Interesting Facts About

Imports and Exports

By Leslie Kramer | Updated January 15, 2018 — 12:50 PM EST

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Imports and exports may seem like terms that have little bearing on everyday
life for the average person, but they can, in fact, exert a profound influence on
both the consumer and the economy. In today’s interlinked global economy,
consumers are used to seeing products and produce from every corner of the
world in their local malls and stores. These overseas products – or imports –
provide more choices to consumers and help them manage strained
household budgets. But too many imports coming into a country in relation to
exports – which are products shipped from the country to a foreign
destination – can distort a nation’s balance of trade and devalue its currency.
The value of a currency, in turn, is one of the biggest determinants of a
nation’s economic performance. Read on to learn how these mundane staples
of international trade have a more far-reaching influence than most people
imagine.

According to the expenditures method of calculating gross domestic product,

an economy’s annual GDP is the sum total of C + I + G + (X – M), where C, I
and G represent consumer spending, capital investment, and government
spending, respectively.

While all those terms are important in the context of an economy, let’s look
closer at the term (X – M), which represents exports minus imports, or net
exports. If exports exceed imports, the net exports figure would be positive,
indicating that the nation has a trade surplus. If exports are less than imports,
the net exports figure would be negative, indicating that the nation has a trade
deficit.
Positive net exports contribute to economic growth, something that is intuitively
easy to understand. More exports mean more output from factories and
industrial facilities, as well as a greater number of people employed to keep
these factories running. The receipt of export proceeds also represents an
inflow of funds into the country, which stimulates consumer spending and
contributes to economic growth.

Conversely, imports are considered to be a drag on the economy, as can be

gauged from the GDP equation. Imports represent an outflow of funds from a
country since they are payments made by local companies (the importers) to
overseas entities (the exporters).

However, imports per se are not necessarily detrimental to economic

performance, and in fact, are a vital component of the economy. A high level of
imports indicates robust domestic demand and a growing economy. It’s even
better if these imports are mainly of productive assets like machinery and
equipment since they will improve productivity over the long run.

A healthy economy, then, is one where both exports and imports are growing,
since this typically indicates economic strength and a sustainable trade surplus
or deficit. If exports are growing nicely, but imports have declined significantly,
it may indicate that the rest of the world is 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.
The U.S. trade deficit, for instance, tends to worsen when the economy is
growing strongly. However, the country’s chronic trade deficit has not impeded
it from continuing to be one of the most productive nations in the world.

That said, a rising level of imports and a growing trade deficit do have a
negative effect on one key economic variable – the level of the domestic
currency versus foreign currencies, or the exchange rate.

Imports, Exports, and Exchange Rates

The inter-relationship between a nation’s imports and exports and its
exchange rate is a complicated one because of the feedback loop between
them. 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.

Let’s use an example to illustrate this concept. Consider an electronic

component priced at $10 in the U.S. that will be exported to India. Assume the
exchange rate is 50 rupees to the U.S. dollar. Ignoring shipping and
other transaction costs such as import duties for the moment, the $10 item
would cost the Indian importer 500 rupees. Now, if the dollar strengthens
against the Indian rupee to a level of 55, assuming that the U.S. exporter
leaves the $10 price for the component unchanged, its price would increase to
550 rupees ($10 x 55) for the Indian importer. This may force the Indian
importer to look for cheaper components from other locations. The 10%
appreciation in the dollar versus the rupee has thus diminished the U.S.
exporter’s competitiveness in the Indian market.

At the same time, consider a garment exporter in India whose primary

market is the U.S. A shirt that the exporter sells for $10 in the U.S. market
would fetch her 500 rupees when the export proceeds are received (again
ignoring shipping and other costs), assuming an exchange rate of 50 rupees to
the dollar. But if the rupee weakens to 55 versus the dollar, to receive the
same amount of rupees (500), the exporter can now sell the shirt for $9.09.
The 10% depreciation in the rupee versus the dollar has therefore improved
the Indian exporter’s competitiveness in the U.S. market.

To summarize, a 10% appreciation of the dollar versus the rupee has rendered
U.S. exports of electronic components uncompetitive but has made imported
Indian shirts cheaper for U.S. consumers. The flip side of the coin is that a
10% depreciation of the rupee has improved the competitiveness of Indian
garment exports, but has made imports of electronic components more
expensive for Indian buyers.

Multiply the above simplistic scenario by millions of transactions, and you may
get an idea of the extent to which currency moves can affect imports and
exports. Countries occasionally try to resolve their economic problems by
resorting to methods that artificially depress their currencies in an effort to gain
an advantage in international trade. One such technique is
“competitive devaluation,” which refers to the strategic and large-scale
depreciation of a domestic currency to boost export volumes. Another method
is to suppress the domestic currency and keep it at an abnormally low level.
This is the route preferred by China, which held its yuan steady for a full
decade from 1994 to 2004, and subsequently allowed it to appreciate only
gradually against the U.S. dollar, despite having the world’s biggest trade
surpluses and foreign exchange reserves for years.

Effect 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, but does this lead to a stronger currency or a weaker currency?
The evidence is somewhat mixed in this regard.

Conventional 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. According to the theory
of uncovered interest rate parity, the difference in interest rates between two
countries equals the expected change in their exchange rate. So if the interest
rate differentialbetween two nations is 2%, the currency of the higher-interest-
rate nation would be expected to depreciate 2% against the currency of the
lower-interest-rate nation.

In reality, however, the low-interest-rate environment that has been the norm
around most of the world since the 2008-09 global credit crisis has resulted in
investors and speculators chasing the better yields offered by currencies with
higher interest rates. This has had the effect of strengthening currencies that
offer higher interest rates. Of course, since such “hot money” investors have to
be confident that currency depreciation will not offset higher yields, this
strategy is generally restricted to stable currencies of nations with strong
economic fundamentals.

As discussed earlier, a stronger domestic currency can have an adverse effect

on exports and on the trade balance. Higher inflation can also affect exports by
having a direct impact on input costs such as materials and labor. These
higher costs can have a substantial impact on the competitiveness of exports
in the international trade environment.

Economic Reports
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. The U.S. and Canada trade balance reports are generally released
within the first ten days of the month, with a one-month lag, by the Commerce
Department and Statistics Canada, respectively. These reports contain a
wealth of information, including details on the biggest trading partners, the
largest product categories for imports and exports, and trends over time, etc.

The Bottom Line

Imports and exports exert a major influence on the consumer and the
economy directly, as well as through their impact on the domestic currency
level, which is one of the biggest determinants of a nation’s economic
performance.