Revision Focus: Export Performance

Explain the factors which may help to determine an economy’s export performance (20 marks)

A revision note on some of the factors that shape the growth of exports for an economy

Exports – sales of goods and services overseas; an injection into the circular flow and a component of aggregate demand. UK exports account for around 25% of AD in the UK.

Export performance might be measured by
% change in volume of exports (real value at constant prices)
% share of international markets / global trade
Profitability of the export sector

Factors influencing export performance:

Cost and price factors:

1. Unit labour costs: labour costs per unit of output, determined by wages relative to productivity. Thus wage inflation and productivity growth are becoming important
2. Average production costs – driven in the long run by exploiting increasing returns / economies of scale
3. Much depends on the scale of capital investment in export sectors – to drive unit costs down and to build the productive capacity for selling output overseas
4. Export subsidies – can reduce the overseas price of exports – a form of protectionism
5. Changes in the exchange rate
a. A depreciation reduces the foreign price of exported output (cet par) and increases the profitability of exporting
b. Assumes exporters change their prices when the currency moves
c. Appreciation has the opposite effect
d. Much depends on the price elasticity of demand for X and the elasticity of supply of the export sector (i.e. is there sufficient spare capacity)
6. Impact of tariffs and other forms of import control on the prices of exports

Non-price factors (i.e. non-price competitiveness)

1. Quality of product, reliability, after-sales service, design
2. Marketing and branding – ability to sell in different countries and different cultures
3. Importance of innovation, research and development in developing new products, extending brands

Export performance also depends on the rate of growth of demand in other countries e.g. an economic slowdown in the EU where 60% of UK trade flows would damage export growth (income elasticity of demand is a relevant concept here). Would UK exporters have the flexibility to be able to de-couple from a recession in the EU/USA and find new markets elsewhere (E.g. in emerging market countries?)