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Imports and exports may seem prosaic terms that have little impact on daily life, but they have a profound influence on the consumer and the economy in the interconnected global economy consumers are accustomed to today view products and production all over the world in their local shopping centers and stores these products abroad and imports offer more choice for consumers and help them manage household budgets stretched too but imports to exports which are products shipped from one country to foreign destinations can distort the balance of a nation trade and devalue its currency value of a currency, in turn, is one of the largest determinants of economic performance of a nation read on to learn how these mundane staples of international trade influence broader than most people realize.
According to the method of calculating the annual gross domestic product GDP spending in an economy is the sum total of C I G X M, C, I and G represent consumption expenditure investment and government spending, respectively.
Although these terms are important in the context of an economy, let's look more closely XM term, representing exports less imports or net exports If exports exceed imports, the net export figure would be positive, indicating that the nation has a trade surplus If exports are less than imports, net exports figure would be negative, and the nation has a trade deficit.
positive net exports contribute something of economic growth that is easy to understand intuitively more exports means more production plants and industrial facilities, as well as a greater number of people employed to keep these plants in the course of the reception performance of export earnings is also a flow of funds in the country, which stimulates consumption and contributes to economic growth.
Conversely, imports are seen as a drag on the economy can be measured from the GDP equation imports represent an output of a country fund, because they are payments made by local businesses importers overseas exporters entities.
However, imports in itself is not necessarily detrimental to economic performance, and in fact, are an essential component of the economy A high level of imports indicates strong domestic demand and a growing economy is even better if these imports mainly productive assets like machinery and equipment, because they will improve long-term productivity.
A healthy economy is one in which exports and imports are increasing, as this usually indicates economic strength and a sustainable trade surplus or deficit If exports grow well but imports have declined significantly, it may indicate that the rest of the world is in better shape than the national economy Conversely, if exports fell sharply but imports increase, it may indicate that the economy is doing better than the overseas markets the US trade deficit for example, tends to worsen when the economy is strong growth chronicle the country's trade deficit has not prevented not to continue to be one of the most productive nations.
But a level higher imports and a growing trade deficit have a negative effect on economic key national currency level variable with respect to foreign exchange, or the exchange rate.
The interrelationship between a country's imports and exports, and its exchange rate is complex because of the feedback loop between them, the exchange rate has an impact on the trade surplus or deficit, which affects the exchange rate, and etc. In general, however, a weaker domestic currency stimulates exports and makes them more expensive to reverse imports, a strong currency hinders exports and makes imports cheaper.
Let's an example to illustrate this concept, consider an electronic component 10 in the US price which will be exported to India Suppose the exchange rate is 50 rupees to the US dollar Ignoring shipping and other costs transaction such as import duties for the moment, the 10 position would cost the Indian importer Rs.500 now, if the dollar strengthens against the Indian rupee to a level of 55, assuming that the US exporter leaving the price 10 for component unchanged its price would increase to 550 rupees 10 x 55 for the Indian importer This can Indian importer seek cheaper components other places 10 the appreciation of the dollar against the rupee declined and the competitiveness of the US exporter in the Indian market.
At the same time, consider a garment exporter in India whose main market is the shirt that the US exporter sells 10 on the US market would fetch 500 rupees when its export revenues are received regardless of new shipping and other costs, assuming an exchange rate of 50 rupees to the dollar, but if the rupee weakened to 55 against the dollar, to receive the same amount of Rs 500, the exporter may now sell the shirt to 9 09 10 depreciation of the rupee against the dollar has therefore improved competitiveness Indian exporter to the US market.
In summary, an appreciation of 10 dollar against the rupee has made US exports uncompetitive electronic components, but has cheaper Indian shirts for US consumers imported The flip side is that a depreciation of 10 the rupee has improved the competitiveness of exports of Indian clothes, but made imports more expensive electronic components for Indian buyers.
Multiply the simplistic scenario above with millions of transactions, and you can get an idea of the extent to which moves in currencies may affect the country's imports and exports may attempt to solve their economic problems by using methods that artificially depress their currencies in an effort to gain an edge in international trade such a technique is competitive devaluation, which refers to the large scale strategic and depreciation of the national currency to increase export volumes another method is to remove the national currency and keep it at an abnormally low level This is the preferred route by China, which held its stable yuan for 1994-2004 decade, and subsequently allowed to appreciate only gradually against the dollar US, despite higher trade surpluses and foreign exchange reserves of the world pe nding years.
Inflation and interest rates affect imports and exports mainly through their influence on the exchange rate rising inflation usually leads to higher interest rates, but this leads to a strong currency or a currency lower evidence is somewhat mixed in this regard.
the conventional theory of money holds that a currency with a higher inflation rate and therefore a higher interest rate to depreciate against a currency with low inflation and lower interest rates The theory parity uncovered interest rate the difference in interest rates between the two countries is equal to the expected change in their exchange rate so if the interest rate differential between the two nations is 2, the currency of the nation higher interest rates would be expected to depreciate against the currency two of the nation's lowest interest rates.
In reality, however, the environment of low interest rates has been the norm in most countries since the global credit crisis 2008-09 resulted in investors and speculators chasing higher yields offered by currency with higher interest rates which had the effect of strengthening currencies that offer course of interest rates, since these hot money investors must be confident that the currency depreciation will not compensate yields higher, this strategy is generally limited to stable currencies of countries with strong economic fundamentals.
As previously reported, a strong currency can have a negative effect on exports and the trade balance rising inflation may also affect exports have a direct impact on the costs of inputs such as materials and labor to work These higher costs can have a significant impact on export competitiveness in the international trade environment.
A nation of the report of the merchandise trade balance is the best source of information for tracking imports and exports This report is published monthly by most major countries Reports in the trade balance of the United States and Canada are generally released within the first 10 days of the month, with a -month lag, by the Commerce department and Statistics Canada respectively These reports contain a wealth of information, including details of the largest trading partners, the larger product categories for imports and exports and trends over time, etc.
Imports and exports have a major influence on the consumer and the economy directly, as well as their impact on the level of the national currency, which is one of the biggest determinants of economic performance of a nation.
Interesting facts about the import and export Investopedia, imports, exports, higher interest rates, affect exports imports.