R
Rana
Guest
Pakistan’s economy (b) Would you expect th? When people are poor they have to spend a large proportion of their income on basic goods such as food. As they get richer, so they can afford to buy an increasing proportion of luxury goods. This means that the income elasticity of demand for basic goods is likely to be low: their demand only rises slowly as incomes rise. The income elasticity of demand for luxury goods, on the other hand is likely to be high.
This has important implications on international trade. If a country exports basic goods with a low income elasticity of demand, and import luxury goods with a high income elasticity of demand, it is likely to run into long term balance of payments problems.
As it grows richer, its demand for imports is likely to grow rapidly As the rest of the world goes richer, however, so the demand for the country’s exports is likely to grow slowly. This has been one of the problems facing many developing countries like Pakistan. As exporters of commoditiessuch as rice, wheat and grains they have found that the demand for their exports has grown relatively slow. As importers of manufactured products, however, their imports have grown relatively rapidly.
This affects their terms of trade. The terms of trade are the average price of a country’s exports divided by the average price of its imports. If the demand for exports grow slowly relative to imports, so the price of exports is likely to fall relative to imports: the terms of trade will deteriorate.
A word of a caution: Income elasticity of demand is only one factor influencing the level of a country’s imports and exports, and only one factor determining its terms of trade.
In the light of above information:
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This has important implications on international trade. If a country exports basic goods with a low income elasticity of demand, and import luxury goods with a high income elasticity of demand, it is likely to run into long term balance of payments problems.
As it grows richer, its demand for imports is likely to grow rapidly As the rest of the world goes richer, however, so the demand for the country’s exports is likely to grow slowly. This has been one of the problems facing many developing countries like Pakistan. As exporters of commoditiessuch as rice, wheat and grains they have found that the demand for their exports has grown relatively slow. As importers of manufactured products, however, their imports have grown relatively rapidly.
This affects their terms of trade. The terms of trade are the average price of a country’s exports divided by the average price of its imports. If the demand for exports grow slowly relative to imports, so the price of exports is likely to fall relative to imports: the terms of trade will deteriorate.
A word of a caution: Income elasticity of demand is only one factor influencing the level of a country’s imports and exports, and only one factor determining its terms of trade.
In the light of above information:
(