How does exports affect gdp

In this case, Fred and Sarah both produce and purchase goods—Fred sells fish to Sarah, and Sarah sells coconuts to Fred. In a given period, Fred sells 10 fish to Sarah for 4 shells island currency per fish, or 40 shells total.

Sarah gathers and sells 15 coconuts to Fred for 3 shells per coconut, or 45 shells total. We can measure the value of island production by either tracking their expenditures spending or by tracking the income each earns from producing and selling their goods. Fred's production yields 40 shells in income when he sells to Sarah, and Sarah's production yields 45 shells of income when she sells to Fred; using the income approach, the GDP of Islandia is 85 shells.

Because any spending is someone's income and vice versa, using either measurement approach results in the same answer. Of course, tracking an actual economy is a bit more complicated. The typical textbook treatment of GDP is the expenditure approach, where spending is categorized into the following buckets: personal consumption expenditures C ; gross private investment I ; government purchases G ; and net exports X — M , composed of exports X and imports M.

Textbooks often capture this in one relatively simple equation:. The equation is an identity—an equation that is true for all values of the variables because of the way the variables are defined Table 1. The same would be true if the spending had been by a business to invest I in technology or equipment or by government G to build infrastructure or fund public schools.

The income approach should yield identical results because spending by one person is income for another. Suppose Fred and Sarah "discover" a nearby inhabited island. Barney, on the neighboring island, sells 10 bananas to Sarah for 3 shells each, and Sarah sells 10 coconuts to Barney for 3 shells each. For Sarah, bananas are imports and coconuts are exports. How does this affect the GDP of Islandia? But, the value of the imported goods bananas are not counted in Islandia's GDP because they were not produced on the island.

Remember that GDP measures domestic production. International trade is captured in the net exports portion of the expenditures equation X — M. However, in the expenditures equation, imports M are subtracted. On the surface, this implies that an extra dollar of spending on imports M would decrease GDP by one dollar. Some of this spending, which is counted as C, I, and G, is spent on imported goods.

As such, the imports variable M functions as an accounting variable rather than an expenditure variable. To be clear, the purchase of domestic goods and services increases GDP because it increases domestic production, but the purchase of imported goods and services has no direct impact on GDP. However, in general, a rising level of imports and a growing trade deficit can have a negative effect on one key economic variable, which is a country's exchange rate, the level at which their domestic currency is valued versus foreign currencies.

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. Assume the exchange rate is 50 rupees to the U. If the dollar were to strengthen against the Indian rupee to a level of 55 rupees to one U.

This may force the Indian importer to look for cheaper components from other locations. At the same time, assuming again an exchange rate of 50 rupees to one U.

If the rupee weakens to 55 rupees to one U. When this scenario is multiplied by millions of transactions, currency moves can have a drastic impact on a country's imports and exports. Inflation and interest rates affect imports and exports primarily through their influence on the exchange rate.

Higher inflation typically leads to higher interest rates. Whether or not this results in a stronger currency or a weaker currency is not clear. Traditional 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 different countries is two percent, then the currency of the higher-interest-rate nation would be expected to depreciate two percent against the currency of the lower-interest-rate nation. However, the low-interest-rate environment that has been the norm around most of the world since the 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 these investors have to be confident that currency depreciation will not offset higher yields, this strategy is generally restricted to the stable currencies of nations with strong economic fundamentals.

A stronger domestic currency can have an adverse effect on exports and on the trade balance. Higher inflation can also impact 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. This report is released monthly by most major nations. The U. Department of Commerce 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, and trends over time.

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That amount gets added to the country's GDP. Conceivably, net exports could be zero, with exports equal to imports and in fact this does occasionally happen in the United States. If net exports are positive, the nation has a positive balance of trade. If they are negative, the nation has a negative trade balance. Virtually every nation in the world wants its economy to be bigger rather than smaller.

That means that no nation wants a negative trade balance. Protectionism refers to government policies designed to restrict imports from coming into the nation. A tariff , also called a duty, is a tax on imports as they come into the country.

Free trade means international trade that is unrestricted by tariffs or other forms of protectionism. Because no nation wants a negative trade balance, some countries try to protect their own markets. This policy, called logically enough protectionism , uses barriers to keep out imports.