Exports and Their Effect on the Economy
Countries Will Do Anything to Increase Exports. Here's Why.
Exports are the goods and services produced in one country and purchased by citizens of another country. It doesn't matter what the good or service is. It doesn't matter how it is sent. It can be shipped, sent by email, or carried in personal luggage on a plane. If it is produced domestically and sold to someone from a foreign country, it is an export.
American tourism products and services can be exports, according to the U.S. Department of Commerce. Even though they are produced in the United States, they are exports when they’re sold to foreigners who are visiting. If an overseas friend sends you money to buy a pair of jeans to mail to them, that's also an export.
How Exports Affect the Economy
Most countries want to increase their exports. Their companies want to sell more. If they've sold all they can to their own country's population, then they want to sell overseas as well. The more they export, the greater their competitive advantage. That's because they gain expertise in producing the goods and services. They also gain knowledge about how to sell to foreign markets.
Governments encourage exports. That's because it increases jobs, brings in higher wages and raises the standard of living for residents. They become happier and more likely to support their national leaders.
Exports also increase the foreign exchange reserves held in the nation's central bank. That's because foreigners pay for exports either in their own currency or the U.S. dollar. A country with large reserves can use it to manage their own currency's value. They have enough foreign currency to flood the market with their own currency. That lowers the cost of their exports in other countries. Countries also use currency reserves to manage liquidity. That means they can better control inflation, which is too much money chasing too few goods.
To control inflation, they use the foreign currency to purchase their own currency. That decreases the money supply, making the local currency worth more.
What Countries Export
Businesses are able to export goods and services where they have a competitive advantage. That means they are better than any other companies at providing that product.
They also export things that reflect the country's comparative advantage. Countries have comparative advantages in the commodities they have a natural ability to produce. For example, Kenya, Jamaica, and Colombia have the right climate to grow coffee. That makes them more likely to export coffee.
India's population is its comparative advantage. It has a workforce who speak English and are familiar with English laws. Those skills make them perfect as affordable call center workers. China has a similar advantage in manufacturing due to its lower standard of living. They will work for lower wagers than people in other countries.
How Countries Support Exports
There are several ways countries try to increase exports. First, they use trade protectionism to give their industries an advantage. This usually consists of tariffs that raise the prices of imports. They also provide subsidies on their own industries to lower prices. But once they start doing this, other countries retaliate with the same measures. Over time, it lowers trade for everyone. In fact, this was one of the causes of the Great Depression.
Once tariffs and subsidies have lowered trade, countries will negotiate trade agreements. It allows greater exports by reducing trade protectionism. The World Trade Organization tried to negotiate an agreement between almost all the nations in the world. It almost succeeded, until the European Union and the United States refused to eliminate their farm subsidies. Now, most countries must rely on bilateral trade agreements or regional agreements.
Countries will also try to lower the value of their currency. This increases exports by making their prices lower. They do this by lowering interest rates, printing more currency or buying up foreign currency to make its value higher. Countries that try to compete by devaluing their currencies are accused of being in currency wars
How Exports Fit Into the Balance of Payments
- Current Account
- Capital Account
- Financial Account