The purpose of this paper is mainly two-fold: to examine some method¬ological issues involved in estimating the rate of overvaluation and to make a point-estimate of the rate based on observed data; and to construct time-series estimates of rates of overvaluation of Pakistani currency at the official exchange rate for the period from 1948/49 to 1964/65.
The importance of the terms of trade in economic development arises from the fact that they affect a country's import capacity as well as the balance of payments position. The position of most of the underdeveloped countries with respect to their export proceeds and terms of trade is precarious and vulnerable. Though the ratio of exports to national income may not be higher in these countries than in the advanced countries, most of these countries depend excessively on a few export commodities for the bulk of their export earnings. Consequently, export disturbances are a source of serious problems for these countries. The traditional pattern of Pakistan's foreign trade is similar to that cf many other underdeveloped countries. The characteristic feature is a heavy dependence on a small number of export items: Jute and cotton (raw, yarn and manufactures) account for about 80 per cent of Pakistan's total export earnings; while raw wool, tea, hides and skins add another 5 per cent1. Though imports are more varied, particular items like machinery and mill work, metals and ores, mineral oils, etc., account for a major share of im¬ports. Lately, with increased home production cf consumer goods, a new trend has become evident. Imports of consumer goods have been considerably reduced, and greater emphasis is now being placed on the import of industrial machinery. But the deficit in the balance of trade and the need to service the foreign debt still limits Pakistan's capacity to import the capital equipment necessary for its industrial development.
