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Imports and Exports

The inflow and outflow of goods and services from one country to the rest of the world

What are Imports and Exports?

Imports are the goods and services that are purchased from the rest of the world by one country’s residents, rather than purchasing it from within the domestic boundaries of the country. Imports lead to an outflow of funds from the country since import transactions involve payments by residents of a country to the rest of the world.

Exports are the goods and services that are produced within the domestic boundaries of a country but sold to the rest of the world. Exports lead to an inflow of funds within the country since export transactions involve selling domestic goods and services to the rest of the world.

 

Imports and Exports

 

What is Gross Domestic Product (GDP)?

Gross Domestic Product (GDP) is the gross market value of the total goods and services produced within the domestic boundaries of a country during a given period of time. It is also known as National Income (Y). Total imports and total exports are essential components for the estimation of a country’s GDP. They are taken into account as “Net Exports.”

 

GDP = C + I + G + X – M

 

Where:

  • C = Consumer expenditure
  • I = Investment expenditure
  • G = Government expenditure
  • X = Total exports
  • M = Total imports

 

Net Exports

(X-M) is collectively known as net exports. Net exports are the estimation of the total value of a country’s exports minus the total value of its imports. A positive net exports figure indicates a trade surplus. It is because Exports > Imports, which means there is an overall inflow of funds in the country from the rest of the world.

On the other hand, a negative net exports figure indicates a trade deficit. It is because Exports < Imports, which means there is an overall outflow of funds from the country to the rest of the world. Trade surplus and trade deficit are both fundamental components of a country’s balance of trade.

 

How to Decrease Imports/Increase Exports

 

1. Taxes and quotas

Governments decrease excessive import activity by imposing tariffs and quotas on imports. The tariffs make importing goods and services more expensive than purchasing them domestically, and the excessive import activity of the country declines.

 

2. Subsidies

Governments provide subsidies to domestic businesses in order to reduce their business costs. It helps bring down the price of domestic goods and services and discourages imports. It also encourages exports as purchasing goods and services becomes cheaper in the subsidized country, and hence, consumers from the rest of the world turn to purchase cheaper products rather than the expensive domestic ones.

 

3. Trade agreements

Sometimes, countries ensure a regular flow of international trade, i.e., regular imports and exports, by entering into a trade agreement with another country, as prescribed by the World Trade Organization (WTO). It ensures regular international trade and stable economic growth for the countries involved.

 

4. Currency devaluation

Another popular method of increasing exports and decreasing imports is devaluing the domestic currency. Governments devalue their currency with the aim of bringing down the prices of domestic goods and services. It makes the devalued country’s goods cheaper and increases exports. The currency devaluation also makes purchasing from other countries much more expensive, discouraging imports.

 

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Aggregate Supply and Demand
  • Balance of Payments
  • Consumer Surplus Formula
  • Gross National Product

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