The Role Of Global Trade In Small And Large Economies
Global trade is now an important phenomenon to small economies as well as large economies. Almost no country would be able to strive efficiently without trade. However, global trade can be more important to smaller economies as compared to larger economies due to several reasons. First, countries with smaller economies do not have enough resources to meet their needs, so there is a need to trade from the outside world. Countries with larger economies do not have much to worry about in this matter, because they have human capital, land, natural resources and capital in higher quantities as compared to countries with smaller economies.
For example, countries like Afghanistan, Malawi, Iraq, Zimbabwe, Ethiopia and so on are relying on imports to provide them with enough food supply as they themselves cannot produce their own food by themselvesIt can also be the case that countries with smaller economies do not have sufficient resources or the type of resources to produce a certain kind of good, so the product needs to be imported or the raw materials needed to produce that product needs to be importedFurthermore, smaller economies sometimes do not have comparative advantage nor absolute advantage, so they can get the goods from the international market at a lower cost than if they produce the goods themselves. This is called relative prices. If the difference between the relative prices in the world market and the relative prices prevailing in the home market is large, country tends to earn more from trade and vice versa. However, trade is also very important to countries with larger economies, because even larger economies cannot produce all the goods they need by themselves; they would have a comparative advantage in a few goods only.
So, the other goods which cannot be produced at home or are produced at a higher cost, even the larger economy would want to import the goods instead of producing it itself. For example, even United States, China, Germany and Japan need to import food from other countries to meet the requirements in their countries. A2. The European Union (EU) is one of the most important trading partners of Pakistan as Pakistan exports 23. 7% of its total exports to EU and Pakistan’s 12. 8% of the total trade is with EU (2015). Major exports of Pakistan to EU include textile, clothing, leather products and medical equipment while Pakistan mainly imports machinery and transport equipment from the EU. In 2016, EU was the largest export partner of Pakistan by absorbing $6. 92 billion worth of exports. Adding to this, Pakistan was granted the GSP (Generalized system of preferences) Plus status by the EU in 2013 allowing duty free access in 28 countries of European Union. The trading ties between Pakistan and EU are on the rise since then.
The GSP Plus status allowed around 78% of the Pakistani exports in the EU at preferential tariffs. The fact that Pakistan was only the second country in South and South east Asia to receive the GSP Plus status (Bangladesh being the first one), gave it 10% to 14% duty advantage over other countries like China, India, Thailand and so on. During the years 2013 to 2015, Pakistan’s garment exports to EU increased at 11% per year while the exports to other countries in the same time increased at just around 1. 5% per year. The textile industry alone is expected to generate a profit of PKR 1 Trillion per year by the gaining of GSP Plus status. All this growth of local industries would help in generating more employment for the local people in Pakistan. Adding to this, the fact that Vietnam, India, China, Indonesia and Thailand are not eligible for GSP Plus status, gives an automatic rise of interest in Pakistani economy. The GSP Plus status can attract investments from abroad, especially from China, in Textile industry of Pakistan. This has the potential to further increase the employment opportunities for the local people.
China has the absolute advantage in the production of cloth and wheat, both.
Pakistan has a comparative advantage in the production of cloth. China has the comparative advantage in the production of wheat.
As we have seen, China and Pakistan have different comparative advantages. Therefore, they specialize in different goods. So, if each country produces that things in which it specializes i. e. China produces wheat and Pakistan produces cloth, both the countries will benefit through trade. This is because when each country produces what it is best at, the total output will be higher than if both the countries would produce both the things. Therefore, each country can now produce more, consume more, export more and consume even more by exporting the surplus produce of their country. For example, if China just produces wheat, it would produce more of it than if it would have been producing cloth too. So, by producing more cloth, China would consume more cloth and export more cloth. Adding to this, China can spend the revenue gained from exporting to buy more imports from rest of the world.
Maximum number of laptops at home: 3000/40=75 laptops. Maximum number of laptops in foreign: 3000/60=50 laptops. Maximum number of bedsheets at home: 3000/4=750 bedsheets. Maximum number of bedsheets in foreign: 3000/10=300 bedsheets.
Home should produce bedsheets as it has a comparative advantage in producing bedsheets while foreign should produce laptops as it has a comparative advantage in producing laptops.
Industry assigned: Non-Metallic minerals manufacturersUnited Kingdom 2017 exports: $5,408,309,338
