How Importing and Exporting Impacts the Economy
In our global economy, consumers are used to seeing products from every corner of the world in their local grocery stores and retail shops. These overseas products—or imports—provide more choices to consumers. And because they usually are manufactured more cheaply than any domestically produced equivalent, imports help consumers manage their strained household budgets.
The devaluation of a country’s currency can have a huge impact on the everyday life of a country’s citizens because the value of a currency is one of the biggest determinants of a nation’s economic performance and its gross domestic product (GDP). Maintaining the appropriate balance of imports and exports is crucial for a country.
- A country’s importing and exporting activity can influence its GDP, its exchange rate, and its level of inflation and interest rates.
- A rising level of imports and a growing trade deficit can have a negative effect on a country’s exchange rate.
- A weaker domestic currency stimulates exports and makes imports more expensive; conversely, a strong domestic currency hampers exports and makes imports cheaper.
Higher inflation can also impact exports by having a direct impact on input costs such as materials and labor.
1. Effect on Gross Domestic Product
When a country is importing goods, this represents an outflow of funds from that country. Local companies are the importers and they make payments to overseas entities, or the exporters. A high level of imports indicates robust domestic demand and a growing economy. If these imports are mainly productive assets, such as machinery and equipment, this is even more favorable for a country since productive assets will improve the economy’s productivity over the long run.
A healthy economy is one where both exports and imports are experiencing growth. This typically indicates economic strength and a sustainable trade surplus or deficit. If exports are growing, but imports have declined significantly, it may indicate that foreign economies are in better shape than the domestic economy. Conversely, if exports fall sharply but imports surge, this may indicate that the domestic economy is faring better than overseas markets.
2. Impact on Exchange Rates
The relationship between a nation’s imports and exports and its exchange rate is complicated because there is a constant feedback loop between international trade and the way a country’s currency is valued.The exchange rate has an effect on the trade surplus or deficit, which in turn affects the exchange rate, and so on. In general, however, a weaker domestic currency stimulates exports and makes imports more expensive. Conversely, a strong domestic currency hampers exports and makes imports cheaper.
3. Impact on Inflation and Interest Rates
Inflation and interest rates affect imports and exports primarily through their influence on the exchange rate. Higher inflation typically leads to higher interest rates.
Traditional currency theory holds that a currency with a higher inflation rate (and consequently a higher interest rate) will depreciate against a currency with lower inflation and a lower interest rate.
A stronger domestic currency can have an adverse effect on exports and on the trade balance. Higher inflation can also index materials and labor. These higher costs can have a substantial impact on the competitiveness of exports in the international trade environment.
A nation’s merchandise trade balance report is the best source of information to track its imports and exports. This report is released monthly by most major nations.
