/ethnic conflicts, but their relation to economic growth seems to be indirect and unclear. For instance cultural

diversity may have a negative impact on growth due to

emergence of social uncertainty or even of social conflicts, or a positive effect since it may give rise to a pluralistic environment where

cooperation can flourish. 4: Merits of Economic Growth Sustained economic growth is a major objective of government policy – not least because of the benefits that flow from a growing economy.


Higher Living Standards: An expanding economy provides the impetus for a rising level of employment and a falling rate of unemployment.



Employment effects: Growth stimulates higher employment through diversification. The British economy has been growing since autumn 1992 and we have seen a large fall in unemployment and a rise in the number of people employed.



Fiscal Dividend: Growth has a positive effect on government finances - boosting tax revenues and providing the government with extra money to finance spending projects



The Investment Accelerator Effect: Rising demand and output encourages investment in new capital machinery – this helps to sustain the growth in the economy by increasing long run aggregate supply.



Growth and Business Confidence: Economic growth normally has a positive impact on company profits & business confidence – good news for the stock market and also for the growth of small and large businesses alike



Increase in firms and consumer confidence: Improve firms' and consumers' confidence (positive outlook) which may lead to an increase in investment.

5: Demerits of economic growth:   Increase in pollution (noise and congestion): Increase in economic growth can lead to the increase in population noise and congestion. Excessive depletion of non-renewable recourse: Products are formed from rawmaterials and when these products are sold in the local and international market there is a decrease in a country‘s resources. On the other hand economic growth increases.  Unevenness between growth and income: The benefits of growth between income groups and regions may be uneven leading to an increase in relative poverty. Income inequalities may widen.  Over estimation of Trade benefits: Some economists argue that the trade and cost advantages of EMU have been grossly overestimated. There is little to be gained from moving from the present system which has some stability built into it, to the rigidities which EMU would bring. 6: Introduction to international trade: International trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), it‘s economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing

international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders. International trade is in principle not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture. Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Then trade in goods and services can serve as a substitute for trade in factors of production. Instead of importing a factor of production, a country can import goods that make intensive use of the factor of production and are thus embodying the respective factor. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor the United States is importing goods from China that were produced with Chinese labor. 7: Present global trade scenario: There was a dramatic rise in world trade volume in the twentieth century. While in the 1928, world exports amounted to US$31.7 billion, this figure has risen to US$215,000.2 billion by 1994.Studies conducted by the UNCTAD in 1994 show that trade in commercial services rose much faster than merchandise trade between 1970 and 1990. The G-7 group, comprising of the US, France, Germany, the UK, Italy, Japan, and Canada, has always commanded a dominant position in the world trade. Gradually the significance of certain Asia Pacific nations, such as China, Singapore, India, Hong Kong, Taiwan and Korea has risen. 8: Regulation of international trade:

Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in mercantilism most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in the United Kingdom, a belief in free trade became paramount. This belief became the dominant thinking among western nations since then. In the years since the Second World War, controversial multilateral treaties like the General Agreement on Tariffs and Trade (GATT) and World Trade Organization have attempted to promote free trade while creating a globally regulated trade structure. These trade agreements have often resulted in discontent and protest with claims of unfair trade that is not beneficial to developing countries. Free trade is usually most strongly supported by the most economically powerful nations, though they often engage in selective protectionism for those industries which are strategically important such as the protective tariffs applied to agriculture by the United States and Europe. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures. Traditionally agricultural interests are usually in favor of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services. The regulation of international trade is done through the World Trade Organization at the global level, and through several other regional arrangements such as MERCOSUR in South America, the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico, and the European Union between 27 independent states. The 2005 Buenos Aires talks on the planned establishment of the Free Trade Area of the Americas (FTAA) failed largely

because of opposition from the populations of Latin American nations. Similar agreements such as the Multilateral Agreement on Investment (MAI) have also failed in recent years. 9: Risk in international trade: Companies doing business across international borders face many of the same risks as would normally be evident in strictly domestic transactions. For example,
      

Buyer insolvency (purchaser cannot pay); Non-acceptance (buyer rejects goods as different from the agreed upon specifications); Credit risk (allowing the buyer to take possession of goods prior to payment); Regulatory risk (e.g., a change in rules that prevents the transaction); Intervention (governmental action to prevent a transaction being completed); Political risk (change in leadership interfering with transactions or prices); and War and other uncontrollable events.

In addition, international trade also faces the risk of unfavorable exchange rate movements (and, the potential benefit of favorable movements).
10: International trade with the Pakistan’s perspective:

The external sector was seriously affected by the economic sanctions imposed on Pakistan after it conducted nuclear tests in May 1998. The lack of foreign investor confidence following the freeze on foreign currency deposits led to a decline in foreign private capital inflows and a sharp decline in money sent home from citizens working abroad, or so called "workers' remittances." The level of foreign direct investment declined by 32.1 percent per year to a low of US$296 million in 1998-99, according to official data. Remittances from Pakistanis abroad, most of them in the Gulf, the United Kingdom, and North America, peaked at US$2.89 billion in 1982-83, but fell to under US$1.5 billion in 1998-99. These adverse developments, along with suspension of new economic assistance by major donors, pushed Pakistan's foreign exchange reserves down from US$1,533 million at the end of April 1998 to US$415 million (the lowest level reached during the crisis) by 12 November 1998, hardly sufficient to finance 2-3 weeks‘ worth of imports.

Disappointing foreign sales performances have given Pakistan a trade deficit every year since 1972-73. This is partly due to the narrow range of export products. Five categories of goods— cotton yarn, garments, cotton cloth, raw cotton, and rice—still account for over 60 percent of export earnings. A second major reason is the vulnerability of key products, notably cotton, to droughts, floods, and pestilence. However, there are other reasons for the poor performance, including the small proportion of high value-added goods in the sales mix, low product quality, and poor marketing. A recent field survey conducted by the Sustainable Development Policy Institute estimated total informal trade between Pakistan and India at around $500 million per year (primarily imports from India via Dubai). Cloth, machinery (for textiles and pharmaceuticals), cosmetics and jewelry, and tires made up most of the goods imported. Commodity Composition of Trade, 2004
Principal Export Products Textiles (fabrics and yarns) $6.5 billion Apparel and clothing Rice Sports goods Total exports $3.0 billion $682 million $315 million $13.4 billion Principal Import Products Petroleum products Industrial machinery Organic chemicals Cotton and fibers Total Imports $3.7 billion $1.3 billion $1.2 billion $800 million $17.9 billion

Direction of Trade, 2004
Principal Export Markets United States United Arab Emirates United Kingdom Germany Total Exports $3.1 billion $1.1 billion $969 million $665 million $13.4 billion Principal Suppliers of Imports Saudi Arabia United Arab Emirates United States China Total Imports $2.1 billion $1.8 billion $1.7 billion $1.5 billion $17.9 billion

SOURCE: International Monetary Fund. International Financial Statistics Yearbook 1999.

The United States has long been Pakistan's largest export market, absorbing over 21 percent of total sales in 1999-2000. The United Kingdom, Hong Kong, and Germany have also been major outlets. In recent years, Japan and the United States have alternated as Pakistan's top supplier, although Gulf countries took a bigger share in 1999-2000, reflecting the sharp increase in the cost of oil imports. In 1999, Pakistan exported goods worth US$8.4 billion; it imported goods in the value of US$9.8 billion, creating a trade deficit of US$1.4 billion. Pakistan's main exports are cotton, fabrics, yarn, rice, and other agricultural products, most of which go to the United States (21 percent), Hong Kong (7 percent), the United Kingdom (7 percent), Germany (7 percent), and the United Arab Emirates (5 percent). Imports are mainly machinery, oil and oil-related products, chemicals, transportation equipment, grains, pulses, and flour. They come mainly from the United States (8 percent), Japan (8 percent), Malaysia (7 percent), Saudi Arabia (7 percent), and the United Arab Emirates (7 percent). Exports of goods and services represent roughly 15 to 16 percent of GDP, and imports equal around 18 percent of GDP. Pakistan is a member of the World Trade Organization (WTO). The Economic Cooperation Organization (ECO), whose founding members are Pakistan, Turkey, and Iran, grants a 10 percent tariff preference on several goods. ECO membership was expanded to 10 in 1993, when Afghanistan, Azerbaijan, and the 5 former Soviet Muslim republics of central Asia were admitted. The second arrangement, the South Asian Association for Regional Cooperation (SAARC), is comprised of India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, and the Maldives. Because of competition in key export sectors such as textiles among the larger member states, this association is not expected to stimulate regional trade flows. Pakistan's leading regional trading partners are Bangladesh (its former eastern part), India, and Sri Lanka. Pakistan is also a member (along with India and Nepal) of the Asian Clearing Union, which was founded in 1976 and aims to facilitate multilateral payments through the use of currencies of participating countries in regional transactions in order to expand intra-regional trade and save convertible foreign exchange. 11: Pakistan’s Trade Strategy: Pakistan has made substantial progress over the past decade in constructing a more open and transparent trade policy regime.



The government has reduced tariff rates across the board. The simple average ad valorem tariff rate in the 2005/06 trade policy is just under 15 percent, compared to over 50 percent in 1995. .



Quantitative restrictions, exchange controls, and other direct state interventions into trade have been largely eliminated; ordinary customs duties are now the primary trade policy Instrument .



Many special regulatory orders that provided discretionary exemptions to firms or industries have been eliminated, thus leveling the playing field and making the trade regime less complex. .



The complete tariff schedule and regulatory orders affecting trade are easily accessible from government.



Pakistan has steadily extended the positive list which restricts the types of goods that may be legally imported from India. The list expanded from 40 items in 1983 to 687 items in 2004/5 and to 768 in 2006.



The signing of the South Asia Free Trade Agreement (SAFTA) in January 2004 is an important step towards higher intra-regional trade in South Asia. The first phase of SAFTA tariff reductions is expected to come into effect from July 2006.

12: World Bank Operations on International Trade for Pakistan: In recent years the World Bank has supported the Ministry of Commerce and other agencies in the Government of Pakistan with analysis on trade issues, including most recently the Pakistan Growth and Export Competitiveness Report, as well as studies on agricultural trade, a series of studies on Pakistan-India trade, plus policy notes on SAFTA, textile quotas, and tariff rationalization. The Pakistan Tax Administration Reform Project supports improvements in customs administration. 13: Impact of international trade on economic growth: It can be said that the positive effects of International Trade (IT) on Economic Growth1 (EG) were first pointed out by Smith (1776). This idea prevailed until World War II (WWII), although with relative hibernation during the ‗marginalist revolution‘. After WWII, the

introverted and protectionist EG experiments had some significance, especially in Latin America. From the 60‘s on, owing to the failure of those experiments and to the association of quick EG with the opening of IT and the consequent international specialization in several countries, as well as to the results of many studies based on the neoclassical theories of EG and IT, a new decisive role was given to IT as EG‘s driving force. Since the classics don‘t distinguish the questions of EG from the questions of IT, the examination of this problem leads us to the classics‘ main models of IT.2 However, given the aim of this work, we attempt to advance on those models which basically discuss the ‗static gains of the IT‘. As far as the interaction between IT and EG is concerned, we found two main ideas to point out in Smith (1776). On the one hand, IT made it possible to overcome the reduced dimension of the internal market and, on the other hand, by increasing the extension of the market, the labor division improved and the productivity increased. The IT would therefore constitute a dynamic force capable of intensifying the ability and skills of workers, of encouraging technical innovations and the accumulation of capital, of making it possible to overcome technical indivisibilities and, generally speaking, of giving participating countries the possibility of enjoying EG. In turn, Ricardo (1817) presented a ‗dynamic model of EG‘ with three forces and two restrictions.3 He characterized the progressive states as having high savings, capital accumulation, production, productivity, benefits and labor demand forcing the increase of wages and demographic growth. However, in view of the limitations of land, both in quantity and in quality, the additional alimentary resources were obtained in conditions of decreasing returns, in which the production is absorbed by wages in an increasing proportion, reducing the stimulation of new investments and, sooner or later, reaching the ‗stationary state‘.4 IT could delay the fall in the rate of profit.5 Apart from the contribution of IT, underestimating the importance of technology, he underestimated the positive effects of IT on technology. Finally, among the Classics, Mill (1848) also explicitly reported the Classic point of view according to which the production resulted from labor, capital, land and their productivities. And just like Ricardo, he recognized that underlying the ‗progressive state‘ there was the ‗stationary state‘, and that ultimately the force capable of delaying this state was technical progress. Accordingly, the emphasis that Smith had placed on the extension of the market decreases, even

though he also defended free trade among countries. We think that this situation was the result of the expectation created by the Industrial Revolution (IR) in regards to technical progress. 14: Impact of exports on economic growth: Depreciation in the Exchange rate should make a country exports more competitive and should increase demand. The exact effect of depreciation depends on the elasticity of demand for exports. Often countries may experience export led growth. For example, China‘s strong rate of growth is primarily caused by the strength of the Chinese manufacturing sector. In this case it is exports that are increasing economic growth, rather than the other way around. However, Economic Growth could increase exports. In a period of economic growth, firms have more money to invest. This investment could increase the long run productivity of the economy and therefore, could help boost exports. In a recession, firms will be more reluctant to invest and therefore, there will be a slower growth in exports. In theory it is also possible Economic Growth could harm exports. This is because high growth could cause inflationary pressures making UK exports less competitive. Also higher growth may lead to higher interest rates. Higher interest rates could cause an appreciation in the exchange rate which makes exports less competitive. 15: Impact of imports on economic growth:  Imports play vital role in enhancing exports, these imports could be in the form of raw materials or machineries; both are used in the manufacturing sector.  It is expected that imports of consumer goods have direct contemporaneous association with exports, while imports of capital goods affect exports with two period lags because machinery imported by the producers first setup and then start production, therefore, it starts impacting exports.  Long-term economic growth of a developing country depends on the imports of capital goods and machinery that accelerates economic productivity.  In order to maintain the trade surplus, total imports should be less then total exports.

 But Pakistan is victim of trade deficit since long time. The trade deficit in the fiscal year 2006-07 is $ 9.9 billion against the deficit of $ 8.4 billion during 2005- 06. The invisibles balance is anticipated to register a surplus of $ 2.8 billion. On this basis, the current account deficit is likely to be around $ 7.1 billion (5.0 percent of GDP) for the year 200607.  Increase in exports results the increase in nominal GDP, therefore the demand in imports also increases.  Pakistan‘s economy is highly dependent upon the imports like industrial inputs, machinery, fuel and essential food items.  The final sector in the circular flow of income model is the overseas sector which transforms the model from a closed economy to an open economy. The main leakage from this sector are imports (M), which represent spending by residents into the rest of the world.  The growth in the country's trade deficit slowed to 17.8 percent during FY07 as compared to 87.0 percent in FY06. Consequently the trade deficit widened to a record US$ 9.9 billion in FY07, against US$ 8.4 billion for the previous year.  The main contribution to the sluggish import growth of 8.1 percent in FY07 was from the deceleration in the growth of petroleum and machinery imports. In addition, imports under food, transportation and metal group declined. However, the slowdown in import growth was offset by the lower export performance, as exports grew by only 3.2 percent in FY07 compared with the FY06 growth of 14.3 percent.26 16: Conclusion There is not a perfect correlation between economic growth and exports. It also depends on the country. Some countries have exports as a major contributory factor in causing growth. Some countries like Japan have strong exports but low rates of growth. Other countries in the past like the UK, US have had strong growth, with pretty poor exports. Growth has been demand led, resulting in current account deficits.

17: References: http://www.worldbank.org/research/growth/ http://www.bized.ac.uk/virtual/dc/copper/theory/th5.htm http://www.scribd.com/doc/8153737/Impact-of-Imports-on-Economy

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