Meaning of Exports and Imports

The terms export and import are associated with international trade and are the most common and known terms of this form of trade. Export in simple term means sending of goods and services that are produced in a particular nation to be used and consumed in some other nation. Import on the other hand refers to the receiving of goods and services produced in some other nation for consumption in one’s own nation. 

The country or person who exports these goods and services is known as the exporter and the act of sending goods and services to another nation is exporting. On the other hand, the country or person who imports the goods and services from some foreign nation is known as importer and the act of receiving or buying goods and services from another nation is known as importing. 

The need for export and import arises because no nation is self-sufficient, thus in order to satisfy human needs and tap the market businessmen import goods from other nations to supply them to the local customers. Goods are exported because a particular nation may be rich in production of certain commodities which may lead to surplus after local consumption. Thus, in order to prevent wastage and make profits a businessman exports these goods to other nations who may require them. Also, international trade (export and import) takes place because a good may be produced at a cheaper rate in another nation when compared to the home nation or it may be more efficient. Thus, import and export takes place to ensure that all types of goods and services can be made available to customers across the globe in an efficient and effective way.

International trade has its own benefits, however the export and import practices, the limitations (quotas) of goods that can be exported and imported, the types of goods that can be traded and the duty charged on exports and imports varies from nation to nation. It depends upon the understanding between the nations involved and the policies of the governments. Since there are two different nations involved when an import- export transaction takes place, it involves two different currencies and hence the exchange rate between these currencies affects the import- export rate and amount by a great deal.

Exchange Rate

An exchange rate is a relative figure that is derived from two different currencies between which the exchange rate is to be calculated. Exchange rate is basically the price of one country’s currency in terms of some other currency. Thus, an exchange rate is said to have two components- domestic currency i.e. the currency of one’s own nation and the foreign currency i.e. currency of a different nation. Exchange rate can be quoted in two ways, directly (expressing foreign currency in terms of domestic) and indirectly (domestic currency expressed in terms of foreign currency).

Exchange rates are determined in the foreign exchange market wherein a large number of buyers, sellers and other participants are involved. The foreign exchange market remains open 24 hours a day for 5 days a week. Exchange rate can be of different types. The rate may be spot or forward exchange rate. Spot rate is the current exchange rate, however forward is the rate that is quoted today and transaction is entered into but the settlement takes place on future date that is decided upon today.The buying rate refers to the rate at which intermediators and dealers buy foreign currency, and the selling rate refers to the rate at which the foreign currency is sold.

The Relationship

Import and Export Rate are to a great extent affected by exchange rate fluctuations. An increase or decrease in exchange rate makes one currency cheaper and the other one costly. Thus, one currency appreciates and the other one depreciates. This leads to changes in demand and supply of a good or service abroad leading to a change in the quantity of imports and exports. Hence international trade is closely linked with exchange rate and its fluctuations.

There are 2 common terms that are often used in the foreign exchange market whenever we talk of international trade (exports and imports) and exchange rate together. These terms are –

Ask Price

Ask price refers to the price at which the importer buys goods and services from the bank. It is the price at which the bank sells imported goods and services to the exporter. It is the lowest price that the exporter (seller) is willing to accept in exchange for a good or service.

Bid Price

Bid price, on the other hand, refers to the price at which the banks buy goods and services from the exporter. It is the price at which exporter sells goods and services to the bank. It indicates the highest price that the buyer (importer) is willing to pay for that particular good or service

The highest bid price and lowest ask price are usually represented by major exchange platforms. The difference between the two is known as the bid-ask spread.