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What’s it: Import means purchasing goods and services from international trade partners. For example, Japanese car manufacturers ship and sell their products to the United States market. So, from an American perspective, they are importing cars. Meanwhile, car manufacturers export cars.
Imports arise for several reasons. For example, goods are not produced in the domestic market even though there is a demand for them. So, we have to import them from other countries.
Take Indonesia as an example. Indonesia’s geographical factors do not allow it to produce wheat. However, Indonesians need grain to make bread, which is widely consumed. Therefore, Indonesians had to supply wheat from abroad.
In addition to availability issues, imports are also affected by prices (inflation), exchange rates, changes in income, and economic growth.
Import vs. Export
Imports are the opposite of exports, representing foreign buyers’ demand for domestic goods and services. When we export, we sell and ship domestic goods to overseas sellers.
For example, Indonesia produces palm oil. In addition to meeting domestic demand, palm oil companies sell their products to buyers in China and India and ship them there.
From the palm oil company’s perspective, the transaction will be an export. In contrast, buyers in China and India view their purchases as imports.
Exports and imports are common in the modern economy. Some goods may not be available in the domestic market due to production limitations, or they may be available but at a higher price. Thus, buying from abroad is an alternative to supplying the domestic market and getting cheaper ones.
Trade balance
We call the difference between exports and imports the trade balance. If we export more than we import, we run a trade surplus. On the other hand, if we import more than we export, we run a trade deficit.
The trade deficit causes the domestic currency to depreciate, ceteris paribus. That’s because we need more foreign currency to pay for imports than we get from exports.
In addition, high imports create dependence on supplies from abroad. So, when foreign producers raise their prices, we are forced to buy them more expensively.
And in the aggregate, the inflation rate represents the price increase. Thus, through imports, inflation in partner countries eventually spreads to the domestic economy (referred to as imported inflation).
In addition, the high dependence on imported supplies makes domestic producers less developed. Instead, it increases production, job creation, and income in partner countries.
For this reason, some countries spur their domestic production to substitute imports. This policy is vital; in addition to reducing imports and their negative effects, such as imported inflation, increasing local production will create more jobs and income in the country.
Types of imports
Imports are differentiated in several ways. For example, based on what we buy they are divided into two:
- Goods represent tangible products such as finished products, raw materials, capital goods, and intermediate goods. They may be for immediate consumption or for further processing.
- Services represent intangible products. For example, when we use a service provided by a consulting firm abroad, we import the service.
Then, in another classification, we categorize imports based on the goods we buy:
- Raw materials become inputs in production to be processed into intermediate or finished products.
- Capital goods such as machinery and equipment help us process raw materials into output.
- Intermediate or semi-finished goods require further processing to become final goods for us to consume, such as aluminum plates into car frames.
In addition, we can also classify imports into two types:
- Industrial goods, such as raw materials, intermediate goods, and capital goods, are not for final consumption.
- Consumer goods, such as fresh fruit, processed foods, and cars, are available for final consumption.
There are several standardizations for classifying the goods and services we import. They include Harmonized System (HS) codes, Standard International Trade Classification (SITC), and Broad Economic Categories (BEC). And if you are more interested in the import data between countries worldwide, you can dig deeper on the UN Comtrade website.
Factors affecting imports
We import for several reasons. The two main ones are:
- Availability
- Price
Then, in addition to the two factors above, other factors also affect imports, including:
- Aggregate demand
- Domestic income
- Exchange rate
- Government policy
Availability. We import because the goods are not produced by local producers, or they are produced but at a higher cost. Thus, local goods are more expensive than foreign goods. As a result, we prefer imported goods over local goods. This also applies to the quality aspect, where we import to get better quality goods.
Price or inflation. Lower prices make imported goods cheaper, prompting us to increase our demand for them. And for the aggregate figure, the price increase is represented by the inflation rate.
For example, when the partner country’s inflation rate is lower than the domestic inflation rate, their products are cheaper than domestic ones. As a result, we increase the demand for their products to get lower prices, increasing imports.
Aggregate demand. Household consumption, business spending, and government spending were partially met by imported products. Thus, changes in their demand also affect imports. In addition, such changes may be influenced by changes in income, profits, or tastes and preferences.
Domestic income. When income increases, we increase the demand for imported products we like, such as luxury goods. The opposite applies.
Changes in income and demand are represented by changes in GDP for aggregate figures. When GDP increases, the economy grows, creating more jobs and income. This situation often leads to higher demand for imported products because not all demand is met from domestic production.
Exchange rate. Appreciation makes imported goods cheaper, boosting demand for them. Conversely, depreciation makes imported goods more expensive because the domestic currency is less valuable when exchanged for foreign currency, lowering the need for imports.
Government policy. Trade liberalization encourages more transactions, including imports. On the other hand, trade protection, such as increasing tariffs, reduces imports.
Impact of imports on the economy (positive & negative)
Imports affect the economy in several ways, including competition, consumer choice, economic growth, exchange rates, and inflation.
Competition. Imports present competition in the domestic market. Thus, competition involves not only local producers but also imported products. Then, more imports also increase supply in the market, pushing market prices down. That ends up lowering profitability.
Consumer welfare. Imports allow us to get the things we need and want. Some goods may not be produced by domestic manufacturers. In addition, imports also increase our choices, making it possible to get cheaper and higher quality.
Gross domestic product (GDP). Imports have an indirect impact on GDP. Indeed, the high dependence on imports keeps the domestic industry from developing. As a result, it hurts business activity, jobs, and income creation in the economy.
However, an increase in imports may also indicate a growing economy. Economic growth pushes up import demand because we have to buy some goods from abroad.
Moreover, importing capital goods such as machinery and equipment contributes positively to long-run output. As a result, the economy accumulates more capital, increasing potential output.
Exchange rate. An increase in imports increases the demand for foreign currency. We must sell domestic currency to get foreign currency to pay for the goods we import. As a result, the domestic currency’s price falls (depreciates) relative to foreign currencies, ceteris paribus.
Inflation rate. Inflation rates in partner countries can spread to the domestic economy through imports, which we call imported inflation. This impact is significant when we rely heavily on imports to meet domestic demand or when the goods we import are critical inputs in most industries. A good example is oil.
