H e

APPLIED ECONOMICS FOR MANAGERS

APPLIED ECONOMICS FOR MANAGERS

GROUP MEMBERS:

1) Saira KhalidF1F14MBBA0001

2) Sadia LatifF1F14MBBA0002

3) Sana RiazF1F14MBBA0004

4) Muhammad Fahad FarooqiF1F14MBBA0007

5) Farwa AmjadF1F14MBBA0018

SECTION:

MBA S1

ACKNOWLEDGEMENT

In performing our Project , we had to take the help and guideline of some respected persons, who deserve our

greatest gratitude. The completion of this assignment gives us much Pleasure. We would like to show our gratitude to Sir Babar Ali, University of Central Punjab, Faisalabad, for giving

us a good guideline for assignment throughout numerous consultations. We would also like to expand our deepest

gratitude to all those who have directly and indirectly guided us in writing this Project.

ACKNOWLEDGEMENT

In performing our assignment, we had to take the help and guideline of some respected persons, who deserve our greatest

gratitude. The completion of this assignment gives us much Pleasure. We would like to show our gratitude to Sir Babar Ali, University of Central Punjab, Faisalabad, for giving us a good guideline for assignment throughout numerous consultations.

We would also like to expand our deepest gratitude to all those who have directly and indirectly guided us in writing this

assignment.

EXECUTIVE SUMMARY

The topic of our Applied Economics Project is “Devaluation of Currency in Pakistan”. We hereby try to investigate the reasons of continuous devaluated currency of Pakistan, its impact and historical problem in Pakistan regarding devaluation of currency.

We defined all the related problems with the related issue and the reasons of devaluation. We also discussed the history of devaluation of Pakistani Currency in comparison with 6 major Currencies (US Dollar, Riyal, Euro, Pound, Yen, Indian Rupee).

We also analyzed the impact of devaluation on economic conditions of Pakistan. Then we suggest certain solutions to Devaluation of Currency. First of all we suggest that certain policies should be revised i.e. Monetary Policy and Fiscal Policy.

In Fiscal Policy, the focus is to decrease foreign borrowings and make BOP and BOT favorable. In Fiscal Policy we give suggestions that how budget deficit can be overcome to reduce Devaluation of Currency.

At the end we give general solutions e.g. Political situation should be favorable, corruption should be removed. We try to give best solutions so that Devaluation of Currency may be controlled in Pakistan.

TABLE OF CONTENTS

SR. NO.

DETAILS

1 Money Vs Currency

2 Difference Between Devaluation And Depreciation

3 Pakistani Currency Devalues Or Depreciates?

4 History About Devaluation In Pakistan

5 Causes Of Devaluation

6 How IMF Fund Participated In Devaluation Of Currency:

7 Impact On Economy

8 Why A Country Will Want To Devalue Its Currency?

9 Why Pakistan Was Unable To Draw The Benefits Of Devaluation?

10 Historical Data Analysis:

10.1 Pak Rupees Vs. Us Dollar

10.2 Pak Rupees Vs. Euro

10.3 Pak Rupees Vs. British Pound

10.4 Pak Rupees Vs. Us Japanese Yen

10.5 Pak Rupees Vs. Us Saudi Riyal

10.6 Pak Rupees Vs. Indian Rupees

11 Solutions To Devaluation Of Currency

11.1 Fiscal Policies

11.1.0 Borrowings

11.1.0.1 Considering Interest Rates/ Borrowings

11.1.0.2 Controlling Balance Of Trade

11.1.0.3 Export Promotion

11.1.0.4 Controlling Balance Of Trade 11.1.1 Money Demand And Supply

11.1.1.1 Increasing Demand For Currency

11.1.1.2 Situation I Pakistan

11.1.1.3 Solutions For Excess Money Supply

11.1.2 Foreign Direct Investment

11.1.2.1 Situation In Pakistan

11.1.2.2 Fdi As A Solution

11.1.3 Development

11.1.3.0 Expansion And Deflation

11.2 Monetary Policies

11.2.0 Budget Policy: A Solution For Devaluation

11.2.1 Tax Reformation: A Solution For Devaluation

11.2.2 Foreign Exchange Reserves: A Solution For Devaluation

11.2.3 Gold Reserves: A Solution For Devaluation

11.2.3.0 General Equilibrium Theory

11.2.3.1 Equilibrium In Money Market As A Solution To Devaluation

11.2.3.2 General Equilibrium Theory In Terms Of Numericals

11.2.3.3 Quantity Theory Of Money As A Solution

11.2.4 Political Stability:

11.2.4.0 Disrupth The Corruption

11.2.4.1 Refined Policies

11.2.4.2 Avoid Terrorist Attacks

11.2.4.3 Keep GDP Positive

12 Conclusion

DEVALUATION OF CURRENCY IN PAKISTAN

Money VS Currency:

Money:Anything that serves as a medium of exchange, a store of value or standard of value is called money. It can be gold or any precious metal.

Currency:Currency is a unit of exchange. It just facilitates the transfer of goods and services. It is a piece of paper. Like Pakistani currency is Rupees. For example:

Difference between devaluation and Depreciation:

Depreciation:When the value of money decreases with account of demand and supply in the economy

is called depreciation. Following are the situations prevail in depreciation: It happens in countries with floating exchange rate Free market determines the exchange rate Govt. pledges to purchase and sale currency in order to maintain its value It is un-official

Devaluation:When the value of money decreases without account of demand and supply in the

economy, it is called devaluation. Following are the conditions of devaluation: Countries having fixed exchange rate faces devaluation This exchange rate is determined by Global investment market This exchange rate is defined by the govt. of country with respect to other

currencies Exchange rate changes every day with respect to other currencies It is official

Fixed exchange rate system:It is a system in which one currency is compared to other single currency or multiple currencies at a time. In this, exchange rate is determined officially.Members of IMF have been prohibited to manipulate their currency against each other to obtain an unfair advantage.

Floating exchange rate system:It is a system that is un-official in which market forces of demand and supply determine the exchange rate. In this system, dampening effect has been seen but central bank of any country can intervene to lock excessive fall in rates. Two limits are there for currency, floor and ceiling.

Pakistani currency devalues or depreciates?

Pakistani currency devaluates since its independence. It adopted the depreciation two times in history but shifted to devaluation again. It means that government decides value of currency by buying or selling it in order to maintain its value.

In Pakistan, the deficits of budget are covered through printing currency notes which leads to devaluation. It is because the value of currency in respect to gold or metallic reserves decrease and inflation is caused.

Revaluation of currency as occurred in mid of 2014 when compared to dollar. It is by the response of favorable economic conditions in order to please the investors to invest their capital in our country.

Pakistan has never gone through denomination, in which a country issues new currency and cancels the old currency because it has devalued excessively.

HISTORY ABOUT DEVALUATION IN PAKISTAN

History :Following are the brief points about history of devaluation in Pakistan:

1. Pakistan first faced devaluation in 1952. Pakistan faced high wholesale prices and increased inflationary pressure.

2. Pakistan faced devaluation of currency in 1972 for the second time, when the prices of Pakistani rupees fell 56.7% against US-Dollar.

3. Pakistani currency devalued in 1996 for third time which was the severest time for our currency. It caused increase in prices within country and govt. had to reduce the tax on imports.

4. The devaluation of currency again came in economy in 2006.

Pakistan has never taken the advantage of devaluation of currency by boosting manufacturing activities and increasing employment opportunities. The reverse situation occurred in Pakistan since history that has been displayed in process below:increased inflationery pressureless savings with producersDecrease in investmentDecrease in employment

Causes of Devaluation:

Following are the causes of devaluation:1. Falling foreign currency reserves2. Capital flight out3. Unfavorable balance of trade4. International ratings for credit5. Speculation6. War against Terror7. Energy crises8. Political instability9. High inflation10. High value of loan

Falling foreign currency reserves:

In Pakistan, the important cause for foreign currency devaluation is that our foreign reserves are decreasing day by day and Pakistan has less amount of backup for issuing currency notes.A table in the following is given to show the historical record of foreign reserves:

1999 2007 2008 2009 2014

$1.96 billion $16.4 billion $8.89 billion $17.21 billion $15.1 billion

Capital flight out:

The people especially the manufacturers are taking their businesses out of country due to shortage of resources and lack of facilities available to them. The manufacturers find it attractive to do business in a country which can provide them with facilities.

Unfavorable balance of trade:

The increased imports and decreased exports have led to devaluation of currency because government does devaluation in order to save currency form abrupt loss.Historical data of five years is given below:

Year Exports Re-Exports Imports Re-Imports Balance of Trade

2009-10 1,617,457 23,470 2,910,975 14.3 -1,270,0612010-11 2,120,846 30,576 3,455,285 2,072 -1,305,9352011-12 2,110,605 18,570 4,009,093 3,131 -1,883,0492012-13 2,366,477 9,946 4,349,879 - -1,973,4552013-14 2,583,463 16,369 4,630,520 1,855 -2,032,544

International ratings for credit:Two international credit rating agencies have ranked Pakistan lower. The scale for Moody’s ratings is as follows:

Pakistan has ranked “Caa1” -“very low institutional and fiscal strength, its weakened external position and large government financing needs”, stated Moody’s Investors Service in its review on the ‘Credit Analysis on Government of Pakistan’.

1. Speculation:

One of the causes of devaluation of currency is speculation. When a speculator predicts that value of Pakistani rupee is going to fall, he will sell the Pakistani rupee in exchange of foreign currency. This will force, actually, to decrease the value of Pakistani rupee.

2. War against terror:

No foreign country wants to invest in Pakistan because they think that their money will drown if they invest in Pakistan. We can say that the repute of Pakistani economy has destroyed due to regular suicide attacks on citizens.

3. Energy crises:

This can be a reason for devaluation of currency because the government has failed to manage the country and electricity or gas crises. So damaged the report and demand for Pakistani currency decreased which caused devaluation in respect to dollar.

4. Political instability:

The instable political conditions of Pakistan have developed a view of non-profitable country for any type of investment resulting devaluation in currency.

5. High inflation:

Due to high inflation in the economy, state bank of Pakistan issues new currency notes without any metallic reserves at the back end. Which in turn reduce the value of our currency.

6. High value of loans:

The loans taken from IMF are increased in value strengthening dollars against Pakistani rupee. It makes negative balance of payment and a higher value to imports that cause devaluation of Pakistani currency.

How IMF fund participated in devaluation of currency:

The rupee supply has significantly increased in the previous years. Awaiting IMF payments along with import payments have created an additional demand for the dollar in our money market that result in an increasing pressure on dollar prices.

From a consumer’s perspective, the rupee depreciation has amplified the costs of imports. Pakistan’s economy heavily relies on imported goods. Furthermore, Pakistan’s import market is the means of support for thousands of individuals and small businesses.

The rupee devaluation has increased their raw material costs and further lessened their profit margins. It has created a bad impact on the income of people of Pakistan.

Moreover, the fluctuation in the foreign exchange market has discouraged importers and exporters both from growing business opportunities and increasing investments in their businesses.

Although the government depends on home remittances sent by foreign Pakistanis, the entire remittance volume is used for daily government expenditures rather than investment in the economy and stability of the currency. Expatriates choose to maintain their holdings in foreign currency to hedge against rupee depreciation as well.

Abrupt decrease in value of

Pakistani rupee

Restricted foreign investors

to invest in Pakistan

Became difficult to

manage BOP

harmful effects of

devaluation

Impact on economy

Good Impact:

These economists say that devaluation of currency is actually good for the economy because decrease in value of currency means that foreign countries have to pay less amount of money for importing our goods. This will attract foreign orders and will boost manufacturing. Which in turn create employment opportunities and hence, will ultimately boost the economy.

Bad Impact:

The other economists say that it has a bad impact on economy because it will prohibit foreign investors to make direct investment in the country. And it will cause to face deficit in trade. And government has to save rupee circulation with increase in interest rate which will limit the supply of money decreasing the purchasing power of people resulting in recession.

Impact on companies:

The companies that import raw material from other countries to produce a final product will find it difficult to pay extra amount of money abroad. So it will resist imports. And the company taking orders from abroad will be happy because the number of orders will increase as foreign companies want cheaper product. It will be cheaper for them to purchase products made in Pakistan.

Impact on Property:

In case of devaluation, the value of property, not in terms of money, will increase for foreigners because they will find it cheaper to buy land in our country.

Resists immigration:

A person moving from Pakistan to other country will face difficulty because he will get lower amount of foreign money. Considering this he will resist to take any decision about immigration.

Balance of payment crises:

In result of speculation, when speculator sell Pakistani currency and purchases foreign currency, the balance of payment crises can occur making the shortage of foreign currency.

Boost demand for domestic products:

Making imports expensive and exports cheaper will increase the demand for domestic good of the country and hence revenue can be increased.

Considered as weakness:

Devaluation of currency is mostly viewed as the sign of weak economy all over the world and it is true for Pakistan because Pakistan has never been able to take advantage of devaluation of currency exactly.

Affect creditworthiness:

Foreign investors will decrease the loan supply or direct foreign investment in the country with devalued currency because they will consider their investment unsafe.

Devaluation cycles:

If a country like Pakistan faces devaluation again and again, the process will make the existing investors dissatisfied. He will be forced to draw the investment out.

Why a country will want to devalue its

currency?A country can devalue its currency itself due to following reasons:

For boost exports To make imports expensive To correct BOT To boost aggregate demand

To boost exports:

The decrease in currency value will make it attractive for foreigners to buy our products because it will become cheap for them and hence they will start importing our products to their country more abruptly.

To make imports expensive:

Import of foreigners’ products will become expensive for our country because we have to get less and have to pay more due to higher value of others’ currency. So, governments do it to discourage the imports.

To correct BOT:

The balance of trade balance will automatically be corrected if exports increase than imports.

Boost aggregate demand:

Devaluation is done by policymakers in order to boost demand for domestic goods in domestic market as well as in foreign market.

Why Pakistan was unable to draw the benefits of devaluation?

Pakistan was unable to take advantage of devaluation of currency because of following reasons:

Due to inelastic exports No value added goods/deal in less elastic goods Major exports in raw form Focus on political battles Corruption

Due to inelastic exports:

All the goods exported by Pakistan are food items mostly and basic needs like cloth and cotton. These items have inelastic demand so even if the price decrease, Pakistan cannot earn more out of it.

No value added goods/deal in less elastic goods

Value added goods can provide countries with high profit margins like other countries are exporting technology items and innovative machines which have elastic demand. So a small devaluation of currency will lead them with high margin of exports. But unfortunately, Pakistan is unable to do so.

Major exports in raw form:

Pakistan does not focus on producing finished products and exporting it. So it earns low amount of foreign exchange. While the countries which import Pakistani raw material, process this material and sale it at high profit margins.

Focus on Political battles:

Any government or opposition in Pakistan pays more attention towards political issues and tries to win arguments. While in actual, they don’t think or do anything for the sake of betterment of the country.

Corruption:

Another tragedy with this country is that, every person who comes in government tries to take more of our national reserves in his own account in Switzerland. Corruption is the major among all the major causes that destroyed Pakistani economy.

HISTORICAL DATA ANALYSIS

Historical Data Analysis:

Pakistani Rupee VS US Dollar

Year Pak Rupee US Dollar

2015 1 109.6

2014 1 105.44

2013 1 97.759

2012 1 90.90

2011 1 85.91

2010 1 84.74

2009 1 79.43

2008 1 66.8

2007 1 60.86

2006 1 59.84

2005 1 59.312

2004 1 57.1429

2003 1 58.1395

2002 1 60.241

2001 1 58.8235

2000 1 52.8135

1999 1 51.0204

1998 1 44.550

1997 1 40.185

1996 1 35.266

1995 1 30.930

GRAPHICAL REPRESENTATION:

1990 1995 2000 2005 2010 2015 20200

20

40

60

80

100

120

Pak Rupee VS US Dollar

US Dollar

YEARS

US D

OLL

AR

EXPLANATION:

Pakistani rupees are deeply effaced by US dollar. From 1999 t0 2015 Pakistani rupees is devaluated by dollar. Currently the value of dollar is 109 rupees.

Dollar is a strong currency all over the world. According to financial analysts dollar will be the king of all currency.

From last 10 years dollar is gradually increasing that is not a good sign for Pakistani rupees.

Pak Rupee VS EURO

GRAPHICAL REPRESENTATION:

Year Pak Rupee EURO

2015 1 113.056

2014 1 144.318

2013 1 131.116

2012 1 117.37

2011 1 117.23

2010 1 119.33

2009 1 107.58

2008 1 103.35

2007 1 78.6821

2006 1 73.2894

2005 1 76.8788

2004 1 71.9412

2003 1 63.0444

2002 1 52.1206

2001 1 54.3354

2000 1 51.8757

1999 1 58.3604

1998 2000 2002 2004 2006 2008 2010 2012 2014 20160

20

40

60

80

100

120

140

160

Pak Rupee VS EURO

Y-Values

YEARS

EURO

EXPLANATION:

Pakistani rupees is devaluated by the 2nd largest currency that is EURO dollar. Graphical representations clearly define EURO dollar is also gradually increasing from

1999 to 2011. In 2012 there was a minor decreased in EURO dollar. Pakistani rupees again devaluated with an increase with 131.116 rupees

Pak Rupee VS British Pound:

Year Pak Rupee British Pound

2015 1 151.22

2014 1 175.42

2013 1 154.35

2012 1 140.44

2011 1 136.98

2010 1 135.68

2009 1 107.92

2008 1 131.45

2007 1 119.5454

2006 1 106.7442

2005 1 110.5329

2004 1 104.3535

2003 1 94.9837

2002 1 84.8703

2001 1 85.9993

2000 1 85.2897

1999 1 83.673

GRAPHICAL REPRESENTATION:

1998 2000 2002 2004 2006 2008 2010 2012 2014 20160

20

40

60

80

100

120

140

160

180

200

Pak Rupee VS British Pound

Y-Values

YEARS

Briti

sh P

ound

EXPLANATION:

Pakistani rupees is not only devaluated by the strong currencies but also by a fine currency that is british pound.

Graphical representation explain that there is a fluctuation in value of currency that start from 2007. Pakistani currency is devaluated by 119 rupees.

In 2008, it increased again with 131 rupees then suddenly it decrease with 107 rupees and current position is 151 rupees = one pound.

Pak Rupee VS Japanese Yen

GRAPHICAL REPRESENTATION:

Year Pak Rupee Japanese Yen

2015 1 0.857

2014 1 1.019

2013 1 1.92583

2012 1 1.1556

2011 1 1.041

2010 1 14.28

2009 1 0.8941

2008 1 0.633

2007 1 1.9899

2006 1 1.9324

2005 1 1.7581

2004 1 1.8637

2003 1 2.0235

2002 1 2.2282

2001 1 1.986

2000 1 2.0445

1999 1 2.2551

1998 2000 2002 2004 2006 2008 2010 2012 2014 20160

2

4

6

8

10

12

14

16

Pak Rupee VS Japanese Yen

Y-Values

YEARS

YEN

EXPLANATION:

Pakistani rupees was devaluated by Japanese yen from 1999 to 2007 In 2008 Japanese yen devaluated by Pakistani rupees and its value became 0.633. In 2010, it rises with 14 rupees that effect Pakistani rupees and devaluate the value of

currency Current position of Japanese Yuan again devaluated by Pakistani rupees.

Pak Rupee VS Saudi Riyal:

GRAPHICAL REPRESENTATION:

Year Pak Rupee Saudi Riyal

2015 1 26.83

2014 1 28.11

2013 1 26.06

2012 1 24.03

2011 1 22.91

2010 1 22.55

2009 1 21.18

2008 1 17.75

2007 1 16.2256

2006 1 15.9572

2005 1 15.8161

2004 1 15.24

2003 1 15.5058

2002 1 16.0663

2001 1 15.6823

2000 1 13.8187

1999 1 13.198

1998 2000 2002 2004 2006 2008 2010 2012 2014 20160

5

10

15

20

25

30

Pak Rupee VS Riyal

Y-Values

YEARS

Riya

l

EXPLANATION:

Saudi riyal is fine currency for trading but it is gradually increased since 1999-2014. Current position is 26.83 rupees in Pakistani currency Value of Pakistani currency is decreasing as compared to Saudi riyal

Pak Rupee VS Indian Rupee:

GRAPHICAL REPRESENTATION:

Year Pak Rupee Indian Rupee

2015 1 1.643

2014 1 1.6965

2013 1 1.8170

2012 1 1.80

2011 1 1.8170

2010 1 1.8263

2009 1 1.6148

2008 1 1.65

2007 2008 2009 2010 2011 2012 2013 2014 2015 20161.5

1.55

1.6

1.65

1.7

1.75

1.8

1.85

Pak Rupee VS Indian Rupee

Y-Values

YEARS

Indi

an R

upee

EXPLANATION:

The value if Indian rupee was same at the time of independence but Pakistani rupees devalued gradually with the passage of time. Now, current value of Pakistani rupees is 1.643 rupees against one rupee of India.

Pakistani rupee and Indian rupee is treated equally at international level. Since 2008-13, it was gradually increasing and Pakistani currency devalued.

SOLUTIONS TO DEVALUATION OF CURRENCY

SOLUTIONS TO DEVALUATION OF CURRENCY

FISCAL POLICIES

BorrowingsFISCAL POLICIES

BORROWINGS

CONSIDERING INTEREST RATES/ BORROWINGS:

Increasing the interest rates:

The government can increase the interest rate in order to control the devaluation of currency because if the government does so, the cost of borrowing the money will increase which will restrict the people from taking loans. As a result, the supply of money in economy will be controlled. Controlling supply will lead to equilibrium position. But this equilibrium position will not be maintained for long and hence, there will be shortage of money in the economy. This shortage of money will increase the demand for money and hence, the value of money will appreciate.

Interest rate and investments:

If the interest rate for the foreign investors is increased which means that they will get more amount of interest as compared to past, they will increase the investment in Pakistan. Increased investment in foreign currency will increase the foreign reserves and hence, strong back end of currency will be there. It will increase the value of currency.

Borrowings

CONTROLLING BALANCE OF TRADE:

DEFINITION OF BALANCE OF TRADE:

Difference between imports and exports is called balance of trade. Its balance can be surplus or deficit. The account can be shown as follows:

Debit sideImports Foreign aidDomestic spending abroadDomestic investment abroad

Surplus

Credit sideExportsForeign spending in domestic economyForeign investment in domestic economy

Deficit

Balance of paymentBalance of trade

Pakistan has been suffering from deficit. The historical values of deficit of Pakistan are as follows:

Years 1993-94 1996-97 2001-02 2004-05 2005-06 2007-08

Deficit 45.9 billion 72.5 billion 62 billion 106 billion 121.2 billion

130.9

Pakistan has been devaluing its currency in order to attract orders from foreign countries because buying Pakistani goods becomes cheater for them as compared to other countries. Or we can say that it will be cheaper for other countries to purchase our product due to payment in less. All it is because the value of our currency lower, their currency has higher value. They can get more by paying less. To achieve this purpose, they reduce the value of currency.

We see that in history from 2000 to 2004, there was a surplus in balance of trade but it has been in deficit since 2005 till now.

Reduce cost of production:Labor is cheap in Pakistan. Pakistan should use labor intensive. These

industries demand lower cost. The products of these industries can be exported

to have favorable balance of payment.

Export finished GoodsInstead of exporting primary goods like raw cotton, Pakistan should export

manufactured goods like textiles and garments, leather goods, food products

and electrical goods. It is presented in the chart below historically form year

2010-14:

LIST OF PRODUCTS EXPORTED BY PAKISTAN IS AS FOLLOWS:

Knitted Fabrics of Cotton Synthetic TextilesFish & Fish Preparations Carpets & RugsRice LeatherFruits & Vegetables Crude Animal MaterialSpices Yarn WasteOil, Seeds Nuts & Kernels Tulle, Lace Embroidery etc.Raw Cotton Leather GarmentsReady-made Garments Leather GlovesCotton Yarn Onyx Manufactures

Cotton Fabrics Chemical & Pharmaceutical Products

Hosiery CutleryMade-up Articles of Textiles Machinery non-electricalBedwear Transport EquipmentSynthetic Yarn Sports GoodsTowels Surgical InstrumentsTents & Canvas Manufactured Articles n.s.Cotton Waste Plants Seeds etc.Handicrafts Ship Stores

EXPORT PROMOTION:

Pakistan can promote the following types of products for exports:

Fish (fresh or frozen) Mineral manufactures nes Other meat preparations

Finish leather Glass Fish fresh chilled or frozen

Vegetables Glassware Fish dried or smoked

Fruits and nuts (fresh or dried) Pottery Crabs, lobsters, shrimps

Spices Precious &semi precious pearls

and stones

Fish repd or presvdnes

Knitted woven fabrics Pig iron and ferro-alloys Rice

Surgical instrufments Iron and steel bars. Billets, coils Cereals

Sports goods Iron and steel shapes Meal, flour-other cereals

Items of import from pakistan Iron and steel univ. Plate and

sheets

Cereal and flour preps nes

Heavy and light machinery Iron and steel hoops and strips Vegetable, fresh & simply

prsvd

Steam boilers and parts nes Iron and steel rails and track mail Vegetable, prsvd or prepdnex

Steam power units and parts

nes

Iron and steel wire excluding wire

rod

Fruits/nuts fresh or dried

Int. Combustion piston engines Iron and steel tube and pipe fitting Fruit presvd or preparations

Engines and gas turbines Iron and steel -rough forgings Sugar and honey including

molasses

Motors and generators electric Silver and platinum Sugar prepns non-chocolate

Agriculture machinery Copper and copper alloys Chocolate and products

Tractors Nicle and nickle alloys Spices

construction machinery Aluminium and aluminium alloys Feeding stuff for animals

Textile machinery Lead and lead alloys Food preparations nes

Plastic and paper machinery Zinic and zinc alloys Non-alcoholic beverages

Printing and allied machinery Tin and tin alloys Tobacco unmanufactured

Machinery for special

industries

Misc non-ferrous base metals Tobacco manufactured

Metal working machinery Finished structure parts nes Oil seeds & nuts

Rolling mills machinery Wire products non-electric Oil seeds nes

Machines for refrigrtnaircondn. Iron steel corp nails nuts etc. Natural rubber

Rotary, reciprocating pumps Hand and machine tools Cotton

Compressors and air pumps Cutlery Jute and other textile fibres

Loading unloading machinery Base metal household equipments Synthetic fibres

Other machines non-electric Manufactures of metals nes Regenerated synthetic fibres

Ball bearings and allied

machinery

Sanitary, plumbing and fitting Wool and animal hair

Electrical insulated equipment Furniture Fertilizers crude

Household appliances Travel goods handbags etc Stones and sand

Ships and boats Clothing-textile fabrics Other crude minerals

Leather Clothing other than knitting,

croch

Iron and steel scrap

Manufactures of leather Clothing knitted or crocheted Non-ferrous base metal ore

and cono

Leather finished Clothing synthetic fabrics Non-ferous base metal scrap

Fur skins-tanned or dressed Clothing nes Precious metals ores-scrap

Wood manufactures nes Clothing made of rubber and fur Bones

Paper and paper board Footwear Crude vegetable materials

Articiles of paper pulp and

board

Optical instruments Coal

Textiles yarn and thread Medical instruments Vegetable oils -soft

Cotton fabrics woven Scientific instruments Chemicals

Synthetic fabrics woven Spectacles frames and lenses Halogenated alcohols

Silk and woollen fabrics Printed matter Organic chemicals

Fabrics knitted or crocheted Sanitary and ornamental articles Inorganic chemicals products

Tulle lace embroidery Toys, games and sporting goods Synthetic dystuffs

Special textile fabrics and

prodcuts

Gold and immitationnewellery Tanning dyes prodcuts

Articles of textile materials Musical instruments Pigments paints and varnishes

Floor coverings and tapestries Manufactured articles Medicinal & pharmaceuticals

Lime cement and fab. Building Live animals Perfumery costmatics

material

Clay and refractory const.

Material

Meat, fresh chilled or frozen Polyvinyl products

Chemicals Starches and glues Plastic materials

EXPORT AGENCIES

Agencies should be made more active. Export Promotion Bureau, Export

Development Fund and Export Processing Zones etc are providing services in

Pakistan for promoting or increasing exports. But policies should be made to

increase their functioning.

PROPER QUALITY CHECK SYSTEM:

Many Pakistanis are notorious due to our exporting commodities of inferior

quality than specified in agreements. So, a proper quality check system at all

ports can be introduced to ensure better quality.  

IMPORT OF ONLY RAW ITEMS

Govt. must try to facilitate its people that they become able to process raw

material in their industries. Only those raw material must be imported which is

not available in Pakistan. Import of luxuries should be banned.

EXCHANGE CONTROL

Exchange control is also an important step to minimize the imports. Exchange

control should be followed, so that there is no wastage of foreign exchange to

import of un-necessary and luxuries.

PREPARE SUBSTITUTES FOR IMPORTED ITEMS

All those industries that are producing substitute of imported goods must be

encouraged so that we can cut the imports of these goods in future which will

save our foreign reserves. And its counter affect will be generation of

employment for Pakistani labor force.

CONTROL OF SMUGGLING

Bara markets should be eliminated. After atomic explosion, the Govt. is taking

strict measures to eliminate markets of smuggled goods.

Major imports of Pakistan are:

Commodity %age of total imports

Amount

Oil 38.40% $15.2 billionMachines 7% $3.1 billionElectronics 6.10% $2.7 billiobChemicals 4.60% $2 billionAnimal fat 4.50% $4.5 billion

Data for itop 10 growing imports of Pakistan is as follows:

Top 10 growing importsAmount as per (2013)

Books, newspaper, pictures: $857.9 millionFish $11.6 millionRailways $59.4 millionLive animals $31.5 millionart and antiques $272,000 food wastw, animal fooder $377.2 milliongems, precious metals $416.6 millionother base materials $21.2 millionumbrellas, walking sticks $801,000 knitted or crocheted fabrics $41 millionlead $97.2 million

Chart of imports will show historical values from year 2000 to 2014 :

CONTROLLING BALANCE OF PAYMENT:

Definition:

It is the measure of all the monetary transactions carried out internationally at

a particular time. it can be calculated monthly, quarterly, semi-annually or

yearly.

Types Of Accounts In Balance Of Payment:

Balance of payments of a country has three types of account:

a)      Current Account

b)      Capital Account

c)      Official Reserve Account

a)      Current Account

It includes export and import of all goods and services and transfer

payments on receipts and payments sides respectively.

b)     Capital Account

In capital account, on receipts side, short term and long-term capital

inflow receipts of foreign direct investment and foreign debts are

posted. Same items are written in payment side while making payment.

c)      Reserve Accounts

It shows the foreign exchange position of a country. Official reserve

account has the records of foreign official holding and increase reserves

of gold and foreign currencies.

HISTORICAL PERCEPTIVE OF BALANCE OF PAYMENT:

Brief data about balance of payment:

Year 1950-51 1954-55 1958-60 1996-97 1997-98

Amount 578 Crore

surplus

9.9 Crore

surplus

surplus 3.28 billion

deficit

1.92 billion

deficit

Year 1999-2000 2006-07 2007-08 2008-09 2009-10

Amount 1.14 billion

deficit

6.878 billion

deficit

16.8 billion

deficit

12.72 billion

deficit

10.945 billion

deficit

SOLUTION TO BALANCE OF PAYMENT:

The balance of payment can be controlled by following:

Giving importance to agriculture sector:

Making investment to this sector may produce good portion of exports because

these goods are mostly necessity and countries have to import it. Moreover, the

food crops of Pakistan are especially well known all over world for its taste

and aroma. So if we provide these food crops to international market at

competitive rates, it will be cheaper for other to purchase and valuable for

Pakistan to sell.

Stop taking international loans:

Pakistan must have to stop taking loans from IMF and other organizations like

this. Because paying large sum of premium make short of our foreign currency

reserves and it leads to devaluation.

Following is the chart for external loan taken by Pakistan since 2002 to present:

Encourage investment:

Pakistan must not take loans but encourage investment because the amount of

loans is going waste in the pockets of our government personnel due to

corruption but investment in a particular sector will generate incomes and

increase employment in the country. Moreover, it will add to the foreign

reserves increasing value of currency.

According to state Bank of Pakistan, the condition of foreign direct investment

in Pakistan is as follows:

Sr. SECTORDecember-2014 (Million US $)

1 Food 1.3 8.8 - 7.5 2 Food Packaging - - - 3 Beverages 2.0 - 2.0 4 Tobacco & Cigarettes 0.1 0.4 - 0.3 5 Sugar 0.1 - 0.1 6 Textiles 11.7 - 11.7 7 Paper & Pulp - - - 8 Leather & Leather Products 0.0 - 0.0 9 Rubber & Rubber Products - - -

10 Chemicals 4.3 1.6 2.7 11 Petro Chemicals - - - 12 Petroleum Refining 0.7 - 0.7 13 Minning& Quarrying - - - 14 Oil & Gas Explorations 9.4 0.5 8.9

  Of which Privatisation proceeds - - - 15 Pharmaceuticals & OTC Products 1.8 0.0 1.8 16 Cosmetics - - - 17 Fertilizers - - - 18 Cement 0.8 0.0 0.8 19 Ceramics 1.3 - 1.3 20 Basic Metals 0.2 - 0.2 21 Metal Products 0.0 5.0 - 5.0 22 Machinery other than Electrical - - - 23 Electrical Machinery 0.0 0.0 0.0 24 Electronics 0.2 1.3 - 1.1

  I) Consumer/Household 0.2 - 0.2   II) Industrial 0.0 1.3 - 1.3

25 Transport Equipment(Automobiles) 17.8 - 17.8

  I) Motorcycles 14.9 - 14.9   II) Cars 2.0 - 2.0   III) Buses,Trucks,Vans& Trail 0.9 - 0.9

26 Power 28.3 3.8 24.5   I) Thermal 6.1 3.8 2.3   Of which Privatisation proceeds - - -   II) Hydel 22.3 0.0 22.3   III) Coal - - -

27 Construction 0.9 0.2 0.7 28 Trade 4.4 0.1 4.3 29 Transport 0.0 0.0 0.0 30 Tourism 0.2 - 0.2

31 Storage Facilities - 0.0 - 0.0 32 Communications 25.4 58.7 - 33.3

  1) Telecommunications 19.8 53.2 - 33.5   Of which Privatisation proceeds - - -   2) Information Technology 5.6 5.4 0.2   I) Software Development 0.3 0.0 0.3   II) Hardware Development 0.0 - 0.0   III) I.T.Service 5.3 5.4 - 0.1   3) Postal & Courier Services - 0.0 - 0.0

33 Financial Business 78.0 6.5 71.4   Of which Privatisation proceeds - - -

34 Social Services 0.0 - 0.0 35 Personal Services 5.3 0.4 5.0 36 Others 1.4 2.1 - 0.7 TOTAL 195.6 89.4 106.3 TOTAL without Privatisation 195.6 89.4 106.3

MONEY DEMAND AND SUPPLY:A SOLUTION FOR DEVALUATION

MONEY DEMAND:A SOLUTION TO DEVALUATION OF

MONEY DEMAND AND SUPPLY:A SOLUTION FOR DEVALUATION

CURRENCY

Purchasing power parity (PPP) balance disturbs due to devaluation of currency because a person buying a commodity in one country will not be able to get that same commodity with same price. Instead, he has to pay some extra amount to get the same product. Financial strategy planning is the main solution for this problem. Another solution to devaluation is depreciation of currency which means that we must consider market forces to determine the value of currency rather than fixed rate system. Following items are included in the depreciation of currency:

Increase demand for currency Decrease supply for currency

Both of the above terms will increase the value of currency.

Increasing Demand for Currency:

So in order to increase the demand we have to do the following things as indicated by this chart:

In own country

Increase interest rates

Directly selling foreign currency

In foreign country

Purchase foreign currency

Direct selling of foreign currency:

An easier way for the government to increase the value of money is to get involved in the sale and purchase of foreign exchange. Since, many times, the currency notes are issued against the pool of foreign exchange. So, the selling of foreign exchange in return of Pakistani currency will have Pakistani currency accumulated to center creating demand in rest of the world. This excessive demand will appreciate the value of currency.

Influencing foreign currency:

A form of attack to foreign currency is that we make sales to other countries and they need our currency to make the payment which increases demand for our currency and value of our currency will rise in foreign market.

MONEY SUPPLY AND DEMAND:A SOLUTION FOR DEVALUATION

SITUATION IN PAKISTAN:

In Pakistan , money supply keep on increasing that cause the devaluation of our currency in terms of other foreign currency because notes are issued without having backing of Gold that cause its value to decrease. Following is the analysis of annual growth rate of money supply from 1990 to 2015 in Pakistan.

Country Code Year Annual growth in money supply

Pakistan PK 1990 11.64Pakistan PK 1991 18.94Pakistan PK 1992 29.3Pakistan PK 1993 18.13Pakistan PK 1994 17.37Pakistan PK 1995 13.81Pakistan PK 1996 20.07Pakistan PK 1997 19.91Pakistan PK 1998 7.86Pakistan PK 1999 4.31Pakistan PK 2000 12.13Pakistan PK 2001 11.62Pakistan PK 2002 16.84Pakistan PK 2003 17.53Pakistan PK 2004 20.51Pakistan PK 2005 17.2Pakistan PK 2006 14.5Pakistan PK 2007 19.72Pakistan PK 2008 5.69Pakistan PK 2009 14.76Pakistan PK 2010 15.05Pakistan PK 2011 12.04Pakistan PK 2012 17.03

GRAPHICAL REPRESENTATION:

SOLUTIONS FOR EXCESS MONEY SUPPLY:

1. Open Market Operations

In Open market operations, central bank purchase government securities for cash in attempts to expand or contract the total money supply.

While purchases of government securities prove to expand the total monetary base, the selling of government securities will ultimately contract a nation's monetary base.

2. The Discount Rate

By controlling the national interest rate, a central bank can adequately meet and further dictate the consumer demand for money.

Effect on Demand:

A decrease in the interest rate will spark an increase in the consumer demand for money.

an increase in the rate of interest will lessen its demand.

Effect on Price Level :

Changes in the interest rate also play a role in the setting of price levels.

Any increase in the demand for money will increase spending levels and cause prices to rise.

A decrease in the demand for money will slow spending levels and produce a subsequent decrease in price levels.

If consumers expect price levels to fall, the demand for money will increase.

If consumers expect price levels to increase, the demand for money will decline.

3. Reserve Requirements

Commercial bank is responsible for holding a certain fraction of all deposits as cash or on account with the central bank. Central banks may alter the total money supply by changing the required percentage of total deposits to be held by commercial banks.

An increase in reserve requirements would decrease the monetary base. A decrease in the requirements would increase the monetary base.

FOREIGN DIRECT INVESTMENT: A SOLUTION FOR DEVALUATION

FOREIGN DIRECT INVESTMENT:

Situation of Pakistan:

Country Code yearForeign Direct Investment percent of GDP

Pakistan PK 1990 0.61Pakistan PK 1991 0.57Pakistan PK 1992 0.69Pakistan PK 1993 0.68Pakistan PK 1994 0.81Pakistan PK 1995 1.19Pakistan PK 1996 1.46Pakistan PK 1997 1.15Pakistan PK 1998 0.81Pakistan PK 1999 0.84Pakistan PK 2000 0.42Pakistan PK 2001 0.53Pakistan PK 2002 1.14Pakistan PK 2003 0.64Pakistan PK 2004 1.14Pakistan PK 2005 2.01Pakistan PK 2006 3.11Pakistan PK 2007 3.67Pakistan PK 2008 3.2Pakistan PK 2009 1.39Pakistan PK 2010 1.14Pakistan PK 2011 0.61Pakistan PK 2012 0.38Pakistan PK 2013 0.55

GRAPHICAL REPRESENTATION:

FOREIGN DIRECT INVESTMENT AS A SOLUTIONForeign Direct Investment

1. Transfer of Technology

FDI allows the transfer of technology particularly in the form of new varieties of capital inputs that cannot be achieved through financial investments or trade in goods and services.

2. Human Capital Resources

Recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country

3. Increase in Income

Profits generated by FDI contribute to corporate tax revenues in the host country. With higher wages and more jobs, the income of the entire country rises as well.

4. Unemployment Reduced

Foreign direct investment assumes the creation of new jobs, as well. New jobs offer more buying power to the population of that country which in turn leads to economic boosts.

5. Overall Economic Growth

All the above factors of foreign direct investment lead to economic growth . This is the increase of real gross domestic product, also known as the GDP.

DEVELOPMENT

DEVELOPMENT

Here the demand and supply of money is considered.

EXPANSION:

Interset rate decreased

borrowings increase

demand Increased

The effect of this is that inflation increases. But the question is that why govt. adopts

it if it increases inflation1? The answer to this question is that because govt. intend to

increase employment and want to attract FDI.

DEFLATION:

The following circumstances prevail in this. These are quite opposite to expansion.

Interest rate Increase

Borrowing Decrease

Money value Increase

This can be the solution to devaluation. The following systems are adopted here:

1. Face floating system

2. Open market introversion system

MONETARY POLICIES

MONETARY POLICIES

BUDGET POLICY :A SOLUTION FOR DEVALUATION

BUDGET POLICY:

Situation of Pakistan:

Pakistan’s History tells that Devaluation is mostly happen due to Corruption and Mismanagement because Pakistan’s Budget go in Deficit due to more spending and less revenues that is the cause of all the related problems that lead to devaluation.

GRAPHICAL REPRESENTATION :

Following is the graph that continuously show the deficit from 1990 to 2014 because Government Spending is more than Revenues:

TABLE REPRESENTATION:Pakistan Government Last Previous Highest Lowest Unit

Government Budget -8.00 -6.40 8.80 -8.00 percent of GDP

Government Debt to GDP 63.30 64.30 87.90 54.90 percent

Government Budget Value -1833864.00 -1369705.00 20.00 -1833864.00 PKR Million

Government Spending 3047404.00 2465266.00 3047404.00 33522.00 PKR Million

Credit Rating 10.84

TAX REFORMATION: A SOLUTION FOR DEVALUATION

Solution:

Taxes

Tax Reformation can be the solution of currency devaluation in Pakistan. In Pakistan tax

is not imposed on non-listed firms. If the Government impose taxes on Non-listed firms

along with listed firms revenues can be generated. As the Government revenues increases

from the expenses there will be favorable budget in the result of this currency will be

stable.

FOREIGN EXCHANGE RESERVES:A SOLUTION FOR DEVALUATION

Foreign exchange reserve matters a lot for Pakistan because can strengthen its position in the international market. Pakistan maintains 45 billion $ Foreign Reserves Per Year but overall position is not much good as described below.

TAXFavorable BudgetStable Currency

Situation of Pakistan:

“ DECREASING FOREIGN RESERVES OF PALISTAN”

Country Code yearForeign exchange reserves including gold billion U.S. dollars

Pakistan PK 1990 1.05Pakistan PK 1991 1.22Pakistan PK 1992 1.52Pakistan PK 1993 2Pakistan PK 1994 3.72Pakistan PK 1995 2.53Pakistan PK 1996 1.31Pakistan PK 1997 1.79Pakistan PK 1998 1.63Pakistan PK 1999 2.12Pakistan PK 2000 2.09Pakistan PK 2001 4.22Pakistan PK 2002 8.8Pakistan PK 2003 11.82Pakistan PK 2004 10.72Pakistan PK 2005 11.11Pakistan PK 2006 12.88Pakistan PK 2007 15.8Pakistan PK 2008 9.02

Pakistan PK 2009 13.61

Pakistan PK 2010 17.26Pakistan PK 2011 17.7Pakistan PK 2012 13.69Pakistan PK 2013 7.65

GRAPHICAL REPRESENTATION:

INCREASE FOREIGN EXCHANGE RESERVES:

When a government devalues its currency, it is often because the interaction of market forces and policy decisions has made the currency's fixed exchange rate untenable. In order to sustain a fixed exchange rate, a country must have sufficient foreign exchange reserves, often dollars, and be willing to spend them, to purchase all offers of its currency at the established exchange rate. When a country is unable or unwilling to do so, then it must devalue its currency to a level that it is able and willing to support with its foreign exchange reserves.

According to State Bank of Pakistan, the condition of our foreign exchange reserves is as follows:

FOREIGN RESERVES AS A SOLUTION:

Foreign reserves can help Pakistan to overcome continues Devaluation in the following way:1. Foreign Currency Reserves:

Foreign reserves denote all the foreign country deposits and foreign country assets held by the central bank of any country.

2. Influence Exchange rates:

Pakistan can overcome devaluation through increasing foreign reserves because large reserves of foreign currency allow a government to manipulate exchange rates and to stabilize the foreign exchange rates to provide a more favorable economic environment.

3. Guarantor for Liabilities

As Pakistan holds substantial foreign debt, in this case holding foreign currency reserves can help to give more confidence in the country’s ability to pay

4. Stable Gold Standard:

In theory the manipulation of foreign currency exchange rates can provide the stability that a gold standard provides, but in practice this has not been the case.

5. Stable Currency:

Stable gold rates can strengthen the position of Pakistan and help in stabilizing the currency as well.

GOLD RESERVES:A SOLUTION FOR DEVALUATION

GOLD RESERVES:

Gold as a Resource of Pakistan:

Pakistan is a rich country, ranked at number third in world listing for natural reserves of precious metals with estimated worth of 2500 Billion US Dollars.

Pakistan is Rich is Natural resources but Poor in Management

Gold is a great resource for Pakistan but it is not explored yet due to poor management and inability of political leaders. They are decreasing every year. Following is the Graphical Representation of Gold Reserves from Year 2000 to 2015.

Interpretation: According to above graph, Reserves continue to increase upto 2008. After 2008 it remains constant and then continuous decreasing. Due to which value of currency keep on decreasing afterwards. Up till now Pakistan’s currency is destabilized because it have no Gold Reserves for

currency backing.

GOLD RESERVES TO OVERCOME DEVALUATION:

Devaluation of Currency can be overcome in the following ways:

Pakistan is rich in Gold Reserves so it should explore its Gold Reserves. Percentage of gold is taken as reserves that have a direct impact on the Currency

Value. Greater the value of Reserves more will be the value of Currency. Pakistan exchange rate can be improves through it if value of currency increased. Gold is considered as a standard of currency valuation in the whole world , if Pakistan

increases it Gold Reserves , it can save its currency from Devaluation.

GENERAL EQUILIBRIUM THEORY :A SOLUTION FOR DEVALUATION

General Equilibrium Theory

General equilibrium theory studies supply and demand fundamentals in an economy with multiple markets, with the objective of proving that all prices are at equilibrium.

Supply and Demand of Money as Determinants of Value of Money:

Supply and Demand analysis determined the value of all of the other goods in the model, it made sense to consider the supply of and demand for money as determinants of the value of money.

Money is a Stock Rather Than a Flow

1. SUPPLY OF MONEY :

If money is just dollar bills, the supply of money is the total number of dollar bills that are held in the economy at a moment of time: add up the number in your wallet and the wallets and cash drawers of all of the households and firms in the economy.

2. DEMAND OF MONEY:

The demand for money is the amount of its total stock of wealth that households and firms want to hold in the form of the monetary asset. When thinking of the demand for money we should think in terms of our desire to hold cash vs. other kinds of assets such as bonds, stock, or physical assets.

RELATIONSHIP BETWEEN MONEY SUPPLY AND MONEY DEMAND:

NOMINAL DEMAND FOR MONEY :

Nominal demand for money is:

+     - + MD = P L ( i , Y)

MD is the number of dollars demanded P is the price of goods L is the function relating how many $ are demanded to Y and i.

DETERMINANTS OF THE NOMINAL DEMAND FOR MONEY:

The equation suggests that there are three main determinants of the nominal demand for money:

Price LevelReal Income

1. Interest rates:

An increase in the interest rate will lead to a reduction in the demand for money because higher interest rates will lead investors to put less of their portfolio in money (that has a zero interest rate return) and more of their portfolio in interest rate bearing assets (Treasury bills).

2. Real income:

An increase in the income of the investor will lead to an increase in the demand for money.

If income is higher consumer will need to hold more cash balances to make transactions (buy goods and services).

3. The price level:

An increase in the price level P will lead to a proportional increase in the nominal demand for money.

If prices of all goods double, we need twice as much money to make the same amount of real transactions.

Since the nominal money demand is proportional to the price level, we can write the real demand for money as the ratio between MD and the price level P.

Then, the real demand for money depends only on the level of transactions Y and the opportunity cost of money (the nominal interest rate)

Formula for Money Demanded:

MD/P = L(Y, i)

1. Relation between Money Demand and Interest Rate :

The relation will be downward-sloping because a higher (lower) interest rate will cause a reduction (increase) in the demand for money.

Interest RateMoney Demand

2. Relation between Money Demand and Income:

An increase in the level of income Y will lead to an increase in the demand for money, at any level of the interest rate and vice versa.

EQUILIBRIUM IN THE MONEY MARKET:

DETERMINATION OF MONEY SUPPLY:

To find the equilibrium in the money market, we need now to determine the supply of money.

The nominal supply of money is determined by the Fed that decides how much money should be in circulation.

The supply of money by the Fed is defined as MS; the real value of this money supply is the nominal supply divided by the price level P, or MS/P

.

FORMULA FOR CALCULATION OF MONEY SUPPLY:

MS/P = L(i, Y)

MS is the amount of money/currency supplied by the Central Bank (through open market operations).

IncomeMoney Demand

EQUILIBRIUM IN MONEY MARKET AS A SOLUTION TO DEVALUATION

The ideal situation for an economy currency is MD = MS. If supply of money will be according to the demand, there will be no surplus of money in

the market and flow of money will be controlled that leads to stable currency.

GENERAL EQUILIBRIUM THEORY IN TERMS OF NUMERICALS

Numerical Example # 1

If the following information are given regarding money market, the level of income is found at some rate of interest where Md = Ms.

Mtd = 0.25Y, Msd = -200i, Ms = Mo = 300

Solution:

Md = Mtd + MsdMd = 0.25Y +(-200i)Ms = Mo = 300Md = Ms0.25Y - 200i = 3000.25Y = 300+200iY = 300+200i/0.25Y = 1200+800iThe LM - equation.

By supposing 10% as interest rate we get the following level of NI

Y = 1200+800(10/100)Y = 1200+80Y = 1280

Putting the value of Y and iMd = 0.25Y -200iMd =0.25(1280) - 200(10/100)Md =320-20Md =300

Thus, i = 10% , Y = 1280, where Md = Ms = 300 If i = 15% , then Y = 1200+800(15/100) = 1320 15%Mtd = 0.25Y = 0.25(1320) = 330Msd = -200(15/100) = -30 AMd = Mtd = Msd = 330-30=300 10%

Numerical Example # 1

If the following information are given regarding money market, the level of income is found at some rate of interest where Md = Ms.

Mtd = 0.25Y, Msd = -200i, Ms = Mo = 300

Solution:

Md = Mtd + MsdMd = 0.25Y +(-200i)Ms = Mo = 300Md = Ms0.25Y - 200i = 3000.25Y = 300+200iY = 300+200i/0.25Y = 1200+800iThe LM - equation.

By supposing 10% as interest rate we get the following level of NI

Y = 1200+800(10/100)Y = 1200+80Y = 1280

Putting the value of Y and iMd = 0.25Y -200iMd =0.25(1280) - 200(10/100)Md =320-20Md =300

Thus, i = 10% , Y = 1280, where Md = Ms = 300 If i = 15% , then Y = 1200+800(15/100) = 1320 15%Mtd = 0.25Y = 0.25(1320) = 330Msd = -200(15/100) = -30 AMd = Mtd = Msd = 330-30=300 10%

Numerical Example # 2

If following are the information regarding money market, find the level of NI at some rate of interest where Md = Ms.

Mtd =L1 = 0.25Y, Msd = L2 = 62.5i, Ms =MoIt is told that some people represent Md by L, Mtd by L1 , and Msd = L2

SOLUTION:

L= L1+ L2 = 0.255Y +(-62.5i)L = 0.25Y -62.5iMs = 500, Ms =MdMo = Md500 = 0.25Y - 62.5i500 + 62.5i = 0.25YY = 500+62.5i/0.25Y = 2000 +250iIf i =10% thenY =2000+250(10/100)Y = 2000+25Y = 2025L1 = 0.25Y = 0.25(2025) = 506.25L2 = -62.5i=-62.5(10/100) = -6.25L =L1 + L2L =(506.25)+(-6.25) = 500Ms = Mo = 500

Thus, when i = 10% and Y = 2025, where Md = Ms = 500. This represent general equilibrium in money market.

Numerical Example # 2

If following are the information regarding money market, find the level of NI at some rate of interest where Md = Ms.

Mtd =L1 = 0.25Y, Msd = L2 = 62.5i, Ms =MoIt is told that some people represent Md by L, Mtd by L1 , and Msd = L2

SOLUTION:

L= L1+ L2 = 0.255Y +(-62.5i)L = 0.25Y -62.5iMs = 500, Ms =MdMo = Md500 = 0.25Y - 62.5i500 + 62.5i = 0.25YY = 500+62.5i/0.25Y = 2000 +250iIf i =10% thenY =2000+250(10/100)Y = 2000+25Y = 2025L1 = 0.25Y = 0.25(2025) = 506.25L2 = -62.5i=-62.5(10/100) = -6.25L =L1 + L2L =(506.25)+(-6.25) = 500Ms = Mo = 500

Thus, when i = 10% and Y = 2025, where Md = Ms = 500. This represent general equilibrium in money market.

Numerical Example # 3

If the following information are given regarding goods and money markets, equilibrium rate of interest and level of NI where goods and money markets are equilibrium if:

C= 102+0.7Y

I= 150-100i

Mtd = 0.25Y

Msd = 124-200i

Ms=Mo=300

SOLUTION:

Y = C+I

Y= 102+0.7Y+150 – 100i

Y(1-0.7) = 252-100i

Y(0.3) = 252-100i

Y=252-100i/ 0.3

Y= 840-333.33i…… (1) The IS Equation

Md=Mtd+ Msd= 0.25Y+124-200i

Md=Ms

0.25Y +124-200i = 300

0.25Y= 300-124+200i

0.25Y=176+200i

Y=176+200i/0.25

Putting the value of I in (1) and (2)

Y= 840 – 333.33 (0.12) = 800

Y= 704+800 (0.12) = 800

Mtd = 0.25Y

Putting the value of Y in Mtd

Mtd = 0.25(800) = 200

Msd = 124-200i

Putting the value of i in Msd

Msd = 124-200(0.12) = 100

Md = Mtd+ Msd

Md 200+100= 300

C= 102+0.7Y

C= 102+0.7(800) = 662

Numerical Example # 3

If the following information are given regarding goods and money markets, equilibrium rate of interest and level of NI where goods and money markets are equilibrium if:

C= 102+0.7Y

I= 150-100i

Mtd = 0.25Y

Msd = 124-200i

Ms=Mo=300

SOLUTION:

Y = C+I

Y= 102+0.7Y+150 – 100i

Y(1-0.7) = 252-100i

Y(0.3) = 252-100i

Y=252-100i/ 0.3

Y= 840-333.33i…… (1) The IS Equation

Md=Mtd+ Msd= 0.25Y+124-200i

Md=Ms

0.25Y +124-200i = 300

0.25Y= 300-124+200i

0.25Y=176+200i

Y=176+200i/0.25

Putting the value of I in (1) and (2)

Y= 840 – 333.33 (0.12) = 800

Y= 704+800 (0.12) = 800

Mtd = 0.25Y

Putting the value of Y in Mtd

Mtd = 0.25(800) = 200

Msd = 124-200i

Putting the value of i in Msd

Msd = 124-200(0.12) = 100

Md = Mtd+ Msd

Md 200+100= 300

C= 102+0.7Y

C= 102+0.7(800) = 662

Subtracting (2) from (1) Y= 840-333.33i+- Y=704+- 800i0= 136-1133.33i

1133.33i = 136

i= 136/1133.33 = 0.12 =12%

i Y S I Md= Mtd+ MsdMs

12% 800 138 138 300=200+100 300

Numerical Example # 4With the following equations, find simultaneous equilibrium in good and money markets.SOLUTION :

Goods Market EquilibriumY= C+I+GY= 10+0.8Yd+100-200i+15Y=10+0.8[Y-T] +100-200i+15Y=10+0.8[Y-30]+100-200i+15Y=10+0.8Y-24+100-200i+15Y-0.8Y= 101-200iY (1-0.8) =101-200iY(0.2) = 101-200iY= 101-200i/0.2 OR Y=505-1000i…… (1) The equation of IS

Money Market EquilibriumMd = Ms0.25Y-40i=1000.25Y=100+40iY=100+40i/0.25Y=400+160i……(2)

The equation of LMPutting value of I in (1) and (2)Y=505-1000i =505-1000(0.0905172)Y=505-90.5172=414.48275Y= 400+160i =400+160(0.905172) = 414.48275Md =0.25Y-40i = 0.25(441.48275) – 40(0.0905172)=100C= 10+0.8Y=10+0.8[Y-T]C=10+0.8[414.48275-30] = 317.58624Yd =Y-T= 414.48275-30 = 384.4828S= Yd-C=384.4828- 317.58624 = 66.89656I =100-200i= 100-200(0.0905172)

I = 100-18.10344 =81.89Thus at 9% rate of interest the equilibrium level of NI is 414.48, whereMd=Ms=100 and I+G=S+T =96.90

i Y Md Ms S+T I+G

9% 414.48 100 100 66.89+30=96.90 81.89+15=96.90

C= 10+0.8YdYd =Y-TT= 30G=GO =15I=100-200iMd=0.25Y-40iMo=100

Subtracting (2) from (1)Y=505-100i+-Y= +-400+-160i0=105-1160i1160i=105i = 105/1160= 0.905172

Numerical Example # 5

With the following equations, find equilibrium level of interest and equilibrium level of NI.C=130+0.5, Yd=Y, T=20+0.2Y, G=Go=112,I=200-600i, Ms=300, Mtd=0.5, Msd=50-600i

SOLUTION .

Goods market equilibrium:

Y = C+I+G putting the valuesY = 130+0.5Yd+200-600i+112Y = 130+0.5(Y-T)+200-600i+112Y = 130+0.5(Y-(20+0.2Y)+200-600i+112Y = 130+0.5(Y-20-0.2Y)+200-600i+112Y = 130+0.5Y-10-0.1Y+200-600i+112Y-0.5Y+0.1Y=130+200-600i+112-10Y(1-0.5+0.1)=432-600i

Y(0.6)= 4322-600i = Y= 432-600i/0.6Y = 720-1000i ... (1) The equation of IS

Money Market Equilibrium: Subtracting (2) from (1)

Md = Ms Y = 720-1000iMtd + Msd =Ms Y = 500+1200i0.5Y+50-600i=300 -------------------------0.5Y = 300-50+600i 0 = 220 - 2200i0.5Y = 250+600i 2200i =220Y = 250+600i/0.5 i = 220/2200 = 0.1 =10%Y = 500+1200i ...(2) the equation of LM

Put the value of i in IS and LM equations

Y = 720-1000(0.1) = 720-100= 620Y = 500+1200(0.1) = 500+120=620

QUANTITY THEORY OF MONEY AS A SOLUTION

According to classical economist J.S. Mill,

Other things remaining constant, as a result of changes in quantity of money (by change in prices) value of money changes in reverse proportion.

Quanitity of moneyValue of moneyPutting the value of Y and i in different variables T = 20+0.2Y = 20+0.02(620) = 20+124 = 144Yd = Y-T = 620-144=476C= 130=0.5Yd = 130+0.5(476)=130+238= 368S = Yd-C = 476-368=108I = 200-600i = 200-600(0.) = 200-60=140Md = 50+0.5Y-600 = 50+0.5(620)-600(0.1)=50+310-60=300S+T = 108+144 = 252I+G = 140+112 = 252

Thus, 10% is the equilibrium rate of interest and 620 is the equilibrium level of NI where both goods and money markets are in equilibrium.

i Y Md Ms S+T I+G10% 620 300 300 252 252

According to Taussig:

Others things remaining equal, the prices will be double if the quantity of money in double. He has also explained the proportion between the quantity of money and value of money.

ACCORDING TO IRVING FISHER, WHO PRESENTED THE “EQUATION OF EXCHANGE”,

P = MV +M ' V 'T

Where,P = average price levelM = quantity of legal moneyV = velocity of circulation of moneyM’ = quantity of credit moneyV’ = velocity of circulation of credit moneyT = Total transactions

ASSUMPTIONS:1. The quantity of goods should not change2. Velocity of circulation of money should not change3. Quantity of barter trade should not change4. Quantity of hoarded goods should not change5. Money should be in use

Quantity of moneyPrices in market

IN MATHEMATICAL TERMS:

Suppose,

M Rs. 5000V Rs. 4M’ Rs. 10000V’ Rs. 8T Rs. 3000

P = MV +M ' V 'T

P = [ (5000 x 4 ) + ( 10000 x 8 ) ] / 3000P = Rs. 33.33

M Rs. 10000V Rs. 4M’ Rs. 20000V’ Rs. 8T Rs. 3000

P = MV +M ' V 'T

P = [ (10000 x 4 ) + ( 20000 x 8 ) ] / 3000P = Rs. 67

M Rs. 2500V Rs. 4M’ Rs. 5000V’ Rs. 8T Rs. 3000

P = MV +M ' V 'T

P = [ (2500 x 4 ) + ( 5000 x 8 ) ] / 3000P = Rs. 17

POLITICAL

POLITICAL STABILITY:

Political Stability is necessary for currency stability but remain unstable always. The political conditions of Pakistan are very instable. It looks like Pakistani politics is like a well from which no one can come out. Sensible political parties like PTI are busy in Dharnas and Nawaz League is busy in dirty politics against each other causing divert of attention from main issues that are constantly acting in destroying the country. If Pakistan want to overcome the situation of Devaluation. Political Stability is the Solution for Devaluation of Currency which can be achieved in the following way:

Stop corruption

Corruption of people in power is also a reason for currency devaluation because they take dollars against our currency, out of our country and create demand of dollars. It means that there will be no reserve of foreign exchange at the back end of our currency issue causing the devaluation of currency.Pakistan has 127th number in corruption index during 2013 which shows the intensity with which funds are being transferred to pockets of officials.Following is the chart that shows the ranking of Pakistan in corruption all over the world.

Disrupth The CoruptionRefined PoliciesAvoid Terrorist AttacksKeep GDP PositivePOLITICAL

Govt. must refine its policy and decide a clear direction

Govt. has no clear policy for fighting against issues. The basic intention of government is to get maximum votes in future and secure their government. That’s why they introduce only single consumer based schemes like Laptop distribution, Metro bus system, motor way system. While the country demand effective management of resources. People want food to eat, water to drink, homes to live, gas, electricity, which are all basic needs and government has no focus on it. That’s why the industries which were heaviliy contributing t economics development in the past, now suffering from economic crises. Due to increased cost of production, the exports and becoming costly and unable to attract foreign buyers and cause devaluation.

Govt. try to avoid large events like Peshawar attack:

Government has fully failed in controlling security of its citizens which caused low business activities and illegal activities. Moreover, the war on terrorism that has now indulged whole Pakistan in it, is the front-eye evidence of government’s failure. Terrorism was once confined to specific areas but now, whole Pakistan has become its victim. The huge loss of brains in Peshawar attack is also included in this. Govt. must take action to control these activities regardless of politics so devaluation of currency can be controlled.

Facilitate people to convert positive GDP (current account deposits)

A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. There are two implications of devaluation. First, devaluation makes the country's exports relatively less expensive for foreigners. Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. This may help to increase the country's exports and decrease imports, and may therefore help to reduce the current account deficit.

CONCLUSION:

All the suggested solutions can help to overcome Devaluation in Pakistan but the most important factor is government itself. if government make effective fiscal and monetary policies , devaluation can be controlled.

REFERENCES:

http://budgeting.thenest.com/difference-between-devaluation-depreciation-25095.html http://www.opfblog.com/1911/currency-devaluation-and-its-impact-on-the-economy/ http://talib.pk/article/48-reasons-for-devaluation-of-pakistani-rupee http://budgeting.thenest.com/difference-between-devaluation-depreciation-25095.html http://jang.com.pk/thenews/apr2008-weekly/busrev-21-04-2008/p3.htm http://www.pkhope.com/currency-devaluation-in-pakistan/ http://www.dawn.com/news/1104590 http://www.en.wikipedia.org/wiki/economy-of-pakistan/ http://www.ukessays.com/essays/economics/the-advantages-and-disadvantages-of-

devaluation-economics-essay.php http://www.tradingeconomics.com/pakistan/currency http://www.sbp.org.pk/ http://www.freecurrencyrates.com/exchange-rate-history/USD-PKR/2002 http://www.freecurrencyrates.com/exchange-rate-history/GBP-PKR/2005 http://www.freecurrencyrates.com/exchange-rate-history/EUR-PKR/2007 http://pakistanpaedia.com/gop/currency/pakistani_currency.htm http://www.tradingeconomics.com/embed/?

s=wgdppaki&d1=20000101&d2=20151231&h=300&w=600&ref=/pakistan/gdp http://www.dawn.com/news/1148425 http://www.sbp.org.pk/ecodata/FER/2015/Forex-23-Jan-15.pdf http://ahsankhaneco.blogspot.com/2012/04/deficit-balance-of-payment-of-pakistan.html http://www.tradingeconomics.com/embed/?

s=ptrdexp&d1=20100101&d2=20151231&h=300&w=600&ref=/pakistan/exports http://www.worldsrichestcountries.com/top_pakistan_imports.html http://www.tradingeconomics.com/embed/?

s=ptrdimp&d1=20000101&d2=20151231&h=300&w=600&ref=/pakistan/imports http://www.investopedia.com/articles/economics/08/currency-crises.asp http://www.newyorkfed.org/aboutthefed/fedpoint/fed38.html http://en.wikipedia.org/wiki/Currency_war https://books.google.com.pk/books?

id=5T8OVIyj8qYC&pg=PA205&lpg=PA205&dq=solution+to+devaluation&source=bl&ots=hW0zLvE3QY&sig=U1-K_ynNuKANQ46Icslh2UfXyDY&hl=en&sa=X&ei=ngXOVNXTFIK8Ue3XgsAM&ved=0CFEQ6AEwCA#v=onepage&q=solution%20to%20devaluation&f=false

http://www.tradingeconomics.com/embed/? s=pakistanextdeb&d1=20020101&d2=20151231&h=300&w=600&ref=/pakistan/external-debt

http://www.tradingeconomics.com/pakistan/government-budget http://www.economicshelp.org/blog/853/currency/foreign-currency-reserves/ http://www.marketskeptics.com/2009/02/foreign-exchange-reserves-explained.html http://www.theglobaleconomy.com/Pakistan/ http://www.brighthub.com/money/investing/articles/101403.aspx http://www.theglobaleconomy.com/Pakistan/Money_supply_growth/ http://en.wikipedia.org/wiki/Gold_reserve http://www.thpsc.com/gold-reserves-pakistan-grand-robbery/ https://www.boundless.com/business/textbooks/boundless-business-textbook/the-

functions-of-money-and-banking-21/money-as-a-tool-123/control-of-the-money-supply-571-3193/

http://people.stern.nyu.edu/nroubini/NOTES/CHAP8.HTM http://www.investopedia.com/terms/g/general-equilibrium-theory.asp