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Interesting Facts About

Imports And Exports


By Investopedia StaffAAA |
Imports and exports may seem like prosaic terms that have little bearing on
everyday life, but they exert a profound influence on the consumer and the
economy. In todays 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 in relation to exports which are products shipped from a country to
foreign destinations can distort a nations balance of trade and devalue its
currency. The value of a currency, in turn, is one of the biggest determinants
of a nations economic performance. Read on to learn how these mundane
staples of international trade have a more far-reaching influence than most
people imagine.
Effects on the Economy
According to the expenditures method of calculating gross domestic product,
an economys 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, lets 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, and 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. Its
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. The countrys chronic trade deficit has not
impeded it from continuing to be one of the most productive nations in the
world.
But a rising level of imports and a growing trade deficit do have a negative
effect on a key economic variable the level of the domestic currency versus
foreign currencies, or the exchange rate.
Effect of Exchange Rates
The inter-relationship between a nations 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.
Lets 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. exporters
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
exporters 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 worlds biggest trade surpluses and foreign
exchange reserves for years.

Effect of 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 differential between two nations is 2%, the currency of the higher-interestrate 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 nations 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 10 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, trends over time, etc.

Conclusion
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 nations economic
performance.

A depreciating rupee is an opportunity,


not weakness

All the opportunities available to China were also open to us. The need is for the government
to set up the right incentives to make those opportunities profitable for the private sector, the
rest will follow, says Sonali Ranade

From the beginning of March this year and end-May, over a period of three months, the dollar rose
by approximately 20 per cent, going from R48.50 to R56.50. The steep depreciation of the rupee
came after the dollar was allowed to depreciate in value against the rupee from R52 in March 2009 to
R44 in March 2011: a depreciation of 18 pc in the value of the dollar in Indian markets. Why did RBI
allow the rupee to appreciate by 18 pc during the 2009-11 period? Is the current depreciation in the
value of the rupee against the dollar justified?
While these are valid questions, the debate on the external value of the rupee misses its salience to
the broader economy. Japan, the Asian Tigers, and most recently China, have all industrialised and
shown phenomenal growth rates using a cheap home currency to reorient their economies for rapid
growth in exports. Indians used to be dismissive of such strategies on the plea that Japan and the
Asian Tigers were "small" countries, which made an export-led growth strategy feasible. India, with a
huge population and a large domestic market, needn't follow a similar strategy.
Then came China with a population larger than ours and showed how a cheap domestic currency
could be used to implement an export-led growth strategy with resounding success. Yet, we cling to
tired old arguments, both unwilling and unable to export our way out of poverty. What accounts for our
negative attitude to exports?
The two largest items on India's import bill are crude oil [$100 billion] followed by gold [$50
billion]. These two items account for a little over 50 pc of our import bill. We produce little of crude

domestically and virtually no gold. Yet, in the world markets we are third largest importer of crude and
the largest importer of gold.
An argument for keeping the rupee over-valued is that since India imports more than it exports, and
as most of our imports like crude are price inelastic, India is better off keeping the rupee over-valued.
The argument is deeply flawed at many levels. Firstly, remember that our current account deficit,
which now is in the region of $90 billion a year, has to be financed. In other words, the excess of
imports over exports every year has to be paid for by [a] borrowing on the international markets;
and/or [b] selling other assets such as equity in our profitable companies to investors abroad. Since
the '90s we have been financing the CAD by borrowing from NRIs, borrowing from other international
investors and selling shares in Indian businesses through FII or FDI routes.
Note, we started with borrowing from institutional investors in the '70s. When that source ran dry we
turned to NRIs. In the '90s even that wasn't enough so we started selling the family silver -- shares in
domestic companies and new businesses. This is not to say FII or FDI is undesirable. But we are not
doing it to foster competition in domestic markets. We are allowing such investments primarily to fund
the CAD. We have no other choice.
The simple fact is, no matter how attractive a strong rupee appears from a tactical standpoint, it
leaves a huge CAD in its wake that has to be funded. We have been running a persistent deficit for
the last 65 years and are running out of funding options. What little advantage we may gain in
"cheaper imports" via a stronger rupee is lost by having to pay higher than normal for funds with which
to cover the deficit. Hence, over time, a stronger rupee debilitates the economy and the shrinking
funding options is what precipitates depreciation of the rupee!
Therefore, a "strong rupee" actually causes a profoundly deeper weakness. Furthermore, a strong
rupee sends out wrong price signals to the economy and sets up perverse incentives that perpetuate
the deficit instead of correcting it over time. The fact is, nations cannot persistently spend more than
they earn. There is a day of reckoning when nations too can and do go belly up.
If we are running a persistent CAD that keeps growing every year, obviously deep structural changes
are needed to correct the imbalance. On the import side, it obviously means curbing the use of crude
and gold, to take the two largest items on our import bill.
Instead of curbing demand we subsidise petroleum, oil and lubricant products, which promotes their
consumption. Similarly for gold, by keeping real interest rates negative on bank deposits we force
households to save via gold rather than via financial products. Were the real returns on bank fixed
deposits positive after accounting for inflation, the investment demand for gold would disappear. But
the government uses sly taxation of wealth saved in bank deposits to manage its fiscal deficit. In the
process it sets up perverse incentives for gold imports.

Elimination of subsidies on POL products would force the economy to be more fuel-efficient and cut
the demand for POL by incentivising the development of other options such as solar or wind power.
We often forget that subsidies hurt the larger economy by killing off innovation that would mitigate the
current problem.
Similarly, an explicitly stated policy of keeping yield on three-year fixed deposits at least one pc pa
higher than WPI or CPI would not only force RBI to be more market-driven in setting interest policy
but also eliminate the investment demand for gold. In fact, consistently followed, the policy could also
free existing stocks for consumption demand and/or exports.
The argument that gold imports don't hurt is absolutely fallacious. Not only are gold imports awfully
deflationary, they are also far more expensive to the economy than to investors who buy if the rupee
is over-valued. The notion that gold imports don't really add to the "real deficit" is equally off the
mark. The privately held gold hoard is simply not available to society when needed.
In 1962, when India was in grave difficulty over the war with China, frantic efforts to mobilise gold to
buy arms mustered a paltry 30 MTs of gold. In contrast, we import about 1000 MTs annually now and
our accumulated holdings must be 20 to 30 times that amount. So let's not pretend that gold held by
private households is easily available for a public purpose. That is an empty slogan.
Why can't we step up our exports? Since independence, if you look at what we have accomplished by
way of finding new markets for our exports, the picture is very revealing.
In the '70s, we went to the IMF for a bailout. Increasing exports was a must. Casting about for a way
out, the government discovered that unknown to it, several smart traders in Surat were importing
small diamonds, using their own capital and connections, for polishing and cutting, and re-exporting
them with handsome margins. The gems and jewelry industry, much like the software services
industry, was born in the private sector and recognised only after it was well-established. The rest is
history.
Similarly, in the '90s a crisis forced us to devalue the rupee and the software services industry took off
responding to the increased profitability that the 20 pc rupee depreciation gave them. In both, the
basic arbitrage was labour cost. The gems and jewelry industry monetised cheap skilled Indian
labour. The software industry followed.
Are there no more opportunities to monetise our abundant labour? The fact is, such opportunities
abound. All the opportunities available to China were also open to us. The need is for the government
to set up the right incentives to make those opportunities profitable for the private sector. The rest will
follow. Are our policy-makers too pusillanimous?
Vast markets for agricultural products are opening up as people with higher income move up the food
chain. China is now the world's largest importer of food and its markets are not closed by quota
regimes. With our cheap rural labour, that is a huge opportunity given the right enabling policies for

investment in agriculture. If such exports haven't taken off it is because we have archaic laws, poor
infrastructure at ports, and lack of focus from policy-makers.
Yet, as soya exports show, nothing is impossible. It would be in the fitness of things if the current BoP
crisis, and the consequent depreciation of the rupee, is used as an opportunity by the government to
open up the farm sector for investment in export-oriented agriculture since we now have a huge
surplus in most agriculture crops except pulses.
A depreciating rupee is an opportunity, not a weakness. Instead of being defensive, the government
needs to launch a programme to educate people and business on how to benefit from it. For that to
happen, the government needs to put its own policy-making shop in order.

Devaluation of the Indian Rupee


by Tejvan Pettinger on March 20, 2014 in A-Level, currency

The Indian Rupee has fallen in value against a basket of currencies since independence
in 1947. In recent years, the Indian Rupee has continued to depreciate in value.
Indian Rupee value against US Dollar

In 1990, you could


buy $1 for 16 Indian Rupees. By 2013, the value of a Rupee had fallen, so that you
would need 65 Indian Rupees to buy $1.
Another way of thinking about it:

In 1990 1 Indian Rupee = $0.06


In 2013 1 Indian Rupee = $0.016
This shows there has been a substantial fall in the value of the Indian Rupee against the
US dollar.

When there is a devaluation in the Indian Rupee it means that Indian exports become
cheaper, but imports are more expensive for Indians to buy.
In particular, a devaluation in the Rupee is bad news for Indians who need to import raw
materials, such as oil and gold.

Causes of Devaluation in Rupee


Lack of competitiveness / inflation. The long term decline in the value of the Rupee
reflects Indias relative decline in competitiveness. In particular, India has a higher
inflation rate than its international competitors. In November 2013, Indian inflation
reached 11.24%. Therefore, there is relatively less demand for the rising price of Indian
goods; this reduction in demand causes a fall in the value of the Rupee.
Current account deficit. A consequence of poor competitiveness and high demand for
imports is a current account deficit. This means India is purchasing more imports of
goods and services than it is exporting. A large current account deficit tends to put
downward pressure on a currency. This is because more currency is leaving the country
to buy imports than is coming in to buy exports.
In the first quarter of 2013 the Current Account Deficit was 18.1 billion. The deficit was
over 6.7% in last quarters 2012, the deficit has fallen to 1.2% in Q3 2013. However, the
Economist notes that 75% of the deficit reduction is artificially related to reducing imports
of gold through government restrictions. (See: Indian economy 2014) Therefore, there is
still an underlying trade deficit, India will need to work on through increasing exports and
competitiveness.
A current account deficit can be financed by capital inflows (on the financial account).
But, recently, India has been struggling to attract sufficient long-term capital investment.
Some major companies have recently pulled out of foreign direct capital investment. This
puts more downward pressure on the Rupee.
Oil Prices
India is a net importer of oil. It has to buy oil in dollars. Therefore, rising oil prices worsen
Indias current account and also weaken the Rupee. More Indians Rupees have to be
spent on buying oil.

Impact of Devaluation in Indian Rupee


Inflationary pressures. India is trying to control inflation, which has been running into
double digits. But, devaluation makes itself makes it harder to control inflation. The
devaluation increases the price of imports, such as oil and fuels, leading to cost push
inflation. Also, devaluation is considered an easy way of restoring competitiveness,

therefore devaluation may reduce the incentives for exporters to work on improving longterm competitiveness. Finally, devaluation can help boost domestic demand. Exports will
rise and consumers will switch to domestic producers rather than imports. This can
cause demand-pull inflation.
Economic growth
A devaluation can boost domestic demand and short-term economic growth. However,
this is not necessarily helpful for the Indian economy. Indias economy needs to
concentrate on boosting productivity and long term productive capacity, rather than
relying on boosting domestic demand. The rapid devaluation has also caused a loss of
confidence in international and domestic investors. With a history of quick depreciation,
foreign investors will be more nervous of investing in India. The devaluation and
inflationary impact will also discourage domestic investors, e.g. firms worried about
future oil prices. This reduction in investment is damaging to long-term economic growth.
Devaluation spiral
The concern is that high Indian inflation causes devaluation, which in turn feeds into
more cost-push inflation. Thus it becomes a difficult to escape out of this unwelcome
negative spiral of inflation-devaluation-inflation.

Policies to stem devaluation in Rupee

Supply side policies to improve competitiveness


Reduce dependency on foreign oil, through domestic and renewable energy.
Monetary policy to tackle inflation and reduce domestic demand. But, will conflict with lower
economic growth and lead to higher unemployment.
Financial controls, e.g. limiting the amount of gold imports to reduce the current account deficit.