• FOREIGN TRADE & BALANCE OF PAYMENTS

Foreign trade is the exchange of goods and services between different countries.

Balance of Payment is the record of a nation’s international transactions.

Assume that the exchange rate is Rs. 10 for $ 1.

Suppose a Pakistani based firm sells cotton worth Rs. 50,000 / $5000 to an American company.

Pakistani exports create a foreign demand for rupees

Satisfaction of this demand generates a supply of rupees.

Financing of this Pakistani export (American import):

Reduces the supply of money (demand deposits) in America

Increases the supply of money in Pakistan by the amount of purchase

Suppose a Pakistani based firm buys 2 computers from an American company.

One computer costs $5000 (Rs. 50000), hence two would cost $ 10000 (Rs. 100000).

Pakistani imports create a domestic demand for f

On the contrary if a MNC buys land in Karachi to set up a factory, or Americans purchase stocks or bonds of a Pakistani company, this would generate supplies of foreign currency into Pakistan. They are thus credit or inpayment items and are shown with a plus (+) sign.

Balance of payments is the record of a nation’s international transactions, it includes both credits and debits. It can be referred to as the Balance Sheet of the country.

As can be seen, the equilibrium rate for the exchange rate is $1.50 for a rupee. At $2.00, the rupee supply, or imports and capital outflows exceeds the demand created by exports and capital inflows by the distance AB. To maintain this rate, the Pakistani government would have to intervene, buying up excess Pakistani rupees from the market. It would be able to buy the rupees by dipping into its international reserves. If it can not afford to do so, then the exchange rate would settle at its equilibrium level of $1.50.

Some topics in this essay:
Exchange Rate, Rate Systems, Bank Pakistan, CAPITAL ACCOUNT, Pakistan Pakistani, INTERRELATIONSHIP ACCOUNTS, SURPLUSES Persistent, Net Exports, Suppose Pakistani, Balance Trade, exchange rate, balance payments, net exports, foreign exchange, current account, capital account, official reserves, foreign currency, foreign exchange rate, foreign trade, real income, current account deficit, real income net, real exchange rate, net investment income,