Today’s global economy is based on trade; trade involves the process of buying and selling. But when it comes to international trade, importing and exporting are the terms used instead of buying and selling. Global importing is the process of buying products or services from foreign countries for domestic consumers, whereas Global exporting is the process of selling domestic products to the foreign consumers. The global imports and exports of products and services facilitate consumers all over the world to purchase foreign products in their domestic markets. The international trade also offers consumers more choices.
The global imports and exports can create a paradigm shift in the market economy of every country. If a country’s imports of goods and services exceed its exports, the particular country may lose its balance of trade.
This economic context of a country is known as the trade deficit. It will negatively affect the market economy of a country. If a country’s exports exceed its imports, the net exports would be positive. This economic situation is called trade surplus.
The trade deficit will definitely lead to the devaluation of that country’s currency. Devaluation is a decline in the value of a country’s currency. It is one of the most significant and the biggest factor in measuring the economic performance of a country. It will pave the way for economic growth.
A trade surplus economy can provide more employment opportunities as it requires more products to export. Therefore, more people are needed to keep up the factories running. The consumer spending increases when the net export becomes positive as it stimulates the inflow of funds into the country.
Effect on Exchange Rate
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An increasing level of imports leads to the outflow of funds. If the imports are machinery and equipment, it may be the indication of a growing economy as it increases the productivity of a country. If a country imports more goods and services, it would have a negative effect on the value of the domestic currency or exchange rate. Devalued domestic currency makes imports highly expensive and stimulates the level of export. On the other hand, a higher exchange rate slows down exports and makes imports cheaper.
Countries may try to devalue their currencies to stimulate their global exports to gain an advantage over international trade. It is known as competitive devaluation. Competitive devaluation is an artificially created economic condition that refers to the comprehensive and strategic devaluation of the domestic currency to increase the volume of exports.
Effect on Inflation
Inflation can highly influence the import and export level of a country. Higher inflation rate may raise the chances of having an increased level of imports as it makes domestic people more competitive to buy imported products and services. Inflation makes domestic products less competitive. It will lead to a high level of import trade. Inflation and imports are having a positive correlation. However, inflation is not only the factor that leads to the increasing level of imports. There are many other factors such as exchange rate fluctuations, government policies, a large number of population and so on, that can also highly influence the global import trade of a country.