Exports and Imports

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An import is any good or commodity, brought into one country from another country in a legitimate fashion, typically for use in trade. An export is one taken out. Import goods or services are provided to domestic consumers by foreign producers. Import of commercial quantities of goods normally requires involvement of the Customs authorities in both the country of import and the country of export. Exports of commercial quantities of goods normally requires involvement of the Customs authorities in both the country of export and the country of import. The advent of small trades over the internet such as through Amazon, e-Bay and the like, have largely by-passed the involvement of Customs in many countries due to the low individual values of these trades.

1 Exchange Rate
2 The Effect of Exchange Rates
- 2.1 Example of the Effect of Exchange Rates
- 2.2 SPICED
3 Trends in Exchange Rates
4 The J-curve Effect
5 Links
6 Contributors

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Exchange Rate

The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another. For example, the higher the exchange rate for one euro in terms of one yen, the lower the relative value of the yen. Mostly, currencies are expressed as U.S. dollars, while the dollar is usually comapred to the Japanses yen, the British pound and the euro. As of the start of 2006, the exchange rate of one U.S. dollar for one euro was about 0.84 which means the dollar can be exchanged for 0.84 euros.

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The Effect of Exchange Rates

The value of the exchange rate effects the demand for exports and imports. For instance, if the pound become stronger,exports would become more expensive, which may lead to less people buying our products which would be damaging to our export market. However, a strong pound will lead to our imports becoming cheaper, leading to a greater demand.

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Example of the Effect of Exchange Rates

Let's use the example of an ice-cream.

For the sheer sake of simplicity, say that one pound (1) equals two hundred yen. (200).

Say that an ice-cream sells for £1 in the UK, and sells for 200 yen in Japan. If that is the case, it doesn't matter where you buy the ice-cream.

But suppose that an ice-cream costs £1 in the UK and 100 yen in Japan. Then you could go to the poorer country (Japan) and use the same pound to buy two ice-creams instead of one. So all other things being equal, the trend would be for ice-creams to be exported from Japan to the UK, because they are cheaper there. Thus, we can say that the price of the ice-cream is less in pounds than it is in yen. In this case, we'd say that the pound is stronger than the yen, or that the yen is weaker than the pound.

Effect of changing exchange rates

If I import hats from the USA they cost $10 dollars When £1:$1 I can sell them in the UK for £10 If the exchange rate changes to be continued..

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SPICED

This leads to the saying SPICED (Strong Pound Imports Cheap Exports Dear)

http://www.revisionguru.co.uk/graphics/diagrams/economics/unit3/exports1.jpg

This means that if the pound would be strong, imports would be cheap because the pound is worth more, thus can buy more; and exports are dear (expensive), because other countries would have to pay more to buy our products.

If the pound were to become weaker the opposite would happen, meaning that our exports would become cheaper because the pound is now worth a lesser amount, (and this would in turn increase the demand for them), and our imports would become more expensive because if the pound would not be worth as much, we would not be able to buy as much with it. This would reduce the demand for imports.

After there has been a change in the exhange rate of the pound, the economic effects will take a while to come into force, and this is because:

We have to allow for time between the change in pound and the change in the balance of payments;
It would depend on how elastic the demand is for any given product;

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Trends in Exchange Rates

Looking at the graph (graph one), the last major depreciation of sterling was in the early to mid 1990's. This was following sterling being pulled out from the European Exchange Rate Mechanism on 'Black Wednesday' (16th September 1992) due to pressure from currency spectators. The currency was devalued by almost 15% against some of the worlds other currencies in Spetember 1992. This continued to devalue for the next three years. (see graph two).

http://www.hm-treasury.gov.uk/media/06C/C3/euro_c1.7.gif

graph one http://www.revisionguru.co.uk/graphics/diagrams/economics/unit3/exports4.gif

graph two http://www.revisionguru.co.uk/graphics/diagrams/economics/unit3/exports3.gif

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The J-curve Effect

After there is a depreciation of the pound then the demand for exports will grow faster if demand for UK goods in foreign countries is elastic. After this depreciation has occurred it is not always possible to switch away from imports due to the implications of a long term contract. We then end up spending more when the exchange rate decreases in value, which worsens the balance of payments in the short run, a process which is known as the J-curve effect.

http://www.revisionguru.co.uk/graphics/diagrams/economics/unit3/exports2.gif

With the above graph, assuming the economy begins at point A with a current account deficit, we would then find a fall in the value of the exchange rate. To start with, the volume of imports will remain steady partly because contracts for imported goods will have been signed.

However, this depreciation increases the price of imports (?) meaning total spending on imports would increase. The demand for exports would also be inelastic in response to the exchange rate in the short term, meaning that the earnings from exports may not be sufficient to compensate for the increased spending on imports. The current account deficit may continue to worsen for some months, which is shown from the move from A-B.

Assuming the elasticity?s of demand for X and M are >1, in the long term the trade balance will improve. This is what we call the Marshall-Lerner condition. On the graph, as demand for exports starts to increase and domestic customers switch their spending away from the imported goods and services; the balance of payments starts to improve. This is shown on the diagram from A to C.

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