Relationship Between Real GDP and Exports
Real gross domestic product refers to a macroeconomic measure of economic output value; it is adjusted for inflation or deflation, which are price changes for commodities. It is a measure of economy done yearly and often known as constant price. Ascertaining real GDP over a year enhances comparison with previous years revealing comparisons for both value and quantity of goods and services. It is obtained by dividing GDP over by GDP deflator. Alulation of real GDP and nominal GDP helps governments to know the purchasing power and economic growth with a specific time span. For real GDP to be useful, it has to be incorporated with nominal GDP. The nominal GDP refers to the analysis of the value of goods and services that employ current prices as they are measured.
Real GDP takes into account changes in prices with time in the market. Positive inflation in the market will result in a lower real GDP as compared to nominal GDP. The real GDP helps a country to know whether they are making tremendous or low outputs (Jansen et al.,2016). A higher value suggests that the country’s output is high while allow value symbolizes low out, which is a concern to the government. The real GDP is calculated with the following formulae:
Real GDP = Nominal GDP ÷ R
R = GDP Deflator Exports of a country refer to those goods produced in that country but are consumed in a different country. The goods are usually transported to various countries by use of air, water or road transport, (Atkin et al.,2017). The goods and services are usually exposed because the country enjoys a competitive advantage in those relevant markets. Comparative advantage is also a factor contributing to a country’s exports. It refers to the goods they have a natural ability to produce in surplus for their consumption and others. Exports affect the country economy to a high level. The more a country exports, the higher the growth of its economy and the less the country exports, the lower the economy. Exportation determines a country’s competitive advantage in global markets. Furthermore, it increases the foreign exchange reserve for the country’s central bank; this is because the foreigners pay for goods and services in their own country’s currency. Having a large foreign currency reserve helps a nation boost the value of its currency in the global markets. It, in turn, ensures the lowering of the cost of their exports in foreign nations. Exports contribute to a country’s income; this is from the tax charged on the exports by the government of the country (Atkin et al., 2017). In order to boost exports, a country an come up with trade protectionism measures which include, use of tariffs which rises the price of imports. It, in turn, results in subsidies encouraging trade wars hence competition. A country an also negotiate for business agreements with fellow countries to ensure standardization of prices of goods and services exported.
| Real GDP | Exports |
| 0 | 50 |
| 100 | 100 |
| 200 | 200 |
The figures above represent the relationship between real GDP and exports in a country. The real GDP is the determinant factor hence lies on the horizontal axis. That makes it the independent factor. It can survive on its own without the contribution of exports. The export is the dependent variable; hence it lies on the vertical axis. Exports depend highly on real GDP to rise. The rise in exports of a country is a result of the increase in real GDP of the country for a specified period. Rise of the real GDP means that the country has a high output of goods and services in that period. For instance, if a country records an increase in the production of certain goods like milk, the country will have to export the surplus milk to create room for more production. As a result, the country achieves high economic growth through the incorporation of real GDP and exports.
Exports are a component of GDP, the relationship between the two results to a positive correlation unless it is with the real GDP that considers deviation in inflation. An increase in real GDP means that there has been an increase in the output of a country. In infers that the production of goods and services in a country has undergone improvement. As a result, it gives rise to the economic growth of the country (Mahmoodi, M., & Mahmoodi, 2016). Availability of increased output gives rise to a number of exports made by the country. The country will be able to produce enough resources to meet their need and meet other country’s needs. Through this, it brings a positive correlation as an increase in real GDP results to an increase in a country’s exports hence economic growth.
Likewise, a decrease in real GDP of a country will, in turn, mean that the country’s number of exports will reduce. It is owing to the fact that the country’s output would have significantly reduced. Therefore a country may be forced to import some goods and services to cater to their people’s needs. Importing goods and services that can be locally made would result in a drop in the country’s economy (Ajmin et al., 2015). It will be more beneficial to the other country’s selling them goods. Low exports by country would mean their competitive advantage in the global markets will be reduced, and they would no longer be able to make terms in business agreements.
Understanding the relationship between real GDP and exports is vital for the growth and development of a county’s economy. This knowledge will enable a country to work towards the achievement of a higher real GDP to increase the exports of a company. In the case where they achieve this, they will make adequate returns for the country. Moreover, it will have a competitive advantage of the rest of the countries as it will have the power to control the market (Mahmoodi, M., & Mahmoodi, 2016). It will enhance job opportunities for the country increasing income earned by individuals hence more revenue to the country. The government can also take measures to protect their exports pries by forming alliances with its neighbouring communities to maintain a high real GDP.
A country will also know the right amount of goods to produce, where that which is surplus is exported, and the rest is left for citizens consumption. The knowledge will enable the country to increase its foreign currency reserve, which in turn ensures that its currency is rated highly in the market. A country will learn how to analyze when their real GDP is about to fall so that they an input corrective measures before it is too late. Understanding the knowledge will enable a country to improve the living standards of its citizens. The real GDP and exports of a country are substantially related and should be analyzed often to equip the government with measures to rectify were necessary to achieve economic growth.
References
Ajmi, A. N., Aye, G. C., Balcilar, M., & Gupta, R. (2015). Causality between exports and economic growth in South Africa: Evidence from linear and nonlinear tests. The Journal of developing areas, 163-181.
Atkin, D., Khandelwal, A. K., & Osman, A. (2017). Exporting and firm performance: Evidence from a randomized experiment. The Quarterly Journal of Economics, 132(2), 551-615.
Jansen, W. J., Jin, X., & de Winter, J. M. (2016). Forecasting and nowcasting real GDP: Comparing statistical models and subjective forecasts. International Journal of Forecasting, 32(2), 411-436.
Mahmoodi, M., & Mahmoodi, E. (2016). Foreign direct investment, exports and economic growth: evidence from two panels of developing countries. Economic research-Ekonomska istraživanja, 29(1), 938-949.