ECO403 Macroeconomics GDB Solution Fall 2012

Pakistan is an agricultural based economy. Most of our industries, export earnings and employments are interrelated to agricultural sector. According to facts and figures, about 25% of Pakistan’s total land area is under cultivation, agricultural sector accounts for 23% of GDP and employs about 47% of total labor force. In other words, we can say Pakistan’s agricultural industry is the main pillar of economy. In Pakistan, direction of the economy mainly depends on crops production while crops depend on many factors like rains, pesticides, fertilizers, availability of water, energy, subsides and economic policies. Our main crops are cotton, rice, sugarcane and wheat.  Pakistan is expecting a bumper cotton and sugarcane crops this year. According to a report, sugarcane output during this year would be 60-62 million tonnes against 58 million tonnes of last year while cotton crop would be 13-14 million tonnes this year against 10 million tonnes of last year. There are many factors involved to encourage the farmers to cultivate the sugar cane and cotton crops in a large area like, support price announced by the government, timely rains, use of biotech, application of enough pesticides and fertilizers. Furthermore, delayed monsoon in Sindh and in some parts of Punjab province have been good for maturing the cotton crops. According to global scenario, estimates of cotton and sugarcane productions are little bit different. Particularly, output of cotton is higher than previous years while sugarcane production is set to decline by 5%.

Requirement:

Keeping in view the above scenario, analyze the effect of heavy bumper crops of cotton and sugarcane on the components of Gross domestic product (GDP) of Pakistan.

Solution:

With increased production of cotton and sugarcane, the demand is bound to decrease. However, global estimates for both crops were lower production for sugarcane however higher production for cotton as compared to last year. So, we will be able to export both crops, but the demand for cotton will be relatively lower as compared to the demand for sugarcane. Therefore, cotton production will have an adverse effect on our GDP, since even if we send it to regions with extremely low cotton produce, due to lowered demand the profit margin will be relatively small. As for our sugarcane crop, if we export that, we could keep a wide profit margin, since the demand for sugarcane will be pretty high due to reduced global production.

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