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    AlFALAH INSTITUTE OF BANKING

    FINANCE

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    Balance Of Payments:

    The system of recording the countrys economic transactions

    for a given period of time. It includes the transactions of both the goods and services in

    the economy.

    Balance of trade:

    BOT is the difference between the values of exports and imports of only physical items

    (goods) of a country during a given period of time (usually one year).

    Difference between BOT and BOP:

    1- Definition

    Balance of Trade (BOT) Balance of Payment (BOP)

    BOT is the difference between the values

    of exports and imports of only physical

    items(goods) of a country during a given

    period of time (usually one year).

    BOP is the difference between the values

    of exports and imports of both visible and

    invisible items (goods and services) of a

    country during a given period of time

    (usually one year).

    2- Surplus or Deficit

    Balance of Trade Balance of Payment

    If the value of visibleexports is greater

    than value of visible imports, the balance

    of trade is said to be favourable and vice

    versa.

    If the value of the total receipts is greater

    than the total payments, the BOP is termed

    as favourable and vice versa.

    3- Goods and Services

    Balance of Trade Balance of Payment

    It includes only (visible) goods.

    It includes both (visible and

    invisible) goods and services.

    4- Revenue and Capital

    Balance of Trade Balance of Payment

    It includes all revenue receiptsand

    payments on account of imports and

    exports.

    The BOP includes all revenue and

    capitalitems.

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    5- Relationship

    Balance of Trade Balance of Payment

    The BOT does not include the BOP. It is

    thepart of BOP.

    The BOP includes BOTalso. Accordingly,

    it is equal to the BOT plus import & export

    of services.

    6- Economic Position

    Balance of Trade Balance of Payment

    It does not show the actual economic

    position of a country.

    Balance of payment shows the real

    economic position of a country.

    Theory of balance of trade:

    The policies of Early Modern Europe are groupedunder the heading mercantilism. Early understanding of the imbalances of trade due tothe mercantilism in which colonial America's natural resources and cash crops wereexported in exchange for finished goods from England, a factor leading to the AmericanRevolution. An early statement appeared in Discourse of the Common Wealth of thisRealm of England, 1549: "we cant buy more from a country then we sell it for so shouldwe impoverish ourselves and enrich them. So a proper explanation of balance of tradetheory by Thomas Muns1630 "England's treasure by foreign trade, or, the balance of our

    foreign trade is the rule of our treasure

    The balance of trade contain on current account, which also includes other transactions

    such as income from the abroad as well as international aid.

    Trade Balance:

    The trade balance of a country reached at equilibrium

    point when the income of the residents of thecountry earn from exports is equal to the

    income of its residents pay to other countries for imports.

    Exports (X) = Imports (M)

    Cash inflow = Cash outflows

    Trade surplus:

    When the revenue from exports of the country are greater than its spending on imports

    i.e.

    Exports > Imports

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    Cash inflows > Cash outflows

    Trade deficit:

    When the spending of a nation on imports is greater than the spending on its exports i.e.

    Exports < Imports

    Cash inflows < Cash out flows

    New Trade Theory:

    (NTT) is the important theory which mostly focus on high returns.

    New trade theory urge to earn maximum returns. They urge to establish big companies bytaking protecting measures, these measures is helpful to existing in the market.

    The Theory's Impact:

    There is nothing important in the new theory except 'infant industries' (an idea offered intheory since the 18th century, and in trade policy since the 1880s. but the question isarises that what is new in the new theory? The answer is that in new theory, it provideprotection against different problems.

    New theory was technical and specialized in type. The story of path-dependent industrialconcentrations can sometime lead to monopolistic competition or even situations ofoligopoly.

    This theory encourage the free trade. Japanese companies were encouraged to import

    foreign production technology but they were required to produce 90% of technologicalparts domestically within five years. It is observe that the shortest compensation of theJapans consumer become more profitable for long term.

    The purpose of trade theory:

    The first purpose of the trade theory is that to know the characteristics of the trade of a

    country. We can easily analysis the commodity of a country. The market of the country

    become easily accessible.

    It became easy to judge the effect of the trading on the economy of a country.

    Another purpose is to analyses the different kinds of policies. Here the important point is

    that most trade theory is based on neoclassical microeconomics, which assumes a world

    of atomistic individual consumers and firms. The consumers pursue happiness

    (maximizing utility) and the firms main object is to earn the maximum profits, with

    the help of perfect information, perfect competition, and so on.

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    Varieties of Theory:

    Neoclassical theory is the simplest theory. It has been assumed that there is only two

    countries one is imported country and other is exported country. And it also assumed that

    there is only two commodities which come into the trading. If there is involve a large

    number of countries than trading will become difficult

    Another feature of this theory is that firm always make production in perfect competition.

    Firm cant be competitive if it hold by small producers. In 1920s, Joan Robinson told the

    effect of firm if it is not working under the perfect competition, its per unit cost will be

    increases, even in big firms the per unit cost is always little Neoclassical model is the

    simplest model among other models. This model represented by English economist Dived

    Richard in the early 1800s. It was simple because he said that there is only one factor of

    production labor.

    There are a large number of theories, every one provide different results. But economistmostly focus on that theory which provide high and continuously production.

    Terms and Conditions of Trade:

    Here are some terms and conditions of trade which are given below:

    1. Orders:

    Orders will be on such forms as the Vendor may require from time to time.

    2. Acceptance:

    Each Order shall constitute acceptance by the Customer of these Terms and

    Conditions of Trade.

    3. Prices:

    All prices quoted are based on New Zealand currency. Prices are subject to change

    without notice. All Orders will be charged at prices prevailing at the date of each Order.

    Unless otherwise stated all prices quoted are in New Zealand dollars and are exclusive of

    Goods & Services Tax (GST).

    4. QUOTTA:

    It means the quantitative restrictions on the trade. If the restrictions are greater than

    the balance of trade will suffer a lot and it will be unfavorable.

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    5. TARIFF:

    It means the taxes on the goods. It is of two types Directand Indirect. Direct means

    the taxes on the goods which are imported and exported. Indirectrefers to the sales tax

    on those goods which imported from other countries.

    Factors affecting BOT

    Cost of production:

    If cost of goods produced in the economy is high then will toward the highprices for those commodities. In this way the inflation will be in the country andour currency will be devalued and as a result we will receive less payments if weexport those commodities due to the devaluation of currency and our balance oftrade will be deficit.

    Raw materials intermediate goods and other inputs:

    If the raw material is available in the country on high prices then it willincrease the prices of the goods produced in the country and which will affect thecountrys balance of trade.

    Exchange rate movements:

    It also a factor for the deficit of the balance of trade in Pakistan becausenow a days 1$ is equal to 100Rs which is a good strategy for exports but inPakistan the imports are greater than exports so it goes against our economy.

    Taxes or restrictions on trade:

    As we know that there are a lot of taxes on the goods imported andexported in the form of custom, excise duties, toll taxes, sales taxes etc. whichincreases the prices of the commodities and inflation occurs in the country whichaffects the balance of trade of the country.

    Adequate foreign exchange:

    This means that the foreign exchange rate is also a cause of the deficit inthe balance of trade. Like 1$ = 100RS this gap increase the payments of importsand decrease the payment of exports.

    Inflation:

    Inflation means the prices are high and the currency is devaluating. Thegap between the rupees and dollars increases as a result our balance of trade is indeficit.

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    Government policies:

    Monetary and Fiscal policies are the policies to improve the economicconditions of the country. But these policies are not performing such functions soas a result our economy is facing a situation of deficit trade. The reason is this thatthe revenues are less then expenditures.

    Political Instability:

    It is a major factor for deficit of balance of trade because the spending iswasted when a new Government comes into power. So it rejects the projectsstarted by the previous Government so a lot of capital is wasted.

    Some important benefits of International Trade:

    Enhances the domestic competitiveness

    Due to the international trade investors try to produce high quality of products and try

    to complete and beat each other.

    Takes advantage of international trade technology

    When we trade with other countries we avail the opportunity to utilize the technology

    in better way of other countries.

    Increase sales and profits

    Every country which have competitive advantage in producing a thing, it produce

    only these goods and earn profit from trading.

    Extend sales potential of the existing products

    Some goods have low domestic demand but it have high demand in other

    countries, in this way we secure our product from spoiled.

    Maintain cost competitiveness in your domestic market

    Due to international trade we can increase our supply of product. We can not only

    seell our product in domestically, we can also sell them in other countries. In this

    way the prices of our product remain maintain.

    Enhance potential for expansion of your business

    Some investors have huge amount to invest, they can establish big businesses in

    nationally and internationally. So when we are free in trading with other countries

    we can expand our business over the see

    Reduce dependence on existing markets

    Through the international trading we can access global market and increase the

    demand of our commodity in other countries. We do not depend on existing

    market,

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    Increase/Decrease in Exports and Imports of Pakistan

    Exports up 4.26%, imports down 2.37%

    The exports from the country witnessed positive growth of 4.26 percent while the importsdecreased by 2.37 percent during the first quarter of the current fiscal year, indicating a

    positive trend in the overall trade volume of the country.

    Exports of Pakistan:

    Exports from the country during July-September 2012-13 were recorded at $6.187

    billion against the exports of $5.934 billion during the same period of last year, according

    to the data of Pakistan Bureau of Statistics (PBS).

    Exports in Pakistan decreased to 179817 PKR Million in February of 2013 from 197202

    PKR Million in January of 2013. Exports in Pakistan are reported by the Pakistan

    Bureau of Statistics.

    Major export items:

    Cotton and knitwear (28 percent of total exports);

    Bed wear, carpets and rugs (8 percent) and rice (8 percent).

    Others include: leather, sugar, cement, fish, sports goods, raw material fruits, vegetables

    and pharmaceutical exports.

    Main export partners are:

    Country name %age of totalexport

    United states 15 %

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    United Arab Emirates 10 %

    Afghanistan 9.5 %

    China 9 %

    United Kingdom 3 %

    Germany 2 %

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    TableMillion $

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    Classification of Exports:

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    Imports of Pakistan:

    On the other hand, the imports into the country decreased from $11.117 billion last year

    to $10.853 billion during the current fiscal year, the data revealed. Based on these figures,

    the overall trade deficit has been recorded at 9.97 percent as it reduced from the deficit of

    $5.183 billion last year to $4.666 this year.

    Imports in Pakistan decreased to 331465 PKR Million in February of 2013 from 366823

    PKR Million in January of 2013. Imports in Pakistan are reported by the Pakistan Bureau

    of Statistics.

    Major imports of Pakistan:

    Pakistans imports are also highly concentrated in few items namely, machinery,

    petroleum and petroleum products, chemicals, transport equipment, edible oil, iron and

    steel, fertilizer and tea. These imports accounted for 73% of total imports during 2006-07.

    Among these categories machinery, petroleum/petroleum products and chemicalsaccounted for 53.4% of total imports.

    Main imports %age of total

    imports

    Fuel 40

    machinery and transport equipment 18

    Chemicals 16

    food and animal or vegetable oils 13

    manufactured goods 12

    Main import partners:

    Country name %age of total

    imports

    United Arab Emirates 17

    China 15

    Saudi Arabia 11

    Kuwait 9

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    Table Million $

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    Classification of Imports:

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    ROLE OF WTO IN THE INTERNATIONAL ECONOMY

    WTO is successor of the General Agreement on Tariffs and Trade (GATT) signed in Geneva in

    1947.

    Importance of GATT

    GATT, the multilateral Agreement, under which rules of fair international trade were

    established, was in force since 1948. It was also used as international forum for negotiationss on

    abolition of trade barriers, that envisaged abolition of quotation of import and export

    (quantitative restrictions) and significant reduction of tariffs.

    Importance of GATT is especially evident in the historic aspect. In 1930th, increasing of number

    of trade barriers led to reduction of international trade resulted in the great depression and

    world economic crisis of 1930th that in its turn appeared a reason of start of the II World War.

    Establishment of international trade organization was the best guarantee for avoidance of

    uncontrolled protectionism and its negative consequences.

    Principles of GATT

    Basic principles of GATT are:

    - Trade without discrimination that envisages providing by the Member States of the most

    favoured nation treatment, and providing of equal rights and obligations to the imported and

    domestic goods.

    - Integration of the countries to the international market and joint planning of development

    of international trade on the base of both multilateral and bilateral agreements.

    - Encouraging of fair competition on the basis of mutual compromise.

    - Settlement of disputes through negotiationss and consultations, and if it is impossible,

    settlement of disputes by relaying on decisions of special bodies of the GATT.

    - Primary use of tariff methods of protection of domestic market instead of establishment

    of quantitative restrictions and other technical barriers.

    - Ensuring of predictable and transparent trade policy of each parties.

    World Trade Organization

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    As it has been already mentioned, transformation of the GATT into WTO on 1 January 1995

    was one of the main results of the Uruguay round. WTO is the organization of the Member

    States, while GATT represented only multilateral agreement between the parties thereof.

    Nowadays, WTO includes 149 full members.

    Share of the Member States to WTO in the international trade exceeds 95%.

    Basic functions of the WTO

    the basic functions of the WTO are:

    - Elaboration of the legal basis for management of the current trade barriers and for

    elimination of discrimination in the international trade;

    - Management of the process of multilateral trade negotiations;

    - Settlement of international disputes related to trade;

    - Supervision of the trade policy of Member States to WTO;

    - Cooperation with international organizations determining the world economic policy.

    Balance of trade equilibrium:

    The trade balance of a country reached at equilibrium point when the income of the

    residents of thecountry earn from exports is equal to the income of its residents pay to

    other countries for imports.

    OR

    The balance of trade equilibrium (BTE) is also defined as a condition when tradingamong different countries is such that the trading partners would generally remain debtfree from one another over a sound number of years. In other words, the value of acountrys imports would be equal to the value of its exports.

    Current Balance of trade of Pakistan:

    Pakistan is a member of the World Trade Organization, and has bilateral andmultilateral trade agreements with many nations and international organizations of theworld.From the past few years Pakistan faces imbalance in its trading activities. The exports are going

    to decline as compare to imports which are increasing day by day and the result is trade deficit.

    Fluctuating world demand for its exports, domestic political instability, and the impact of

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    Causes of disequilibrium in trade:

    Here are some causes of imbalance of trade in Pakistan which are given below:

    High Level of Consumption:

    Developing countries are mostly consumption oriented. Due to this reason most ofthe goods which are produced within country are consumed locally. The exportablesurplus is on the decline.

    Variations in Agriculture Productivity:

    There may be temporary disequilibrium caused by random variations in trade due

    to seasonal fluctuations, the effects of weather on agriculture production etc. Deficits inbalance of trade due to variations in trade are expected to correct with in short time.

    o Export of semi-manufactured goods or raw material:

    Developing countries like Pakistan are exporting primary or semimanufactured goods like cotton and rice. These commodities do not get highprices in the international market. Near about 40% of total earning of foreignexchange is had by the export of primary or semi-manufactured goods.

    o Un-favorable terms of trade:

    In developing counties like Pakistan the import unit values are higher thanexport unit values. So a decline in terms of trade causes imbalance in the balanceof payments.

    o Unfavorable attitude of developed countries:

    Due to unfavorable altitude of developed countries our balance of paymentis unfavorable. For example the developed countries like U.S.A. and U.K. haveput many restrictions on imports from Pakistan. They have fixed quotas againstthe cloth of Pakistan.

    o Import of Capital Goods:

    Developing countries like Pakistan are importing capital goods toindustrialize the economy. Due to this reason balance of trade remainsunfavorable.

    o Inflation:

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    Inflation :

    Inflation negatively affect our both BOT and BOP because when

    inflation occurs in our economy it become the cause of devaluation of money.

    GDP:

    GDP directly relate with our BOT. when our GDP is growing it mean

    our economic cycle is on the boom. It shows we are producing a large number

    of goods and services.

    Exchange rate:

    When our exchange rate is high we can purchase foreign goods on low

    prices.

    Foreign economic assistance:

    If developed countries properly assist the developing and under

    develop countries this will be helpful in balance of trade.

    INTERNAL SPECIFICATION OF AGRI AND NON AGRI SECTORS

    OF PAKISTAN

    Economy of every state depends on three sectors i.e. agriculture, industry and

    commerce. These three are interrelated with each other as the progress or retrogress of

    one sector effects the other two. Pakistan is an agricultural state thus agriculture gains are

    of much importance than any other sector. Importance of this sector is manifold as it

    feeds people, provides raw material for industry and is a base for foreign trade. Foreign

    exchange earned from merchandise exports is 45% of total exports of Pakistan. It

    contributes 26% of GDP and 52% of the total populace is getting its livelihood from it.

    67.5% people are living in the rural areas of Pakistan and are directly involved in it.

    There are two crops in Pakistan i.e. Rabi & Kharif.

    Crop | Sowing season | Harvesting season

    Kharif | AprilJune | OctDec

    Rabi | OctDec | AprilMay

    Major crops of Pakistan are wheat, rice, maize, cotton and sugar cane. These majorcrops contributed 7.7% last year against the set target of 4.5%. Minor crops are canola,

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    onions, mangoes and pulses which contributed 3.6% as there was no virus attack lastyear. Fishery and Forestry contributes 16.6% and 8.8% respectively. Though theagricultural sector is facing problems in Pakistan yet the major chunk of money comesfrom this sector. There is no denying the importance of agriculture in strengthening thenational economies of agrarian countries like Pakistan. It has been the subject ofacademic discussion among the classical economists especially David Ricardo whobelieves that the role of food supply is crucial in determining economic growth.

    Historically agriculture has played key role in achieving economic development.According to academicians, economic development is a complex process oftransformation involving a mix of factors. Rather than canceling each other, bothindustrialization and agriculture complement the process of development. Industrial-urban development is premised on the use of state-of-the-art technology, entrepreneurialskills and capital accumulation. This development directly or indirectly transformsagriculture. At the same time, industrialization further creates the demand for wage goodsor food commodities. Growth in population builds up pressure on food supply thuspaving the way for diversification and specialization in agriculture. A different reasonwhy trade is beneficial is because it makes accessible to national consumers andproducers an array of goods and services that would not be available otherwise. Since

    these include consumer goods as well as capital goods and inputs, trade favors bothdomestic consumers and the development of the domestic production capacity.

    Diversity refers to the availability of goods that cannot be produced in the country or

    could only be produced under very special and expensive conditions (e.g. mangoes in

    Scandinavia). It also refers to different types or brands of goods actually produced in the

    country (e.g. different types of apples, motor pumps or meat cuts) or goods which are not

    produced in the country but could eventually be produced there with acceptable costs.

    Through product differentiation countries do not need to either fully specialize in

    industries where they have a comparative advantage or totally abandon industries where

    they do not; they can specialize in industrial niches (e.g. different makes of cars) andcarry out mutually beneficial trade in niche products of industries where trading partners

    also operate. Intra-industry trade of this kind is common in consumer goods industries,

    but is less characteristic of trade in agricultural products because of the importance of

    natural resource endowments and their greater homogeneity.

    Measures/steps taken by the government regarding exports and imports

    The following measures have been taken during 2011-12 in the import / exportregime, through Amendments in the Import Policy and Export Policy Orders:

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    Conclusion

    In this report we have covered the following topics. First we have seen the

    balance of payment. What is balance of payment? Then we have seen the balance of

    trade. What is balance of trade and how it is related with the economy. For this we have

    discussed the trade theories. In which old and new theories are discussed and their

    varieties. Then we discussed about the terms and conditions of the trade within and

    outside the country. These terms and conditions are helpful for the economy to generate

    the profit. Then we have discussed about the exports and imports and what are the results

    of exports and imports. Then we have seen the equilibrium of trade and what are its

    benefits and what are restrictions, welfare and losses of balance of trade. Then we have

    covered the internal specialization means from which we can make our economic

    conditions and our balance of trade better.

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    We have concluded from all these topics that our balance of trade should be

    balanced because it helps in stabilizing the economic conditions. Currently our balance

    of trade is facing the deficit condition and that is the cause of following problems like

    high taxes, low investment, devaluation of currency, high prices, unemployment, etc. in

    the last there are recommendations and suggestions to solve these problems and how we

    can make our balance of trade balance and favorable for the economy.

    Recommendations/ Remedial Measures:

    There are some recommendations and suggestions to improve the trade deficit ofthe Pakistan.

    1. Brain drain:

    A lot of people who get higher education from our country but due to lowemployment opportunities they prefer other countries for job instead of Pakistan.No doubt they are our precious assets so we should provide job opportunities forthem in industries and other sector. As like in china they produce jobopportunities for their students before completing their degree by buildingindustries etc.

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    2. Privatization:

    Our big sector like steel mills, PIA and railways are going in losses frommany previous years. We should privatize them in this way we can make hugeprofits. PIA and railways are also helpful in our export and import.

    3. Black money:

    Black money is crucial problem in our country. People earn money fromdifferent illegal resources and then convert it into the white money but this moneydo not include in the GDP it also devalue our money which affect our balance oftrade because we have to pay more for our imports but our money is limited.

    4. Per capita income:

    In our country the ratio of employment is very low due to joint familysystem. So other family members rely on one person. So government shouldimplement such policies which create job opportunities as well as complete to

    everyone even he is old or young as like china did.

    5. Research and development sector:

    We must concentrate on our research and development sector. In ourcountry this is the sector which is prey to victim of negligence. We should devotea specific percentage our budget on research and development. So that it will behelpful in promoting technology. We must establish separate research anddevelopment departments on our Universities and other education institutes.

    6. Government tenure

    There should be political stability in the country so that the trade should bein balance or in the favor of the economy. The duration of the Government shouldbe more than the 5 years. It should be 15 to 20 years. In this way when a personcomes in power he will work for the betterment of the economy because he knowsthat he is in power for longer period so he will implement new policies and thosepolicies will be change the countrys future.

    7. Availability of raw materials:

    There should be such policies implemented which increases the

    production and new methods should be used like High Yield Varity of Seed.Inthis way the production will increase and then it should be utilized to producefinished goods and those goods should be exported to other countries in this waythe Balance of Trade will be favorable. The irrigation is also a problem in rawmaterials creation. Modern techniques of irrigation can solve the problems ofirrigation in Pakistan. This includes drip irrigation and sprinkle irrigationmethods. By using this technique the farmers can save a huge sum of moneywhich he pays for irrigation through tube wells and tractors. More dams should be

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    but also the people of the country. New machines and technology should be

    implemented to increase the production of the country.

    13.Produce Imports Substitute:

    We should utilize our resources in better way so we can produce value

    added goods. Because of this we can decrease the demand of foreign goods and

    the negative effect in BOT will be compensated. For example our country is rich

    in natural resources like a huge oil reservoir in Baluchistan if we utilize them in

    better way we can decrease our import of oil and can balance our trade.

    14.Produce Quality Products:

    According to a survey about 60 products in Pakistan which can become

    international brand like handicrafts. By doing little effort we can convert our

    domestic products into international product and can earn more rather than from

    selling in our domestic territory. By this our exports will be increased.

    15.Good Infrastructure

    To make the BOT favorable, our infrastructure should be good. If

    infrastructure is good our transport system will be better and delivery will be easy.

    If we have proper warehouses we can store our precious goods in them for long

    time and when we see that the demand for our goods are high than we can sell

    them on high profit

    16.Interest rate

    Interest rate decrease, investment increase, new industries will be opened,

    production will be increase, export will be increase and BOT will befavorable.

    Interest rate decreases, foreign investor will be attract and export will be

    increase and BOT will be favorable.

    17.Taxation

    Direct tax decrease, excise duty decrease then foreigner will have to payless, and export will be increase and BOT will be favorable.

    Indirect tax decrease, price decrease, demand increase and export will be

    increase and BOT will be favorable.

    18.Encourage Foreign Investment:

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    We should encourage investor nationally as well as internationally. We

    should provide them incentives like we should impose low tax in corporate sector.