What Are Exports? Their Effect on the Economy

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

CARGO-SHIP-BLUE.jpg
Countries do whatever they can to increase exports. Photo: The Image Bank/Getty Images

Definition: Exports are the goods and services produced in one country and purchased by citizens of another country. 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 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, American tourism products and services can be exports.

Even though they are produced in the United States, they are exports when they’re sold to foreigners who are visiting. If an overseas friend sends you money to buy a pair of jeans to mail to them, that's also an export. (Source: Department of Commerce.)

How Do 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.

Governments 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 means they can better control inflation, or too much money chasing too few goods. To control inflation, they use the foreign currency to purchase their own currency. That lowers the supply, making the local currency worth more.

What Do Countries Export?

Businesses are able to export goods and services where they have a competitive advantage. That means they are better than any other companies at providing that product. 

They also export things that reflect the country's comparative advantage. Countries have comparative advantages in the commodities they have a natural ability to produce. 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 have a large population of people who speak ​English and are familiar with English laws. 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. They will work for lower wagers than people in other countries.

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 tariffs that raise the prices of imports. They also provide subsidies on their own industries to make prices lower. But, once they start doing this, other countries will retaliate with the same measures. This will lower trade overall. In fact, this was one of the causes of the Great Depression.

Once tariffs and subsidies have lowered trade, countries will negotiate trade agreements. This allows greater exports by reducing trade protectionism. The World Trade Organization tried to negotiate an agreement between almost all the nations in the world. It almost succeeded, until the EU and the United States 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