The Importance of Exports in an Economy
“Export growth is important because of its effect on internal trade and economic stability. Even more, the rate of economic growth and the distribution of income and wealth in a country are closely related to export growth.”
Growth of an economy is directly related to exports. If exports increase at a faster pace as compared to imports, nothing can stop an economy from being a developed one. On the other hand, the instability in exports can adversely affects the process of economic development.
Lower exports mean low foreign exchange and lower foreign exchange in turn means a small purchasing capacity of a nation in the international market.
Fluctuations in export earnings introduce uncertainties in an economy. These uncertainties influence economic behavior by adversely affecting the level and efficiency of investment and in turn have a negative effect on growth.
In addition to the above factors, export growth is also important because of its effect on internal trade and economic stability. Even more, the rate of economic growth and the distribution of income and wealth in a country are closely related to export growth.
The concept of trade stability or instability may be based either on a country’s aggregate trade in comparison with the cost of the world or on a binary country pair comparison. Such binary pairs may be large depending upon the number of trading allies.
Export instabilities have been claimed to affect economic growth both positively and negatively. Fluctuation in exports earnings introduces uncertainties in the economy.
The other side of the picture is that a greater amount of uncertainty on export proceeds also brings about risk aversion. People tend to invest more in their own country and the economy starts improving gradually. But this is not much observed these days.
Export fluctuations, on an average, act as a hindrance to the stability and growth of the under developed countries. A high degree of export instability may be expected to deter investment on a number of grounds.
It is also expected to raise borrowing costs, because export fluctuations tend to cause balance of payment complexities. This ultimately leads to low confidence of people in the process of maintenance of the exchange rate.
Export instability stimulates inflation. The simple rule of the thumb is that as inflation rises in a country, the products and services tend to be costlier, with minor exceptions, of course.
Author - DeeKay
Tags - Finance, Economy
This article was created by DailyOjo staff. Report Spam/Abuse