What Are Exports? Their Effect on the Economy

Countries Will Do Anything to Increase Exports. Here's Why.

Countries do whatever they can to increase exports. Photo: The Image Bank/Getty Images

Definition: Exports are the goods and services that are made in one country and transmitted to foreigners. It doesn't matter what the good or service is. It doesn't matter how it is sent. It can be shipped, sent by email, or hand-carried in personal luggage on a plane. If it is produced domestically and sold to someone from a foreign country, it is an export.

For example, tourism products and services are considered exports.

That's true even though they are sold to foreigners who are visiting. If an overseas friend sends you money to buy a pair of jeans and mail it to them, that's also an export. (Source: Department of Commerce)

How Exports Affect the Economy?

Most countries want to increase their exports. Their companies want to sell more. If they've sold all they can to their own country's population, then they want to sell overseas as well. The more they export, the greater their competitive advantage. That's because they gain expertise in producing the goods and services. They also gain knowledge about how to sell to foreign markets.

Countries encourage exports. That's because it increases jobs, brings in higher wages and raises the standard of living for residents. They become happier, and more likely to support their national leaders.

Exports also increase the foreign exchange reserves held in the nation's central bank.

That's because foreigners pay for exports either in their own currency or the U.S. dollar. A country with large reserves can use it to manage their own currency's value. They have enough foreign currency to flood the market with their own currency. That lowers the cost of their exports in other countries.

Countries also use currency reserves to manage liquidity. That allows them to better control inflation, or too much money chasing too few goods. They use the foreign currency to purchase their own currency. That lowers the supply, making the local currency worth more. That stops inflation.

What Do Countries Export?

Business export goods and services where they have a competitive advantage. That means they are better than any other companies in providing that product. 

They also exports things that reflect the country's comparative advantage. That occurs in a country that has the natural ability to grow certain commodities. For example, Kenya, Jamaica, and Colombia have the right climate to grow coffee. That makes them more likely to export coffee.India's population is its comparative advantage. They speak English, and are familiar with English laws. At the same time, they have a large population. That gives them an advantage in skilled yet affordable call center workers. China has a similar advantage in manufacturing.

That's because its population has a lower standard of living. That makes it low-cost.

How Countries Support Exports

There are several ways countries try to increase exports. First, they will use trade protectionism to give their industries an advantage. This usually consists of taxes on imports, called tariffs, that make prices higher. They also provide subsidies to their own industries to make prices lower. However, once they start doing this, other countries will retaliate, lowering trade overall. In fact, this was one of the causes of the Great Depression.

Once tariffs and subsidies have lowered trade overall, then countries will negotiate trade agreements. This allows greater exports by reducing trade protectionism. The World Trade Organization tried to negotiate an agreement between nearly all the nations in the world. It almost succeeded, until the EU and the U.S. refused to eliminate their farm subsidies. Now, most countries must rely on bilateral trade agreements, or regional agreements. 

Countries will also try to lower the value of their currency. This increases exports by making their prices lower. They do this by lowering interest rates, printing more currency, or buying up foreign currency to make its value higher. Find out which countries are winning and losing these Currency Wars.  

How the Exports Fit Into the Balance of Payments

What Is the Balance of Payments?

  1. Current Account
  2. Capital Account
  3. Financial Account

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