Importance of exports to the economy

Exports play an important role in the UK economy, influencing the level of economic growth, employment and the balance of payments. Lower transport costs, globalisation, economies of scale and reduced tariff barriers have all helped exports become  a bigger share of national income in the post war period. In 2011, exports of goods and services accounted for 19% of GDP (up from 14% in 1990). Imports accounted for 24% of GDP Рindicating that we have a current account deficit.
exports-percent-gdp

Importance of exports

  • Employment. Growth in exports can create employment. For example, the growth in car exports have created many job in car industries, such as BMW factory in Oxford, and Nissan in Sunderland. Traditionally export jobs have been in manufacturing industries – an important source of full-time employment, especially in industrial regions. In recent years, exports have become more diversified with a greater reliance on service sector based exports.
  • Economic growth. Exports are a component of aggregate demand (AD). Rising exports will help increase AD and cause higher economic growth. Growth in exports can also have a knock on effect to related ‘service industries’. For example, the success of car exports in Sunderland will help the local economy with local clubs and shops benefiting from increased spending. Similarly a fall in exports, during a global economic downturn can have a big negative impact on UK economy.
  • Current account deficit. The strength of exports has a large role in determining the current account deficit. In the past few decades, the UK has had a persistent current account deficit, which many attribute to the UK’s relative poor export performance.

UK-current-account-deficit

To reduce the current account deficit, the UK needs improved export performance

Exports to Europe account for approximately 55-60% of GDP. Though exports to non-EU countries are increasing at a faster rate than to EU countries.

What determines the level of exports?

  • Competitiveness. The relative competitiveness of exports will play an important role in determining the level of exports. If UK prices relative to other countries, the UK will lose out. Competitiveness is determined by factors such as unit labour costs, inflation, productivity, infrastructure and price of raw materials (see: factors that determine competitiveness)
  • Quality and value added of exports. For some industries like medicines, demand is price inelastic. Therefore, a change in price has less effect on demand. The key issue is the importance, quality and value added of the product.
  • Exchange rate. A depreciation in the exchange rate will make UK exports more competitive, but may contribute to cost-push inflation and will cause more expensive imports.
  • Long run productivity. (see: UK productivity)

How to increase the level of exports

  • Pursue a weaker pound (if in fixed exchange rate – devaluation).¬† A lower value of the pound makes exports cheaper, but this boost to competitiveness may prove temporary because of the increase in inflation. Also, if you rely on depreciation, exporters may have less incentive to cut costs and improve long-term productivity.
  • Supply side policies to improve competitiveness. Supply side policies could include both interventionist supply side policies (such as education and training) and market oriented supply side policies (e.g. reducing power of trades unions, reducing government regulation). This can enable increased productivity.
  • Private sector innovation. There is only so much the government can do to promote private sector productivity. Competitiveness depends on new technology and management techniques as much as any government policies.
  • Reduce tariff barriers. Lower tariff barriers can help increase trade. However, if you reduce general tariff barriers, some domestic industries may lose out because they can no longer compete. However, the theory of comparative advantage states overall economic welfare will increase – there will just be a shift within the economy.

Who does the UK export to?

top UK Exporters

Source: UK Trade Info

exports-eu-non-eu

What does the UK export?

The UK exports a diverse range of products. Despite the process of de-industrialisation, we still manufacturer many goods.

Some of the best performing export sectors in recent years include:

The top Products manufactured by category include:

UK exports graphic

source: Guardian

By comparison household consumption is still a more important part of GDP

consumption-percent-gdp

This compares to household consumption which accounts for around 60% of GDP.

Government spending

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One Response to Importance of exports to the economy

  1. komane July 27, 2013 at 11:58 am #

    what will be the importance of exports of an individual firm it a country’s economy?