One way this adjustment can take place is if the dollar depreciates, making imports more expensive for Americans and exports cheaper for foreigners. If trade deficits are sufficiently large and unsustainable, economists believe that they will be associated with a weakening dollar at some future date.
The U. As a result, they have been willing to finance growing U. While the deficits have reached unprecedented levels, the dollar has shown no consistent signs of weakening over this decade Chart 2. Oxford Reference. Publications Pages Publications Pages. Recently viewed 0 Save Search.
A Dictionary of Human Geography. Find at OUP. Read More. Your current browser may not support copying via this button. When this scenario is multiplied by millions of transactions, currency moves can have a drastic impact on a country's imports and exports.
Inflation and interest rates affect imports and exports primarily through their influence on the exchange rate. Higher inflation typically leads to higher interest rates. Whether or not this results in a stronger currency or a weaker currency is not clear.
Traditional currency theory holds that a currency with a higher inflation rate and consequently a higher interest rate will depreciate against a currency with lower inflation and a lower interest rate. According to the theory of uncovered interest rate parity , the difference in interest rates between two countries equals the expected change in their exchange rate. So if the interest rate differential between two different countries is two percent, then the currency of the higher-interest-rate nation would be expected to depreciate two percent against the currency of the lower-interest-rate nation.
However, the low-interest-rate environment that has been the norm around most of the world since the global credit crisis has resulted in investors and speculators chasing the better yields offered by currencies with higher interest rates. This has had the effect of strengthening currencies that offer higher interest rates.
Of course, since these investors have to be confident that currency depreciation will not offset higher yields, this strategy is generally restricted to the stable currencies of nations with strong economic fundamentals. A stronger domestic currency can have an adverse effect on exports and on the trade balance. Higher inflation can also impact exports by having a direct impact on input costs such as materials and labor. These higher costs can have a substantial impact on the competitiveness of exports in the international trade environment.
This report is released monthly by most major nations. The U. Department of Commerce and Statistics Canada , respectively. These reports contain a wealth of information, including details on the biggest trading partners, the largest product categories for imports and exports, and trends over time. Fiscal Policy. Advanced Forex Trading Concepts. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
These choices will be signaled globally to our partners and will not affect browsing data. Suppose two countries have an equal amount of labor and land endowments. Yet one country has a skilled labor force and highly productive land resources, while the other has unskilled labor and relatively low-productivity resources. The skilled labor force can produce relatively more per person than the unskilled force, which in turn impacts the areas in which each can find a comparative advantage.
The country with skilled labor might design complex electronics, while the unskilled labor force might specialize in basic manufacturing. Likewise, the efficient use of natural resources can mean relatively more or less value extracted from a similar initial endowment. Barriers to trade also impact a country's balance of exports and imports.
Policies that restrict imports or subsidize exports impact the relative prices of those goods, making it more or less attractive to import or export. For example, agricultural subsidies might reduce farming costs, encouraging more production for export. Import quotas raise prices for imported goods, which reduces demand. Nations that restrict trade through high import tariffs and duties may run larger trade deficits than countries with open trade policies.
This is because impediments to free trade may shut them out of export markets. There are also non-tariff barriers to trade. A lack of infrastructure can increase the cost of getting goods to market. This increases the price for those products and reduces a nation's global competitiveness, which in turn reduces exports. Investment can work to reduce these barriers. For example, investments in infrastructure can increase a nation's capital base and reduce the price of getting goods to market.
Demand for particular products or services is an essential component of international trade. For example, the demand for oil impacts the price and the trade balance of oil-exporting and oil-importing countries alike. If a small oil importer faces a falling oil price, its overall imports might fall.
The oil exporter, on the other hand, might see its exports fall. Depending on the relative importance of a particular good for a country, such demand shifts can have an impact on the overall balance of trade.
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