Well, I really wanna know that how do imports and exports effect nations’s economy and its currency. I’ve been reading some articles regarding third world economy and have educated myself about how a country cuts down its imports and increases its exports to cope up with economic challenges, but how does it work? Thanks in advance.
In: Economics
Been a while since I opened an economics textbook, but the general gist should be correct.
The GDP of a country indicates how healthy the economy is. If the GDP rises, it means that more goods are being produced, which means the economy is better able to meet the needs of the people. A higher GDP is usually better, at least in materialistic terms and assuming no other problems like wealth inequality, high inflation, etc etc.
GDP is measured by adding 4 sources: Private Consumption, Investment, Government, and (Exports minus Imports). An increase in spending by any of these segments will increase GDP. Boosting exports and lowering imports will mean more goods produced in the country, raising GDP.
When companies in these countries buy goods from each other, they have to change their currency. Let’s say it’s Japan (Yen) and Germany (Euro). A German retailer wants to buy Japanese cars. They have to sell Euros to buy Yen.
By this act of selling euros, the supply of euros has gone up. By buying Yen, the demand of Yen has gone up. Since there is now more Euros and less Yen in the market, the exchange rate of Euros/Yen will go up (ie Yen is worth more than before in Euros).
Import = you buy stuff
Export = you sell stuff you produce
Less import = less buying
More export = more selling
Countries tend to export the stuff they can produce relatively cheaply and import the stuff that they can get cheaper from other countries. To the best of my knowledge, economists do not usually think it is important for a country to export more than it imports.
If you export stuff, foreign buyers need to buy some of your currency (i.e. swap some of their currency for yours) to pay your country’s sellers. This increases the value of your currency, as well as your reserves of foreign currency. It is good for your country’s sellers, because they can sell a larger quantity than before, and at a higher price. However, it is bad for your country’s buyers, because they must pay a higher price to compete with the foreign buyers.
Similar things happen in reverse if you import stuff. Your country’s buyers/importers need to buy some of the other country’s currency. Consumers/buyers in your country are better off than before, because they can buy stuff that was produced at a lower price in a foreign country. (Think of toys or shoes that became cheaper as we increasingly started to import them from China or southeast Asia). However, importing is bad for manufacturers in your own country, because they are competing with foreign manufacturers.
In most cases, economists would argue that the good effects of exporting are larger than the bad effects. Remarkably, the same is true for importing!
In addition to asking here, the folks over at r/AskEconomics might be able to offer you some more help on the subject.
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