Export

Export Function in Economics

The export function in economics represents the relationship between exports and a nation's Gross Domestic Product (GDP). GDP calculates the value of all goods and services that have been produced in a country during a specified time frame. For this instance, think of it as a country's output.

Fig. 1 - Export Function

The export function in Figure 1 above shows that exports increase as GDP rises. Exports rely on foreign demand as a driving factor rather than domestic factors. A country can produce as many goods as it wants but if foreign demand is lacking, then it can only lower the prices so much before production becomes economically unprofitable. However, if foreign demand increases, for whatever reason such as a change in tastes and trends, then exports will increase, and thus GDP will increase. However, it is important to keep in mind that, while exports are not dependent on domestic factors, there is still a positive relationship between exports and GDP.

Export: Import Function and Net Export Function

The net export function is a bit more exciting than the export function, but to understand it we need to be familiar with the import function. The import function shows the relationship between imports and a country's GDP. Unlike exports, imports are dependent on domestic factors and generally change depending on a nation's GDP since the wealth of a nation impacts how much people can afford to buy. Generally speaking, as GDP increases, so do imports, making the relationship between the two variables positive.

Fig. 2 - Import Function

In Figure 2 above we can see the positive relationship where imports increase as GDP increases. The graph for net exports combines the information from Figures 1 and 2. Net exports are a country's imports (M) subtracted from its exports (X), written as (X-M).

Fig. 3 - Net Export Function

Figure 3 above shows the net exports function. When the curve is still above the X- axis, net exports are positive and the country is still exporting more goods than it is importing, creating a trade surplus. When the curve meets the X-axis and net exports are zero, the country has reached a trade balance. The nation enters a trade deficit when the curve goes below the X-axis and net exports become negative.

The above analysis concerned the relationships over time. However, for any given period, all else equal, exports, imports, and net exports all have differing effects on the calculation of GDP. An increase in exports increases GDP because they bring in more revenue from foreign nations through the goods that are exported. Imports, on the other hand, do not affect GDP since they are not produced domestically. Net exports, like exports, also increase GDP so long as they are positive. If they are negative they will decrease GDP.

Difference Between Export and Import Trade

The difference between export and import trade is that one brings foreign goods into the market, creating a leakage out of the economy, while the other sends goods abroad, creating a financial injection into the economy.

Exports inject money into the domestic economy because the transaction brings money in from other economies. Exports are calculated by adding together the value of all goods manufactured domestically and sent abroad. Imports do the opposite, where funds from the domestic economy leak into foreign economies.

Exports have a positive effect when calculating GDP. Because GDP adds together the total value of all goods and services produced domestically, it does not add the value of imported goods. Exports increase GDP while imports do not affect GDP because they are an offset to the part of consumer spending that is spent on imported goods.

Just because exports impact domestic GDP, does not mean that GDP impacts exports. Since exports rely on foreign demand, a nation's level of exports cannot easily be meaningfully increased by domestic forces, at least not directly. The government can enact certain supply-side policies that can make domestic goods appear more attractive to foreign buyers. This is the opposite of imports, where higher GDP, as an indicator of economic health, correlates with increased imports since people have more money to spend. Indirectly, however, higher domestic spending on foreign goods can impact foreign spending on domestic goods, or exports. The more domestic consumers spend on imports, the more foreign economies grow, which means their consumers and firms have more money to spend on domestic goods and services.

An increase in exports is caused by a change in foreign demand. How this change in demand came about can differ. For example, the domestic government can peg the domestic currency to a stronger foreign currency, making domestic goods appear cheaper on the foreign market. They can also make trade deals with foreign governments or lower the cost of international transactions, all to increase foreign demand and exports. In addition, as stated above, foreign demand for domestic goods and services can be influenced by domestic demand for foreign goods and services.

Advantages and Disadvantages of Export

Let us get into the advantages and disadvantages of exports.

Table 1 - Advantages and Disadvantages of Exports

Export: Advantages

Exporting goods and services is important to an economy because it improves a nation's opportunities for economic growth and development. Exporting provides producers with more opportunities to sell their goods and earn profits. By exporting they are also bringing in money from other economies to grow their own rather than just cycling through what is already available in the domestic economy. By having to interact with other nations for trade, nations are forced to build relationships with each other. These relationships are important for political alliances that become vital during times of civil unrest, war, or natural disasters.

Speaking of disasters, exporting is also a good policy for mitigating risk. Think of it as not putting all of your eggs in one basket. That way, if your nation experiences some sort of economic difficulty, there will still be demand for your business from foreign consumers.

By exporting goods companies can expand their consumer base because they can reach more people to buy their products. Without exporting, firms are limited to their domestic consumer base with little room for expansion. When a firm can reach more consumers, they are able to sell more and therefore will increase production to meet demand. Unless the firm is already at its production capacity, increasing production has the potential to reduce the per-unit production cost if the firm is running efficiently.

Foreign consumers will buy goods from other nations because they are cheaper than what is available to them in their home country. As an exporting country, where foreigners go to buy goods, domestic prices are cheaper than abroad. For domestic producers, this means that they can raise their prices and still be competitive in the global market. However, this leads us to the disadvantages of exporting.

Export: Disadvantages

Since producers can increase their prices and still be globally competitive, domestic consumers suffer because they too will have to pay higher prices. Fluctuations in the exchange rate are also hurdles that exporters have to contend with. For example, if the exporting country's currency becomes stronger compared to that of the consumer, the exporter may see a reduction in sales because the goods appear more expensive to the consumer.

When producing goods for export, firms need to pay attention to cultural differences to optimize their goods for foreign markets, which can take a lot of research and effort. An example of this is how the menus for fast food chains differ depending on the country the restaurant is located in.

Another disadvantage is having to contend with the political climate between your nation and another. For example, doing business between countries like the US, Russia, and China can become difficult when political relations and conflicts are constantly resulting in changing sanctions, embargoes, or tariffs. These types of issues cause disturbances in shipping routes which negatively impact a business.

Export Examples

Some export examples are final goods like cars, cell phones, computers, or clothing. These are goods that are made in one nation from start to finish and the completed product is exported to other countries. Exports do not have to be final or complete goods to qualify as an export. Perhaps a nation only produces the first stage of a good or an input into a final good. Take wool for example. The sheep might be raised, shorn, and the wool cleaned in Australia, but the sweater that is produced from the wool is knitted in India. Wool is an export from Australia, an import to India, and then the wool sweater becomes an export from India to wherever.

Three of the United States' largest exports are pharmaceutical preparations, crude oil, and industrial machinery (1). These exports alone totaled $221,096 million¹. Pharmaceutical preparations are drugs meant for both human and animal consumption in their finished dosage and their ingredients. Crude oil is oil that has not been processed or refined into other variations that are widely used like gasoline or diesel. Industrial machinery is any machinery that is used for large manufacturing or production such as industrial weaving looms.