Prepared For:

Ma’am Hina Amir

Prepared By:

 Gufishaa (FA20-BBA-001)
 Amna Karim ( FA20-BBA-136)

TRADE DEFICIT  Emaan Umair (FA20-BBA-038)

 Shiza (FA20-BBA-062)
Project Work
SECTION-A
SUBJECT: Macro-Economics
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Trade Deficit

Introduction
The trade deficit is an amount by which the expenses of the countries Imports
exceeds its actual fares. It is a contrast between how much a nation imports
and how much it exports. You can ascertain a trade deficit by deducting the
complete worth of a nation's fares from the absolute value of its imports. In the
short run, a negative equilibrium of trade checks expansion. Enormous
dependence on imports additionally leaves a country defenseless against
financial declines. It's a single direction of estimating worldwide trade, and it's
likewise called a negative equilibrium of business. Turned out badly, they can
damage work advertises and cause issues of reserve funds and investment. In
any case, a substantial trade deficit debilitates homegrown businesses over the
long run and diminishes open positions. When done right, they can let
exchanging accomplices represent considerable authority in their qualities and
make abundance for all purchasers.

After some time, financial backers could see the decrease in spending on
locally created products harming homegrown organizations and their stock
costs. As a nation imports a more significant number of products than it
purchases locally, at that point, the country of origin may make fewer
positions in specific enterprises. It additionally tallies travel, admissions, and
other traveler transportation tolls bought while voyaging. Subsequently,
financial backers could encounter more irregular venture openings locally and
put resources into more positive freedoms in foreign securities exchanges. The
outcome would be a lower economic exchange as financial backers sell locally
held stocks and sending capital streams abroad. Over the long haul, a trade
deficit can cause more rethinking of occupations to different nations. It can
likewise decrease the danger of expansion since it makes lower prices. Also, if
a country is sending out more, those ventures are selling more merchandise
worldwide, which can prompt an ascent in the securities exchange.
Subsequently, a trade deficit could exist together during seasons of monetary
development and a rising securities exchange.
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Causes of Trade Deficits:

A trade deficits occurs when countries have no capacity to produce a basic
goods and services for their peoples and they import many things to produce a
thing for example raw material, machinery parts, oil, electrical equipment’s,
iron and steel etc. when countries import all these things from foreign
countries through sea so shipping charges are very high and the cost of
manufacturing a thing is increase. So when import is increase than export
countries face trade deficits.

 More government spending:

If country spending more money than their savings, it produce a trade deficits
and reduces the nation saving rate. So countries borrowed a money from
foreign countries it decrease the value of their currency.

 Reduced the country GDP:

If the domestic consumer spends more money to purchase a foreign thing it
increases the imports of the country. So the annual income of country
decrease that make it difficult to save money therefore trade deficit is increase
and GPD decrease.

 A country's inability to produce some goods:

When countries are not willing to produces high quality products and their
prices are high as compare to foreign products because foreign material is
cheaper and have lower foreign wages and lower foreign capital costs. So
domestic consumers preferred to purchase a foreign products that’s why
exports are low and import is high that create an account of deficit.

 Domestic companies:
When domestic company manufactures a lot of its products in other countries
because they bare a low cost of production that’s why country nation income
decrease and produce a trade deficit.

 Inflation:
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Rising inflation because local goods and services price increase and not have
good quality so domestic consumer buy thing from foreign countries create an
account deficit.

 Rise in oil prices:

When oil price increase the trade balance and national income is decrease and
trade cost high mean huge cost payments required for imports and increases
the trade deficit in an economy.

 Political instability:
If there is political stability in the country than foreign as well as local investor
shows lack of trust for investment in country. It creates a trade deficit in the
economy.

 Limited foreign trade:

When the internal resources are not enough to produce a high quality product
than foreign investor are not invest in the economic growth of the country
that’s produce a trade deficit.

 Competition:
When government signs a new trade deal and reduces tariffs than it creates
competition. Foreign imports become cheaper and much more competitive.
That’s produce a trade deficit.

IMPACTS OF TARDE DEFICIT

Increasing trade deficits reduce national savings. It has impacts on a country’s
currency and lowers the value of its goods and services, overall disrupting the
economy.

IMPACT ON CURRENCY
According to classic theory, countries who face trade deficit will see their
currency weaken, and similarly those with a trade surplus enjoy a strengthened
currency. Under all normal market conditions, countries definitely face trouble
with their currency weakening. What happens when a currency weakens is, for
example, a Pakistani ruppee exchanges for less of other currencies. As a result,
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the Pakistani ruppee will buy fewer goods. A weakened currency makes a
country’s exports cheaper and its imports even more expensive.

IMPACT ON EMPLOYMENT
Trade deficits also have depressing effects on wages, in many ways, disrupting
a nation’s economy. People who become unemployed and lose jobs do not
affect the unemployment rate in the long run, but trade and its jobs do make up
for a lot in the composition of a nations employment. Why it does not affect
too much is because demand in other countries for more workers increases to
meet their increasing exports. Unemployed people are hired by foreign
companies which creates offset for the trade deficits. This is known as
outsourcing of jobs. However, outsourcing of jobs can also adversely effect a
nation through brain drain.

POSITIVE IMPACTS
Where there are so many adverse effects of trade deficit on the economy, it
also has some positive impacts.

IMPACT ON PRODUCTIVITY
A positive impact of trade deficits on a country is that it increases its domestic
production. A country dealing with trade deficit can buy fewer or no goods
from those it has a deficit with. This results in that country encouraging their
own domestic production which could boost their economy. Another reason
for a country to work on their domestic production becomes the increased
demand from foreign countries because of lower prices due to the weakened
currency.

IMPACT ON INFLATION
A trade deficit could also improve a country and its nations living standard
and lifestyle. This will happen when people with lower incomes are able to
buy more goods and services on comparatively lower prices. Trade deficits
and the resultant lower prices become the cause of increased deflation in a
country.

Measures to Reduce Trade Deficit

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 Government takes direct control which aims at limiting the export.

 The government restricts the import of undesirable product by
leaving heavy imports duties etc.
 The government also imposes exchange control for dual purpose
motive.
1- To control foreign exchange rate.
2- To increase exports.
 Through active deal tactfulness administration is seeking to gets
enhanced request access for the immigrant businesses in transnational
requests by deciding free deal contracts and preferential trade
agreements with different countries.
 The leading business support institutions are being strengthened. Trade
Development Authority of Pakistan has been restructured Pakistan.
 Trade Development Authority of Pakistan is undertaking various
export promotional activities through trade exhibitions and delegation.
 Expenditures reducing policy designed to regulate demand and limit
payment on imports encouraging rising personal sector saving.
 Consume less and save more: If the government reduces consumption
(businesses save over they spend) imports will drop and fewer
borrowing from abroad are going to be needed to buy consumption.
 Depreciate the exchange rate. Trade deficit reversals are typically
pushed through extensive actual change fee depreciation. A weaker
dollar makes imports extra high priced and exports cheaper and
improves the alternative stability.
 The Texpo Pakistan has recently been held in Karachi for show casing
a large number of Pakistan’s textile products to foreign textile buyers.
 The availability of affordable finance for the export sector has
considerably improved which is helpful in reducing the trade deficit.
 A deficit is often financed by the capital inflows. If the domestic rate
of interest is above the world rate there will be capital inflows and
therefore the balance of payments deficit is corrected.
 Devaluation of rate of exchange makes export cheaper and imports
more expensive.
 Reduce domestic consumption and spending on imports e.g., tight
fiscal policy etc.
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“THE END”
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