Impact of Inflationary Trend on Pakistan’s Economy (Balance of Payments)

Abstract

Inflation is a term known by most of us, criticized by majority of us, feared by all of us but not understood by many of us. In common terms, rise in general price level of a country is regarded as Inflation. But economic analysis of inflation is very deep and in economics, the term inflation means much more than understood by a common man. Inflation is defined as the change in the level of prices. Rising prices has always been an important issue for a common man and the issue raised by many opposition parties to topple the acting governments. A common man has no knowledge of foreign debts, FDI or the foreign reserves. He only knows that if the prices increase too much then the government is not performing well which makes this issue all the more important. What the balance of payments measures is the inflows and outflows of a nation's currency across its national borders with the rest of the world (ROW) over some period of time, usually a year, but often calculated quarterly or even monthly. Increasing prices have a direct impact on Balance of Payments as they result in higher costs of production as well as increasing the prices of export commodities and therefore decreasing the export prospects . The relation between Inflation and balance of payments is very sensitive and though some work has been already done on both the issues separately but no great efforts have been made to understand the relation between inflation and balance of payments. Who controls inflation and whether it is even possible to control inflation are two very perplexing questions that have been dealt with detail in this thesis work. This research study includes extensive study of Pakistan’s trade performance since 1947 to date along with discussing the driving forces behind those 2 economic conditions and it also gives practical recommendations to control the inflationary trend to improve the exports of the country