The Trade Balance of Pakistan and Its Impact on Exchange Rate of Pakistan: A Research Report

Abstract

Trade balance is a difference between a country's imports and its exports. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy. A country has a trade deficit if its imports are more than it exports; the opposite scenario is a trade surplus. It is also referred to as “trade balance" or "international trade balance."

Balance of trade data shows the imports and exports of goods and how a country competes in a global marketplace. Investors and policymakers are increasingly using trade balances to determine the health of the economy and its relationship with the rest of the world. Imports and exports can include physical goods and intangible services .i.e. Middle Eastern nations have stronger physical exports due to the international oil trade. A negative balance of trade is a bad sign for a country's long run economic health. Balance of trade data is a very important piece of understanding the global puzzle of international trade.  Much like an income statement, balance of trade data clearly defines whether a trade deficit or trade surplus.

Countries generally try to create trade policies that encourage a trade surplus. They consider this to be a favorable trade balance because it's like making a profit as a country. You'd prefer to sell more, so you can get a higher income, and have more capital for your residents. This will translate into a higher standard of living by hire more workers. It will reduce unemployment and generate more income for your residents.

To maintain this favorable trade balance, leaders often resort to trade protectionism. They protect domestic industries, by levying tariffs, quotas or subsidies on imports.

A trade surplus is not always a favorable trade balance. China and Japan have both become dependent on exports to drive economic growth. To maintain this surplus, they both purchase large amounts of U.S. Treasuries to keep the dollar's value high, and the value of their currencies low -- making their exports competitively priced.

Trade deficits are usually considered to be an unfavorable balance of trade. A country that imports more in consumer products than it exports in raw materials doesn't give its domestics businesses the experience needed to make those higher value-added products. Furthermore, it could eventually deplete its natural resources, and it is dependent on global commodities' prices.

In special circumstances, a trade deficit can actually be a more favorable balance of trade. For example, Hong Kong has a trade deficit, but most of its imports are raw materials which it converts to finished goods and re-exports output. Canada's slight trade deficit is a result of its strong economic growth, which allows its residents to enjoy the higher standard of living afforded by diverse imports.