Importing and Exporting Goods: How they affect the Economy

Importing and Exporting Goods: How they affect the Economy.

Importing and Exporting Goods: How they affect the Economy

Introduction

Imports and exports make the backbone of a country’s economy, but their effects determine the country’s economic performance through the balance of payment. There is a parallel connection between the success of a nation and the performance of the nation in the international trade. Since the emergence of globalization, it has become difficult for any nation to operate in isolation. Globalization opened up the trading barriers that existed there before and allowed free inflow and outflow of goods and services from one country to another. International trade plays a significant role in domestic and international economic development (Hatemi 13). Consequently, exports and imports have been at the center of the success or failure of any country’s economy. When a country becomes a constant consumer of other countries goods and services its trade balance suffers a great deal. Since very few countries are self-sufficient, it is important to strike a balance between the level of imports and exports. Exports represent a gain for a country since they encourage technological advancement and inflow of foreign exchange (Hatemi 13). On the other hand, imports represent an outflow of foreign exchange. The difference between the net levels of imports versus exports is called the balance of payment (Dritsakis 26). Therefore, when the balance of payment is negative, it means that the value of imports is higher than the value of exports (Dritsakis 26). Moreover, when the balance of payment is positive, it means that the value of exports is higher the value of imports (Dritsakis 26). Evidently, when the value of the balance of payment is positive, the country benefits significantly with employment opportunities in the industries, the government gains revenue through taxation, and the buying power of the native increases since they have a significant disposable income. A deficit on the trade balance has a negative impact on the economy of a country. The debate surrounding the impact of export and import on the economy has been rife in the recent past. This study was conducted to get a better perspective of the issue. The research is divided into a literature review, methodology, and results in analysis, conclusion, and recommendation.

Literature Review

Several economists have conducted research to establish the impact of export and imports on the economy. Agreeing to Shihab and Soufan in a study conducted in 2013; there exist a long-run association between manufactured exports and primary exports with economic development. In addition, Kalaitzi conducted a study to establish a relationship amongst exports and imports on the economic growth of the United Arab Emirates between 1980 and 2010. In the study, he utilized the Engle-Granger’s two-step cointegration test and the Johansen cointegration tool in an attempt to establish the reality of the connection between exports and the economic growth.

According to a study by Kim, Lim, and Park (1819-1822), the state of the exports and imports also matters when determining their impact on economic growth. From the study, manufactured exports are more valuable than unfinished products. For instance, most of the developing countries export primary products and import manufactured goods and services. Subsequently, developing countries do not gain much economically from as compared to their developed counterparts who exports finished/manufactured goods. Additionally, the primary products are subject to frequent market price fluctuations as opposed to the manufactured. Consequently, the nature of exports and imports matters significantly on the future of the economy.

Ahmet Ugur in 2008 established the impact of exports and imports on the economy of Turkey.Consequently, it was found that there is a significant relation between imports and exports and economic growth and decline (Turan and Karamanaj 5). From the study, imports and exports account for over 90% of the economic growth in Turkey (Turan and Karamanaj 5). Moreover, in another research depicting the Portugal economy, Francisco in 2010 used the Granger-causality method and found out that there is no significant link between imports and exports on the economic growth (Turan and Karamanaj 5). In another study using the Granger-causality test on the impact of imports and exports, it was established that increasing of exports had a significant impact on the economy of Japan. Nevertheless, the research indicated an unpremeditated association between the global trade and economic growth (Hatemi 13).

The various studies provide a different conclusion on this matter depending on the approach used in the study. Relatively, most of the researches indicate that there is a close correlation between exports and imports on the economic growth and economic decline. As stated earlier, the imports and exports affect the balance of payment. A deficit in the balance of payment can be meaningful to a developing country. Conversely, a deficit in the balance of payment can have a significant impact on the economy of a developed country. For instance, a developing country needs many infrastructures to improve or bolster its economic growth. A high balance of payment deficit can mean that the country has invested heavily in imported capital to launch its economic success. Conversely, a high balance deficit can cause a balance of payment crisis, which in return slows economic growth by scaring away investors. In addition, the balance of payment crisis will lead to layoffs in local industries, increase vulnerability to imported inflation, weaken the currency, and exhaust foreign currency reserves.

Most of the developing countries rely heavily on export for economic prosperity (Kim, Lim and Park 1819). Undeniably, most of the developing countries do not have a strong internal market and adequate technology to produce and consume goods and services produced locally. Most of the products produced locally are in the primary form, and since the products are meaningless in their raw form, they are exported to make them more valuable. Export of primary products is the primary source of foreign exchange for most of the developing countries. Despite fetching low prices, the developing countries benefit significantly from the export of such products and most of the developing countries peg their hopes on such exports to improve economically.

Moreover, use of imported labor or expertise can significantly affect the gains made from exporting of goods and services. The value of imported expertise is always high and the gains made will depend on the value and amount of products exported. For instance, most of the developing countries hire/ import experts to produce goods and services. The gains made from the export of goods and services are affected significantly by the amount used to pay for the expertise.

Methodology

The methodology used in this study is an empirical analysis of data from various previous studies to ascertain the association among the exports and imports on the economy. The data depends on the country where the research was conducted to ascertain whether there is a relationship or not. According to Dritsakis (561), it was found that exports have a causal effect on economic development in the USA and the European economy due to the influence of exports and imports. The exports had no causal effects on economic development in Japan. Therefore, a strong long-run link exists between imports, exports, and economic development in the European Union and the United States of America.

Correlation Analysis

Data from the Sir Lanka bank was used in the study encompassing the correlational analysis.

  • EG- Economic growth
  • EX- exports
  • IM- imports
 EGEXIM
EG

sig

1.355

.023

.391

.012

EX

sig

 1.987

.000

IM

sig

  1

 

From the correlational analysis, both the imports and exports have a great connection to a country economic growth. The point 0.05 denotes this: At this level, p<0-05 indicating that exports have a close relationship with economic development. The same case applies to the imports since at the same 0.05 level the P<0.05 indicating a long-run relationship with the economic growth.

Regression Analysis for Sir Lanka Economy

Import vs. Economic Growth

VariableCoefficientStd. Errort-statisticProb.
Import

constant

0.000207

3.793686

7.80E

0.440652

2.64955

8.609264

 
R-squared0.152545Mean dependent var.

 

 4.680488

 

Adjusted R-squared0.130815Mean dependent var.

 

 1.968530
S.E of Regression1.83526Akaike info criterion 4.099802
Sum squared resid.131.3592Schwarz criterion 4.183391
Log likelihood-82.04594F-statistic 7.020142
Durbin-Watson stat1.56893Prob.(F-statistic) 0.011580

Source. Journal of Economics and Sustainable Development

From the figure, change in R-squared is equivalent to 13% variation meaning that a 13% growth in the economy was influenced by imports into the country. From the various empirical analysis, imports and exports have an impact on the economy for some countries and none in other countries. The findings also depend on the model that was used during conduction of the research. Through the use of the two-regime TAR model on Japan, Philippines, Korea and Taiwan, there was a causal correlation between transfers and economic development export for Japan between 1973 and 2002 (Lee and Huang 47). According to Lee and Haung (47), the model used to investigate the scenario has an impact on the results found. The relationship between causal relationship pitting exports and imports on economic development can be attributed to some factors. Some of the factors include policies and the nature of the local market. For instance, foreign direct investment can affect significantly increase exports. In this case, the local consumption of the produced goods is low thus an increase in the level of exports (Lee and Huang). Contrary, when a country has a high consumption of locally produced goods the value of exports may be insignificant compared to the gains made locally.

In most cases, exports and imports have a causal relationship with economic growth. Exports help a country to gain foreign exchange, and through the foreign exchange, development projects are initiated. Moreover, imports help countries to acquire what they cannot produce. Most of the developing countries rely significantly on exports for economic growth purposes. Without exports, most of the economies of most of the developing countries would collapse. Exports and imports expand markets for goods and services hence they have a direct impact on the economy.

 

Works Cited

Dritsakis, Nikolas. “Exports and Economic Growth: An Empirical Investigation of E.U, USA and Japan Using Causality Tests.” Mediterranean Journal of Social Sciences, vol. 5, no. 20, 2014, pp. 561-621.

Hatemi, Abdulnasser. “Export Performance and Economic Growth Nexus in Japan: A Bootstrap Approach.” Japan and the World Economy, vol. 14, no. 1, 2002, pp. 13.

Kim, Sangho, Lim, Hyunjoo, and Donghyun Park. “The Effects of Imports and Exports on Total Factor Productivity in Korea.” Applied Economics, vol. 41, no. 14, 2009, pp. 1819-1834.

Lee, Chien-Hui, and Bow-Nung Huang. The Relationship between Exports and Economic Growth in East Asian Countries: A Multivariate Threshold Autoregressive Approach. Journal of Economic Development, vol. 27, no. 2, 2002, pp. 47.

Turan, Gungor, and Bernard Karamanaj. “An Empirical Study on Import, Export, and Economic Growth in Albania.” Academic Journal of Interdisciplinary Studies, vol. no. 3, 2014. pp. 5.

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Importing and Exporting Goods: How they affect the Economy

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