Why Do Exports Matter?
Countries all over the world try to promote exports. Almost every country offers financial incentives to exporters. Countries like China have Special Economic Zones wherein exporters are not charged any tax. Similarly, other countries have special banks and insurance agencies promoted by the government to facilitate export growth.
This brings us to the importance of exports. If the government is spending so many resources and providing so many incentives to exporters, then they must be important for a country. In this article, we will understand the economic benefits that are derived from exports.
Utilization of Comparative Advantage
The fundamental principle driving international trade is that of comparative advantage. Some countries are blessed with some natural resources whereas others have different resources at their disposal. Consider the case of a country like Saudi Arabia. It has much more oil than it could possibly use. However, there are very few other resources that can be used internally. It is exports which allow Saudi Arabia to lead a prosperous life. They export the excess oil and import all the other goods. Similarly, countries like India and China which have the highest working populations export their labor services. Hence, it is important for any country to recognize their core competency and start focusing on exporting them.
Contribution to GDP
Net exports are the difference between imports and exports. If the net exports number is positive it adds to the GDP of the nation. On the other hand, if the net exports number is negative, it subtracts from the GDP of the nation. This is because goods which are sent abroad are also manufactured locally. Since GDP counts only local production, exports definitely lead to an increased GDP.
Of late, countries have started using GDP as a proxy measure to determine the rate of economic growth. Hence exports have become even more important because they appear to be directly linked to economic growth.
Increase in Employment
Exports lead to domestic production. Domestic production requires domestic labor. Hence, exports lead to an increase in employment in the nation. Apart from direct employment provided by exports, there is also a spillover effect.
This means that once export workers get paid, they also spend their money to consume goods and services. This leads to even more job creation. As a result, the entire economy develops. Economists often cite the example of China while explaining this point. The unemployment rate in China has been drastically cut down after the export-oriented policies were brought into place.
Also, economists often cite the United States example to prove their point. After World War-2, the United States was a dominant exporter of goods to the world. This period saw a massive rise in employment in the United States. However, soon America became dependent on cheap imports from nations such as China, Japan, and Korea. Now, the unemployment rate has skyrocketed in America. Since the production of goods is not happening in America, the American worker is unemployed!
It is for this reason that countries are now wary of decreasing exports. A fall in exports is treated as an early indicator of impending economic recession.
Recovery from Recession
Exports are a very important tool to spur economic growth in a country. This means that exports can also be used to recover from recessions. The logic behind this is simple. During the recession, there is a negative sentiment in the entire economy. Factories and offices stop giving wage increments. As a result, consumers start deferring their purchases. The result is that a vicious cycle ensues and production comes to a halt.
During the same time, other countries around the world are not suffering from a recession. Hence the consumers in these countries are willing to spend. It is here that exports come into play. Exporters from recession prone countries can send their goods to nations with favorable economic climate. This will increase the local GDP and reduce unemployment. This puts the economy
Increasing exports is one of the most effective ways to beat the recession.
Earning Foreign Exchange
The dollar is the most important currency in the world today. It is a reserve currency. This means that international trades happen either in dollar or gold. Essential commodities like oil and gold are priced only in terms of dollar or gold. Hence all countries need dollars for their survival.
Exports are the only way to earn dollars. It is for this reason that exports are considered to be vital to the solvency of a nation. A thriving economy can suddenly implode in the absence of dollars. This is because they will not be able to import essential commodities. Hence, exports are considered to be the lifeline of ant economy. This is why governments all over the world create special schemes to spur exports.
It must also be noted that exports need to be done at a profit. Some countries are subsidizing their products so that they become cheaper on the international market and spur exports. This will not benefit the economy. This is because at the end, this amounts to giving away stuff for free! Subsidies do not spur exports. They simply give away money that was earned by other industries in the nation. Subsidies are more political in nature. They are meant to benefit some people at the expense of the majority.
Authorship/Referencing - About the Author(s)
The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
- International Trade - Introduction
- History of International Trade
- Backdrop to International Trade
- International Trade Integration
- Payment Mechanisms in Global Trade
- International Payment Systems
- Letter of Credit in International Trade
- International Trade Terms - INCOTERMS
- Types of Licenses
- Types of Customs Duties & Taxes
- Customs Department - An Introduction
- Customs Brokerage
- Imports and Customs Clearance
- Documentation in Customs Clearance
- Import Documentation
- Customs Clearance Agency & Process
- International Marketing Business Model
- Export Marketing Channels
- Increasing Exports through FTZ
- Why Do Exports Matter?
- The Case against Export Credit Agencies