We all are familiar with the terms imports and exports when it comes to international as well as domestic economy. In this article i will tell you how imports and exports affects the economy.
Imports are an important indicator and a vital component of the economy. A high level of imports indicates robust domestic demand and a growing economy. Let’s take an example – today market has a growing demand for electronic gadgets, clothing, food, automobiles and other consumer goods. Many of them are foreign brands. It is because of imports they are accessible to us. When you purchase these goods, you are paying for these goods and that makes the economy grow. Therefore, a high level of imports indicates robust domestic demand and a growing economy. Now It’s even better if these imports are mainly of productive assets like machinery and equipment. These assets are used for long term productivity and productivity is necessary for an economy to grow.
When net exports exceeds net imports, the nation has a trade surplus. And that is really good for any nation’s economic growth. It means more output from factories, more number of people are employed, inflow of foreign money in to the country.
in a healthy economy, exports and imports are both growing. if imports are growing and exports are sharply declining, it means the rest of the world is in better shape than the domestic economy. If the opposite happens, it means the domestic economy is doing better. When the imports are higher than the exports trade deficit occurs. If the trade deficit keeps increasing, then it can have a negative effect on the domestic currency.
If domestic currency is week, that stimulates exports and makes imports more expensive. And a strong domestic currency hampers exports and makes import cheaper.
Inflation has a direct relation with interest rates. inflation means increase in the general price level of goods and services in an economy over a period of time. if the interest rates are low, then there is an increase in the money supply in the economy, In simple terms people have more money in their hands, and then they tend to consume more which eventually increases the prices of goods and services. Now try to understand this, higher inflation typically leads to higher interest rates, if the prices of goods and services are high, to bring it down the govt generally increases the interest rates so that there is less money supply in the economy.
Now if the inflation is high, that decreases the consumer spending because the prices of goods and services are high. Similarly, high inflation lead to decreases in imports, as people don’t have money to buy foreign goods anymore they would instead rely on domestic goods. Therefore we can also say that high inflation of a country decreases the exports of another country.
If inflation is high, which means consumer spending is low on foreign products but fairly good on domestic products, that increases the demand of domestic goods. Then exports may increase because businesses export their goods in a hope of higher competitive price. Again that may not be the case every time, but it happens.
The Imports and exports has a major impact on the consumer and the economy directly, and the same is true when seen the other way round.