Explain and illustrate using diagrams which factors influence a country’s level of exports and imports.
A countries exports and imports can be influenced by the balance between the price competitiveness and non price competitiveness.
Competitiveness can be explained as the price of exported goods to the countries in which the commodities have been exported to. This is majorly considered by the difference in the exchange currency. There has to be a balance between the currency of the country exporting goods and the country that will be receiving the exported goods. This will affect the price of that commodity in the country in which the export has been taken to. The lesser the exchange rate the affordability of the product in that foreign country will also be cheap. Hence, this will increase the demand for the exported goods because of its affordability in that country.
The figure below shows the illustration of how the competitiveness of the price would affect the price of a commodity in the country in which the exports have been taken to.
X- Represents the total money value of exports in the domestic currency
Price competitiveness in the two countries can also be influenced by the rate of inflation in the exporting country which affects the price of the products being exported in the importing country.
E.g. if the country exporting goods has a 2% rate of inflation and the importing country has an inflation rate of 5% this will mean that the exporting country will have an advantage over the importing countries. This will influence the price of the commodity to be cheap in the importing country compared to the domestic price of the same commodity in the importing country. This will increase the demand for the goods in the importing country hence facilitating the level of exports of a country to e specific country.
Non price competitiveness signifies the factors that make a product to be preferred over the other. E.g. quality, technological advancement e.t.c this will mean the if an exporting country produces quality products, than the already available at a cheaper price; this will increase the demands for the product hence, will facilitate the level of exports to that country.
Exports also depend on the position in the economic cycle in the countries you export to. This will be in terms the level of growth in the country one is exporting to. If the country being exported has an explosion in its economic growth rate then the demand for the product will be high affecting the export to be increased by the country exporting the commodities. This is because the rate will be replicated in the increase of income for the importing country hence the demand also will increase.
In other words the curve will shoot upwards due to the rate of the exchange rate, the higher the exchange rates, the less expensive the imports became, increasing the demand for the imports.
Hence, in general there are two factors that majorly affects the level of imports and exports in a country, if the rate of inflation in a country exporting goods is higher than the importing country, this means that there exporting country will be at an advantage that the importing country. Hence its curve or graphical representation will shoot to the right. This is because of the price competitiveness.
The graphical representation of the exporting country will only be affected if the importing country improves the quality of product and the technological applications, hence this will change the graph of the exporting country to incline towards the left because the importing country has an advantage over its commodities or products.
The combined graphical representation will be;
M- Represents the exporting country while X represents the importing country.
From the above explanation, it is evident that the level of imports and exports of a country is majorly influenced by the price competitiveness between the two countries. This is determined by the exchange rate and the level of inflation between the two countries, and the second influencing factor is the non-price competitiveness, this can be determined by the input in the production of a commodity i.e. which will increase its quality. E.g. technological application in the process of production