A look at the relationship between economic growth and exports.
Readers Question: How would an increase of economic growth lead to an increase in exports? Also, does the increase only happen just in a fixed period of time, or increase in one period is likely to affect the future?
Economic growth doesn’t necessarily lead to an increase in exports, although it often does. I don’t fully understand the last question.
What determines export growth?
1. Demand from other Countries. Demand for UK exports, will depend on the rate of economic growth in other countries. The UK’s main export targets are EU countries. Therefore, if there was growth in the Eurozone we would expect an increased demand for UK exports. A recession would cause a fall in demand for UK exports.
- Note: UK exports do not depend on UK domestic demand.
2. UK Competitiveness. If the UK can boost general competitiveness and productivity then UK exports will become more competitive and should increase.
3. Exchange Rate. A depreciation in the Exchange rate should make UK exports more competitive and should increase demand. The exact effect of a depreciation depends on the elasticity of demand for exports.
Does an Increase in Economic Growth Cause increased Exports?
Often countries may experience export led growth. For example, China’s strong rate of growth is primarily caused by the strength of the Chinese manufacturing sector. In this case it is exports that are increasing economic growth, rather than the other way around.
However, Economic Growth Could increase exports. In a period of economic growth, firms have more money to invest. This investment could increase the long run productivity of the economy and therefore, could help boost exports. In a recession, firms will be more reluctant to invest and therefore, there will be a slower growth in exports.
In theory it is also possible Economic Growth could harm exports. This is because high growth could cause inflationary pressures making UK exports less competitive. Also higher growth may lead to higher interest rates. Higher interest rates could cause an appreciation in the exchange rate which makes exports less competitive.
There is not a perfect correlation between economic growth and exports. It also depends on the country. Some countries have exports as a major contributory factor in causing growth. Some countries like Japan have strong exports but low rates of growth. Other countries in the past like the UK, US have had strong growth, with pretty poor exports. Growth has been demand led, resulting in current account deficits.