The lifeblood of the global market is trade. In this lesson, you'll learn about the importance of importing and exporting and related concepts including trade deficits, balance of payments, and formal and informal barriers to trade.
Meet Ellen. She's the president of a small country. One of her country's key industries is consumer electronics. In fact, it leads the world in production of computer tablets. Ellen's country is both an exporter and importer of goods. An export is the sale of goods to a foreign country, while an import is the purchase of foreign manufactured goods in the buyer's domestic market.
Ellen's country has successfully exported its tablets all over the world, including Canada, Mexico, the European Union, Australia and several countries in Asia. On the other hand, Ellen's country imports different components from Asian countries necessary to manufacture its computer tablets. Consequently, countries will often import goods that can be more effectively and cheaply produced by another country and focus on producing and exporting the goods in which it excels at producing.
Why It's Important
Exporting and importing helps grow national economies and expands the global market. Every country is endowed with certain advantages in resources and skills. For example, some countries are rich in natural resources, such as fossil fuels, timber, fertile soil or precious metals and minerals, while other countries have shortages of many of these resources. Additionally, some countries have highly developed infrastructures, educational systems and capital markets that permit them to engage in complex manufacturing and technological innovations, while many countries do not.
Imports are important for businesses and individual consumers. Countries like Ellen's often need to import goods that are either not readily available domestically or are available cheaper overseas. Individual consumers also benefit from the locally produced products with imported components as well as other products that are imported into the country. Oftentimes, imported products provide a better price or more choices to consumers, which helps increase their standard of living.
Countries want to be net exporters rather than net importers. Importing is not necessarily a bad thing because it gives us access to important resources and products not otherwise available or at a cheaper cost. However, just like eating too much candy, it can have bad consequences. If you import more than you export, more money is leaving the country than is coming in through export sales.
On the other hand, the more a country exports, the more domestic economic activity is occurring. More exports means more production, jobs and revenue. If a country is a net exporter, its gross domestic product increases, which is the total value of the finished goods and services it produces in a given period of time. In other words, net exports increase the wealth of a country.
Barriers to Trade
Exporting is not always an easy endeavor. Ellen's country often faces both formal and informal trade barriers that hinder the export of its computer tablets. Formal trade barriers are barriers to trade that are intentionally created for the express purposes of making it harder for an exporter to sell goods in a foreign market, while informal trade barriers are not necessarily created to hinder imports of goods but have the effect of doing so. Let's take a look at some of the more prevalent barriers.
Ellen's country often faces formal trade barriers. A common barrier is a tariff, which is a special type of tax that is imposed on goods imported into a country. Tariffs often make the imported good more expensive than its domestic equivalent. For example, a tariff imposed on the company's tablets may make it more expensive than a domestic tablet when it would have been cheaper if the tariff was not imposed. Thus, tariffs are often imposed to protect domestic companies.
Ellen's country often faces import quotas, which are limits on the number of a specific product that can be imported into a country during a specific period of time. For example, a neighboring country may restrict the number of tablets imported from Ellen's country. This means that Ellen can only export so many tablets to that country. Sometimes, a fixed quota will be imposed, which is an absolute limit on the quantity of exports. On the other hand, sometimes a country will impose a tariff surcharge on imports that exceed a certain level.
Ellen's country also faces informal trade barriers. Informal trade barriers can include product standards and health and safety standards. A product will have to meet these standards before they are allowed to be sold in the country.
Accounting for Trade
Countries keep track of the exports leaving and imports coming in. A country's balance of payments (BOP) is a record of all the economic transactions between a country and all other countries. It records all imports and exports. For example, the United States keeps a balance of payments recording all transactions between itself and every other country with which it conducts transactions. If the balance of payments is positive, that means more money is coming into the country than going out. If the balance is negative, it means that there is more money going out of the country than coming in.
The biggest part of a country's balance of payments is its balance of trade (BOT). You can calculate the balance of trade by subtracting the country's imports from its exports. A negative balance of trade means the country has a trade deficit - the value of its imports exceeds the value of its exports.
Let's review what we've learned. Exports are goods that are sold in a foreign market, while imports are foreign goods that are purchased in a domestic market. Exports and imports are important for the development and growth of national economies because not all countries have the resources and skills required to produce certain goods and services. Nevertheless, countries impose trade barriers, such as tariffs and import quotas, in order to protect their domestic industries.
Countries diligently track their economic transactions with other countries in their balance of payments (BOP). A positive balance of payments means more money is coming into the country than going out, and a negative balance of payments means that more money is going out than coming in. A country's balance of trade (BOT) is a component of its balance of payments and is determined by subtracting its imports from its exports. If a country imports more than it exports, it has a trade deficit.
After you have finished with this lesson, you'll be able to:
- Define imports and exports
- Describe some barriers to trade that countries face
- Explain what a country's balance of payments consists of and what is meant by a trade deficit