BALANCE OF TRADE .doc

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Report about

Submited to Riaz Dahr

Group Members Taha Yaseen BM-25093 Anzar Ishaqui BM-25167 Shoaib Hassan BM-25118

Asad Mazhar BM-25065 Aamir Ali Khan BM-25128

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“We owe our profound thanks and deepest gratitude to almighty Allah, most beneficent, most merciful, who blessed us with determination, strength, ability and divine help to complete this piece of study”.

Several people have made significant contributions to the supplementary materials accompany the textAll of our fellow student who help us in giving ideas related to the formulation of questionnaire and formatting of the report.Mr Riaz Dahar for guiding us through this journey.we thanks all of them for their corporation, moral and material support.

Thanks,

Sincerely

SHOAIB HASANAAMIR ALI KHANANZAR ISHAQUITAHA YASEENASAD MAZHAR

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INSTITUTE OF BUSINESS AND TECHNOLOGY

COURSE: GLOBAL ECONOMIC ISSUES

TITLE OF PROJECT REPORT: Balance of Trade

MONTH OF SUBMISSION: November, 2010

NAME OF PROJECT SUPERVISOR: Riaz Dahr

ABSTRACT Nowadays the world having challenges in possible to make trade between the whole world, so we want to get edge through the better use of technology and this use of technology is known as Globalization. Technology is the key factor in this change and plays a very important role in the advancements of functions performed in the industries and on the basis of using better and advanced technology, every organization wants to take competitive advantage over their competitors.

But along with the advancements in the functionality of the organizations, there exist many problems like with performance appraisal systems, training and development, recruitment and selection etc. As there exist many advantages of using the advanced technology, there also exist disadvantages of these functions. If we consider the performance appraisal techniques, it has different requirements in public and private sectors. It also creates different types of problems in the public and private sectors.

Due to the personal biasness, stereotype and different rules and regulations of the organizations having diverse environment create problems in the perform trade activities

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TABLE OF CONTENTS

Serial #

TopicPage

#Acknowledgement i

Abstract ii

1. Introduction 1

2. Executive Summary

3.

3.13.23.3

Literature Review

Balance of trade History of BOT Determinants of BOT

4 Research methodology

5. Conclusion

6. Recommendation

7. References

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The difference between a country's imports and its exports. Balance of trade is the largest component of a country's balance of payments. 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 it imports more than it exports; the opposite scenario is a trade surplus

Balance of trade

The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports A positive or favorable balance of trade is known as a trade surplus if it consists of exporting more than is imported; a negative or unfavorable balance is referred to as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance.

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Import/Export Balances Balance of Trade Trade Deficits Trade Surpluses Balance of Payments

UNDERSTANDING TRADE BALANCE Trade balance is a reflection of a country’s international market and its domestic consumption. A country’s balance of trade comprises a major segment of balance of payments. This is an effective mechanism to quantify a country’s overall economic transactions with the rest of the world. It also affects the country’s overall GDP for that particular period.

Factors that effect trade balance are : Demand and Supply Domestic Business Trade agreement Tariff and Policies Exchange Rate New Technology

The demand and supply trend defines the cost of domestic products to be sold in the international market.

Domestic Business Sound, domestic policies are required to boost production and international trade. Some countries like US provide subsidies to local manufacturers for exported goods and services.

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External pressures: Many countries export items that face heavy competition in international market. This results in market segmentation and low pricing. Countries that are mostly oil exporters or IT hubs tend to generate favorable trade balance due to less competition in the international market. External pressures also work in the form of trade bans. These bans are enforced by either individual countries or international organizations such as the WTO or IMF.

The balance of trade encompasses the activity of exports and imports, like the work of this cargo ship going through the Panama Canal.

The balance of trade forms part of the current account, which includes other transactions such as income from the international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position.

The trade balance is identical to the difference between a country's output and its domestic demand (the difference between what goods a country produces and how many goods it buys from abroad; this does not include money re-spent on foreign stock, nor does it factor in the concept of importing goods to produce for the domestic market).

Measuring the balance of trade can be problematic because of problems with recording and collecting data. As an illustration of this problem, when official data for all the world's countries are added up, exports exceed imports by almost 1%; it appears the world is running a positive balance of trade with itself. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, smuggling and other visibility problems. However, especially for developed countries, accuracy is likely.

Factors that can affect the balance of trade include:

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The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting economy vis-à-vis those in the importing economy;

The cost and availability of raw materials, intermediate goods and other inputs; Exchange rate movements; Multilateral, bilateral and unilateral taxes or restrictions on trade; Non-tariff barriers such as environmental, health or safety standards; The availability of adequate foreign exchange with which to pay for imports; and Prices of goods manufactured at home (influenced by the responsiveness of

supply)

In addition, the trade balance is likely to differ across the business cycle. In export-led growth (such as oil and early industrial goods), the balance of trade will improve during an economic expansion. However, with domestic demand led growth (as in the United States and Australia) the trade balance will worsen at the same stage in the business cycle.

Since the mid 1980s, the United States has had a growing deficit in tradable goods, especially with Asian nations (China and Japan) which now hold large sums of U.S debt that has funded the consumption. The U.S. has a trade surplus with nations such as Australia. The issue of trade deficits can be complex. Trade deficits generated in tradable goods such as manufactured goods or software may impact domestic employment to different degrees than trade deficits in raw materials.

In 2006, the primary economic concerns focused on: high national debt ($9 trillion), high non-bank corporate debt ($9 trillion), high mortgage debt ($9 trillion), high financial institution debt ($12 trillion), high unfunded Medicare liability ($30 trillion), high unfunded Social Security liability ($12 trillion), high external debt (amount owed to foreign lenders) and a serious deterioration in the United States net international investment position (NIIP) (-24% of GDP), high trade deficits, and a rise in illegal immigration

These issues have raised concerns among economists and unfunded liabilities were mentioned as a serious problem facing the United States in the President's 2006 State of the Union address. On June 26, 2009, Jeff Imelda, the CEO of General Electric, called for the U.S. to increase its manufacturing base employment to 20% of the workforce, commenting that the U.S. has outsourced too much in some areas and can no longer rely on the financial sector and consumer spending to drive demand

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Conditions where trade imbalances may not be problematic

Small trade deficits are generally not considered to be harmful to either the importing or exporting economy. However, when a national trade imbalance expands beyond prudence (generally thought to be several percent of GDP, for several years), adjustments tend to occur. While unsustainable imbalances may persist for long periods (cuff, Singapore and New Zealand’s surpluses and deficits, respectively), the distortions likely to be caused by large flows of wealth out of one economy and into another tend to become intolerable.

In simple terms, trade deficits are paid for out of foreign exchange reserves, and may continue until such reserves are depleted. At such a point, the importer can no longer continue to purchase more than is sold abroad. This is likely to have exchange rate implications: a sharp loss of value in the deficit economy’s exchange rate with the surplus

economy’s currency will change the relative price of tradable goods, and facilitate a return to balance or (more likely) an over-shooting into surplus the other direction.

More complexly, an economy may be unable to export enough goods to pay for its imports, but is able to find funds elsewhere. Service exports, for example, are more than sufficient to pay for Hong Kong’s domestic goods export shortfall. In poorer countries, foreign aid may fill the gap while in rapidly developing economies a capital account surplus often off-sets a current-account deficit. Finally, there are some economies where transfers from nationals working abroad contribute significantly to paying for imports. The Philippines, Bangladesh and Mexico are examples of transfer-rich economies.

Essentially claimed that the foreign assets were not carried on the books at their higher, truer value.

Friedman presented his analysis of the balance of trade in Free to Choose, widely considered his most significant popular work.

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Physical balance of trade

Monetary balance of trade is different from physical balance of trade. (which is expressed in amount of raw materials, known also as Total Material Consumption). Developed countries usually import a lot of primary raw materials from developing countries at low prices. Often, these materials are then converted into finished products, and a significant amount of value is added. Although for instance the EU (as well as many other developed

countries) has a balanced monetary balance of trade, its physical trade balance (especially with developing countries) is negative, meaning that a lot less material is exported than imported. For this reason, activists talk about the issue of ecological debt which implies a sort of predatory economic system. The nature of the trade balance statistics is such that is conceals distorted material flow.

United States trade deficitMain article: United States Balance of trade

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The U.S. has held a trade deficit starting late in the 1960s. It was this very deficit that forced the United States in 1971 off the gold standard. Its trade deficit has been increasing at a large rate since 1997 and increased by 49.8 billion dollars between 2005 and 2006, setting a record high of 817.3 billion dollars, up from 767.5 billion dollars the previous year.

The graph indicates that, as Frederic Bestial predicted, the deficit slackened during recessions and grew during periods of expansion. Also of note, many economists calculate trade deficits and/or current account deficits as a percentage of GDP. trade

Globalization Is Gaining Speed

The world economy is becoming a single, interdependent system

Export:

Domestic product sold abroad

Import:

Foreign product sold domestically

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EXECUTIVE SUMMARY

A country's international trade consists of both importing and

exporting goods and services. The difference between the amount

exported and the amount imported equals the balance of trade. A

trade surplus consists of exporting more than importing while a trade

deficit consists of importing more than exporting

DIRECT EXPORTING.

The typical exporting system is a company-owned export department,

in which a manufacturer sells directly to companies or consumers in

foreign countries. In this arrangement, the company has complete

control over the marketing and distribution of its goods and services,

distribution, sales, pricing, and other business choices. Most U.S.

exporters, however, don't utilize this system. Many companies depend

on one or several specialized export channels outside their

organizations. Most companies choose direct and indirect routes.

Direct exports are sold through foreign-based parties. Indirect exports

are sold through home-based proxies or resellers. Both methods can

be implemented through either merchants or agents. In these cases,

merchants actually assume ownership of the goods, as opposed to

agents, who only represent the manufacturer or owner. Bartering is

another method that manufacturers may use to sell their goods

abroad

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INDIRECT EXPORTING.

When a company uses a home-based merchant or agent to find and

deliver goods to foreign buyers it utilizes indirect exporting. This

method of exporting poses the

least amount of risk and expense because it is relatively easy to start

up and has a moderate up-front capital investment. Indirect agents

act as intermediaries between the exporter and buyer and facilitate

the flow of goods. The typical exporting system is a company-owned

export department, in which a manufacturer sells directly to

companies or consumers in foreign countries. In this arrangement,

the company has complete control over the marketing and distribution

of its goods and services, distribution, sales, pricing, and other

business choices. Most U.S. exporters, however, don't utilize this

system. Many companies depend on one or several specialized export

channels outside their organizations. Most companies choose direct

and indirect routes. Direct exports are sold through foreign-based

parties. Indirect exports are sold through home-based proxies or

resellers. Both methods can be implemented through either

merchants or agents. In these cases, merchants actually assume

ownership of the goods, as opposed to agents, who only represent the

manufacturer or owner. Bartering is another method that

manufacturers may use to sell their goods abroad

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IMPORTING

Importing products into countries is often dependent on what product,

commodity, or service is being imported. In the United States the

Harmonized Tariff Schedule is the directory for determining what if

any tariff is imposed on the product in question. Importing into any

country should involve communicating with that country's customs

agency to determine the necessary licensing and logistics issues.

Often a customs broker is necessary to facilitate the smooth transfer

of goods and services between countries. Inherently, importing

involves exporting from one country; thus many of the issues involved

in exporting are relevant and necessary for importing goods and

services.

Literature Review

Balance of Trade

The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports A positive or favorable balance of trade is known as a trade surplus if it consists of exporting more than is imported; a negative or unfavorable balance is referred to as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance.

History of Balance of Trade

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 2010 Jul 2010 - The Central Bureau of Statistics (BPS) reported earlier the balance of trade in July 2010 had a deficit. Darmin predicted the deficit could still happen in the months ahead this year. "Before it was not negative but as imports grew higher that exports next year we believe the trade surplus will be smaller," he said. Darmin said capital inflow remained large so that the capital and financial balance would remain positive

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DETERMINANTS OF THE BALANCE OF TRADE

There are three major determinants of the trade balance or net

exports: Foreign exchange rates, national incomes, and domestic and

foreign price levels.

EFFECTS OF THE FOREIGN EXCHANGE RATE.

The way the foreign exchange rate affects exports and imports has

already been discussed in fair detail. In a nutshell, if the U.S. dollar

appreciates (the dollar becomes stronger and the foreign exchange

rate increases), exports decline and imports increase, causing the

foreign trade deficit to rise. If the dollar depreciates (the dollar

becomes weaker and the foreign exchange rate decreases), the

foreign trade deficit falls.

EFFECTS OF CHANGES IN DOMESTIC AND FOREIGN

INCOMES.

Changes in national incomes in foreign countries as well as in the

United States have an important effect on net exports. If national

incomes in foreign countries rise, foreign residents demand greater

amounts of goods and services, some of which can be bought from the

United States. As a result, an increase in incomes in foreign countries

leads to an increase in U.S. exports, causing the foreign trade deficit

to rise (assuming other factors do not change). If national incomes in

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foreign countries fall, U.S. exports to these countries will

decline, leading to a decline in the foreign trade deficit as well.

If the U.S. national income rises, U.S. consumers demand more

goods and services, and some of this increased demand is for goods

and services produced in other countries. As a result, a rise in U.S.

income increases U.S. imports, causing the foreign trade deficit to

rise. On the other hand, if the U.S. national income declines, the

demand for goods and services by U.S. consumers falls, so does the

demand for imported goods and services—this leads to a decrease in

the foreign trade deficit.

From the preceding discussion, it follows that changes in net exports

are also tied to rates of economic growth, both home and abroad.

While U.S. policy makers have some control over the rate of economic

growth in the United States, they cannot unilaterally influence rates

of economic growth in foreign countries. As a result, U.S. policy

makers do not have complete control of the behavior of U.S. net

exports.

PRICES IN THE UNITED STATES AND IN FOREIGN

COUNTRIES.

Even if the foreign exchange rate and the domestic and foreign

economic growth rates remain unchanged, changes in price levels can

affect U.S. net exports. Let us first look at the effects of a change in

the price level in the United States. Suppose that the U.S. inflation

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rate is equal to 10 percent per annum. This means that prices

of goods and services in the United States are rising at the annual

rate of 10 percent, on average. As a result, a Jeep Cherokee that costs

$10,000 this year will cost $11,000 next year. Also, let us assume that

foreign prices do not change and that one U.S. dollar is equal to 100

Japanese yen, and this exchange rate will

not change next year. Now, look at the effect of the U.S. price

increase on the price of a Jeep Cherokee in terms of Japanese yen, the

price most relevant to a prospective Japanese buyer of a Jeep

Cherokee. This year the Jeep Cherokee costs 1,000,000 yen ($10,000

× 100) to a Japanese buyer, but it will cost 1,100,000 yen next year.

Due to an increase in the price in yen, the export of Jeep Cherokees to

Japan would decline as the demand for the vehicle declines in Japan

(given that other factors do not change). Thus, in general, an increase

in U.S. price levels will hurt U.S. exports.

An increase in U.S. price levels will also affect U.S. imports of foreign

goods and services. In the above example, we assume that the U.S.

price level rises and the Japanese price level does not. Thus, a

Japanese-made Toyota costs the same amount in U.S. dollars this year

as it will next year (since the foreign exchange rate is also assumed to

remain unchanged), but a Jeep Cherokee sold in the United States will

cost 10 percent more. This implies that the next year, a Japanese-

made Toyota will become cheaper relative to a Jeep Cherokee—thus, a

Toyota will become relatively more attractive to a prospective U.S. car

buyer the next year. In general, therefore, U.S. price increases also

increase U.S. imports. The price increases serve as a double-edged

sword that reduces exports and

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increase imports simultaneously, causing net exports to decline—that

is, the foreign trade deficit becomes worse or the magnitude of the

foreign trade surplus declines.

One can see that changes in foreign price levels will have analogous

effects. If foreign prices increase and the U.S. price level does not

increase (given that other

factors do not change also), U.S. exports will rise and imports will fall,

causing the U.S. foreign trade deficit to shrink or the foreign trade

surplus to grow, as the case may be.

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Methodology

Exporting is the act of producing goods or services in one country and selling or trading them to another country. The term export originates from the Latin words ex and portare, meaning to carry out. The counterpart to exporting is importing which is the acquisition and sale of goods from acquired from another country and selling them within the country. Although it is common to speak of a nation's exports or imports in the aggregate, the company that produces the good or service, as opposed to a national government, usually conducts exporting in terms of logistics and sales transactions. However, export and import levels may be highly influenced by government policies, such as offering subsidies that either restrict or encourage the sale of particular goods and services abroad. Certain exports, such as military technology, may be banned entirely, at least for certain recipients, in cases of trade embargoes or other government regulations (e.g., U.S. companies generally can't export to or import from Cuba). Exporting is just one method that companies use to establish their presence in economies outside their home country. Importing is the method used to acquire products not readily available from within the country or to acquire products at a less expensive cost than if it were produced in that country.

Countries may be in a favorable position to export for several reasons. A country may export goods if it is the world's sole supplier of a certain good, such as when it has access to natural resources others lack. Some countries are also able to manufacture products at a relatively lower cost than other countries, for example, when labor costs less. Other

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factors include the ability to produce superior quality goods or the ability to produce the goods in a season of the year when other countries need them.

SUGGESTION

Currency depreciation can solve the trade deficit problem

The answer is plainly no. A depreciation of the US dollar will not remove the trade deficits. In 1970s, one dollar exchanged for 360 Japanese Yen. Now, one dollar is worth for only around 100 Yen. In other words, Yen has appreciated 72%. Still, Japan runs a huge trade surplus with the US today.

Exchange rate is just one of the many factors that drive the trade balance between two countries. Differences in interest rate, savings,  growth rate, level of financial development (in terms of how easy to get access to consumer credit) all played a role.

Here I show a historical graph from St. Louis Fed, which looks at the relationship between trade-weighted dollar index (with major trading partners) and the US trade deficits. The green line is the dollar index (left axis), the higher the value, the more valuable the dollar. The red line is US trade deficits (right axis) in billions of dollars.

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As shown in the graph, from mid 1980s to early 1990s, the dollar index dropped (or depreciation) against major currencies by  over 40%, dropping from 150 to 85, and the trade deficits got eliminated.

Trade-balance shock is on the way

Undervalued currencies, he argued, are the equivalent of import tariffs and export subsidies, and should be no more acceptable than any other form of protection. Expressing the sentiment of many in the US he concluded: “Nicely, nicely isn’t working. Time to get tough.”

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Conclusion

In conclusion, we can say from start to end of this report we try to

discuss all aspects of BALANCE OF TRADE, means the factor which

involve in the BOT like trade surplus, trade defict and we can say also

When a company uses a home-based merchant or agent to find and

deliver goods to foreign buyers it utilizes indirect exporting. This

method of exporting poses the least amount of risk and expense

because it is relatively easy to start up and has a moderate up-front

capital investment. Indirect agents act as intermediaries between the

exporter and buyer and facilitate the flow of goods.

Importing products into countries is often dependent on what product,

commodity, or service is being imported. In the United States the

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Harmonized Tariff Schedule is the directory for determining

what if any tariff is imposed on the product in question. Importing into

any country should involve communicating with that country's

customs agency to determine the necessary licensing and logistics

issues. Often a customs broker is necessary to facilitate the smooth

transfer of goods and services between countries. Inherently,

importing involves exporting from one country; thus many of the

issues involved in exporting are relevant and necessary for importing

goods and services.

REFERENCES

WHAT IS BOThttp://en.wikipedia.org/wiki/Balance_of_tradehttp://www.investopedia.com/terms/b/bot.asp

INTRODUCTIONhttp://en.wikipedia.org/wiki/Balance_of_trade

HISTORYhttp://www.google.com.pk/#q=HISTORY+OF+BALANCE+OF+TRADE&hl=en&sa=N&biw=1020&bih=550&rlz=1R2ADFA_enPK399&tbs=tl:1&tbo=u&ei=MvzaTJL2N4WOvQPVw-CPCg&oi=timeline_result&ct=title&resnum=11&ved=0CGgQ5wIwCg&fp=21c59695f60729b7

http://www.jstor.org/pss/1928723

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