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What Is the Relationship between Exports and Economic Growth?
The link between exports and economic growth has been closely studied by economists, largely because of the results achieved by export-led growth in some countries. The theoretical basis for achieving growth through the development of export industries is that competition on an international scale requires efficiency, innovation and investment, all of which may encourage economic growth within a country. The development of export markets can lead to economies of scale as industries expand and develop their markets overseas in response to foreign demand. Industries may promote world-class skills in product design, research and development and marketing, which increase their export capacity and promote economic development in their own country. The promotion of international trade leads to free trade policies that promote exports from the country and attract direct foreign investment into local industries.
Vigorous export-led growth has been undertaken in a number of Asian countries by creating conditions in which exporters can develop their business. In some cases, special economic zones or free zones have been set up with favorable regulatory and tax incentives combined with modern infrastructure. Companies operating in certain sectors, such as export-oriented manufacturing or high-technology businesses, have been permitted to operate in such zones. Such locations have provided a setting within which enterprises may attract foreign investment and develop efficient and innovative processes to compete on an international level. These zones may offer reductions or exemptions from customs duties on raw materials and equipment that are imported for incorporation into goods for export.
The development of export industries may enable a country to increase specialization in those activities in which it has a comparative advantage and increase total production in the economy as a result. By increasing markets for their goods, enterprises may increase their production levels and take advantage of economies of scale to increase efficiency. Technology developed or acquired for competition on an international scale may be used domestically to increase efficiency of production and lower costs. Another link between exports and economic growth is, therefore, the encouragement of specialization and more efficient use of a country's resources.
Government policies developed to increase international trade may have beneficial effects on the economy, once again linking exports and economic growth. The low tariff policies agreed on with other countries may mean that low-cost imports enter the domestic market, increasing choice for consumers and spurring domestic industries to lower costs and increase efficiency. The general reduction in the cost of goods and the growth in national income can lead to an increase in the population's well being and an increase in tax collections for the government. This enables government investment in infrastructure to further increase international competitiveness. Government policy may, therefore, be directed toward increasing exports and economic growth by creating a favorable business environment.
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![A number of Asian countries have created favorable conditions for exporters to foster economic growth.]()
By: ButchA number of Asian countries have created favorable conditions for exporters to foster economic growth.
Discussion Comments
@SarahGen-- That's very interesting, I had never thought of it that way. Exports negatively impact life standards in other ways too. It can lead to very rough conditions for workers with long hours and low wages. It can even lead to child labor. But the thing with economic growth is that it doesn't care about social matter. The goal is to cut costs and increase profits. Economic development is a whole another matter which concerns itself with sustainable growth and social welfare.
Exporting goods is obviously a most for any country that wants to benefit from trade. But I think that if it is not done right, there can be downsides as well.
When I lived in the Balkans for a while, I encountered an issue in which the government was exporting a lot of produce to European countries. But they were exporting so much that not much was left for people in the country. So while the government made money on exports, produce prices were going up in the country, making it difficult for people to buy what they need.
We all know that high prices and low spending is not good for the economy. It has numerous effects on inflation and reduces and standard of living.
So while exports are an economic advantage, it should not turn into a disadvantage with the wrong policies.
At the very basic level, exports increase production in a country and create more jobs. So as people produce and export goods, they will expand production to meet demand from the international market. Every country has a comparative advantage in a good. The good can be produced more efficiently and at a lower cost than other countries. This makes that good a valuable export on a global scale.
Many developing countries in South America have been using this model. There is a demand for a variety of produce like fruits from these regions in North America. And this has provided a steady stream of income for these countries which they can then invest for more economic growth. Many people have found a source of income this way as well.
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