This document discusses Pakistan's economic structure and international trade theories. It provides details on: - Pakistan's transition from an agrarian to industrial economy from 1947 to present, with industry now accounting for over 20% of GDP. - Pakistan's major industries including textiles, chemicals, food processing, and its reliance on foreign donors for economic development. - Five major international trade theories: mercantilism, absolute advantage, comparative advantage, factor proportions, and product life-cycle theories. Each theory explains patterns of trade based on factors like accumulated wealth, production efficiency differences, resource endowments, and stages in a product's development.

1. Lecture No: 08
Course Facilitator: Khurshid Alam Swati
University of Swat, Swat
Email your query to:
Khurshidalamswati@yahoo.com
Economic Structure &
Trade Theories

2. Economic Structure
The main source of income in a town or city
(National) it is used to determine the growth rate of
a cities economy (National)
The economic structure of an economy is a function
of the sum of all the different economic activities in
the geo-political boundaries of that area
The major features of a country or region's economy,
including what and how much it produces and trades,
and how it spends its income
2© Khurshid Alam Swati

3. Pakistan Economic Structure
Pakistan was an agrarian economy in which a
small number of powerful landowners with
large holdings dominated the countryside
West Pakistan forced farmers to rely on the
extensive irrigation system developed by the
British
Indus water disputes
Pakistan had almost no industry in 1947
3© Khurshid Alam Swati

4. Pakistan Economic Structure (Cont’d)
Energy sources were rudimentary, with wood
and animal dung furnishing the bulk of the
energy consumed. Ports, transportation, and
other services, such as banking and
government, were underdeveloped
Despite formidable problems, Pakistan
achieved rapid economic expansion. From FY
1951 to FY 1986, the GDP growth rate
measured at a constant FY 1960 factor
averaged 5.2 percent.
4© Khurshid Alam Swati

5. Pakistan Economic Structure (Cont’d)
Floods in 1992
A substantial industrial base was added as
industry (including mining, manufacturing,
and utilities) became the fastest growing
sector of the economy
Industry's share of GDP rose from 8 percent
in FY 1950 to 21.7 percent in FY 1993
Various services (including construction,
trade, transportation and communications,
and other services) accounted for the rest of
GDP. 5© Khurshid Alam Swati

6. Pakistan Economic Structure (Cont’d)
The economy of Pakistan is the 26th largest in the
world in terms of purchasing power parity (PPP),
A population of over 183 million (the world's 6th-
largest)
Pakistan ranks as the 15th largest trader of goods in
the world
While it is the worlds 6th largest trader of services
Major industries includes textiles (garments, bed
linen, cotton cloth, yarn), chemicals, food processing
(mainly sugar, salt, wheat, rice, fruit), agriculture,
fertilizer, cement, dairy and rugs
7© Khurshid Alam Swati

7. Pakistan Economic Structure (Cont’d)
Pakistan's economic progress has been impeded by
internal disputes and its long confrontation with India
within the country for many years. The country's
decades-long battle with India over territorial
disputes had choked up large military spending,
resulting in huge nation debt burden.
Pakistan's weak economy also depends heavily on
foreign donors, such as the World Trade
Organization, IMF, World Bank, and countries like the
US. For instance, the US have reduced Pakistan's
bilateral debts by 1 billion in 2003, and a further 500
million in 2004. Pakistan also receives US$2.11 billion
in aid from its ally countries 8© Khurshid Alam Swati

8. International Trade Theories
1. Mercantilism
2. Absolute advantage
(Classical)
3. Comparative advantage
4. Factor Proportions Trade
5. International Product Cycle
4-9

9. 1. Mercantilism: Mid-16th Century
Mercantilism is a philosophy from about 300 years ago
The base of this theory was the “commercial revolution”,
the transition from local economies to national
economies, from feudalism to capitalism, from a
rudimentary trade to a larger international trade
The theory states that the world only contained a fixed
amount of wealth and that to increase a country wealth;
one country had to take some wealth from another,
either through having a higher import/export ratio.
This tendency, to export more and import less and to
receive in exchange gold (the deficit is paid in gold) is
called mercantilism
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10. Mercantilism (Cont’d)
Trade theory holding that nations should accumulate
financial wealth, usually in the form of gold (forget
things like living standards or human development)
by encouraging exports and discouraging imports
Their policy was to export in the countries that they
controlled and not to import (to have a positive
Balance of Trade)
A nation’s wealth depends on accumulated treasure
 Gold and silver are the currency of trade
Theory says you should have a trade surplus.
 Maximize export through subsidies.
 Minimize imports through tariffs and quotas 4-11

11. 2.Theory of Absolute Advantage
The principle of absolute advantage refers to the
ability of a party (an individual, or firm, or country) to
produce more of a good or service than competitors,
using the same amount of resources - labor as the only
input
Adam Smith (1776) argued:
 Capability of one country to produce more of a
product with the same amount of input than another
country – Done through Management
 A country should produce only goods where it is most
efficient, and trade for those goods where inefficient
4-12

12. Theory of Absolute Advantage (Cont’d)
Adam Smith’s theory starts with the idea that export
is profitable if you can import goods that could satisfy
better the necessities of consumers instead of
producing them on the internal market
Trade between countries is, therefore, beneficial
One country would have an absolute advantage over
the other if it can produce same amount of goods
with fewer resources
4-13

13. 3.Theory of Comparative
Advantage
Refers to the ability of a party to produce a
particular good or service at a lower marginal and
opportunity cost over another
Extends free trade argument
Makes better use of resources
Trade is a positive-sum game
 Abundant, low-cost labor in China
 Mass of IT workers in India
 Oil in Saudi Arabia
 Abundant agricultural land in Pakistan
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14. 15
Limitations of Early Trade Theories
Do not take into account the cost of international
transportation
Tariffs and import restrictions can distort trade
flows
Scale economies can bring about additional
efficiencies
When governments selectively target certain
industries for strategic investment, this may
cause trade patterns contrary to theoretical
explanations
Today, countries can access needed low-cost
capital in global markets
© Khurshid Alam Swati

15. 4. Factor Proportions Theory
Countries produce and export those goods that
require resources (factors) that are abundant (and
thus cheapest) and import those goods that require
resources that are in short supply
 Pakistan - ????
Export goods that intensively use factor endowments
which are locally abundant
Import goods made from locally scarce factors and
exports goods that are abundant
Patterns of trade are determined by differences in
factor endowments - not productivity
Examples:
 China and labor
 USA and pharmaceuticals
 Canada and electric power
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© Khurshid Alam Swati

16. 5. Product life-Cycle Theory
The theory suggests that early in a product's life-cycle all the
parts and labor associated with that product come from the area
in which it was invented. After the product becomes adopted and
used in the world markets, production gradually moves away from
the point of origin
In some situations, the product becomes an item that is imported
by its original country of invention
A commonly used example of this is the invention, growth and
production of the personal computer with respect to the United
States
A company will begin by exporting its product and later undertake
foreign direct investment as the product moves through its
lifecycle
Affects the direction and flow of imports and exports
4-17© Khurshid Alam Swati