The Gross Domestic Product (GDP) is defined as the market value of the final services and goods which are produced within an economy annually basis. GDP can be compared to the previous years in order to provide information about whether a country is producing more output and expanding or producing less output and contracting. The net exports are given by subtracting the total exports of a country minus the value of the total imports. The relationship between net exports and GDP has been studied and various theories have been provided to show whether there is a positive or negative correlation between net exports and GDP. This paper analyzes the relationship between GDP and net exports by analyzing data from various developing countries between 1997 and 2017.
The GDP is used to measure the health of an economy; it is one of the most important economic data of a country. GDP is important for business owners. Additionally, international trade is a component of GDP and is a significant component of a nation’s economy. One of the important aspects of international trade is net exports. Net exports are calculated by taking goods exported minus goods imported. A positive trade balance would occur when the value of exports exceeds the total value of imports. A negative trade balance is experienced among most developing countries where the value of imports exceeds the value of exports.
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Data and Graph Analysis
The analysis of the relationship that exists between Net Exports and Gross Domestic Product was analyzed by taking data retrieved from World Bank regarding world development indicators (“World Development Indicator”, 2019). The data were analyzed in terms of imports, exports and the GDP. The net exports were calculated and a graph of the GDP versus the net exports was created. The relationship between the GDP and net exports was considered to be generally positive for the scatter plot created. The graph in figure 1 is the scatter plot draw for several developing countries where data was taken between 1997 and 2017. A general look at the graph shows that most countries that have low GDP have negative net exports while most countries that have a higher GDP have positive net exports. The data thus indicates that a positive trend in GDP and net exports.
Figure 1: GDP vs. Net Exports in Developing Countries
The study and analysis of GDP and Net Exports in different countries are important for the analysis of economic development. There are several contributors to economic growth and development and one of the most important questions is how countries can realize economic growth. Several theories have been proposed which indicate how countries can realize economic growth. The major theories include growth-led exports growth, export-led growth, and the theory of international trade.
Export-Led Growth Theory
Export-Led Growth is a theory that observes that the growth of exports is a significant factor in determining growth in the economy. The theory encourages that countries should continually engage in producing goods and exporting them in order to realize significant growth. Export-led growth can be applied in developing countries where they can identify a specific niche in the world economy where they can find a certain type of export. Export-led growth can lead to increase in GDP and economic improvement because it enables a country to balance its investments and surpass liabilities when the materials for trade exists. Additionally, growth in exports can fuel greater productivity and this can result in more exports and thus fuel a higher spiral cycle (Hameed et al., 2012). The strategy of export-led growth emphasizes on expanding a country’s exports in order to fuel economic growth.
Understanding the trade surplus can also be used to indicate why there is a positive relationship between the GDP and net exports. The formula for net exports is taken by subtracting the exports minus imports. A nation would have a trade surplus when the imports are lower than exports. Such a situation would lead to economic growth since more exports occur from more output from industrial facilities, factories, and an increase in the number of employed individuals. A higher amount of exports also means that there is a flow of funding into the country and this represents consumer spending which results in economic growth.
Growth-Led Exports
Growth-led exports is a theory which indicates that a unidirectional relationship exists between economic growth and exports and not the other way round. The theory observes that economic improvement further leads to a rise in exports and not vice versa. Such an association can be linked to the initial development of a country’s domestic economy. Growth in the domestic economy can lead to a reallocation of existing resources, labor training effects, and economies of scale which ultimately lead to further exports (Hameed et al., 2012).
The export led growth and the growth led exports are different in their interpretation of the relationship between net exports and GDP. Those that observe the export-led growth theory observe a positive relationship between the GDP and net exports. The growth-led export contradicts such a view by indicating an inverse relationship where higher GDP would cause growth in exports. According to Ronit and Divya (2014), many developing nations thus face a dilemma where they should decide to focus their economies on export activities or focus most of their activities on promotional of economic growth and the result will be an increase in international trade.
International Trade Theory
The theory of international trade observes that international trade and trade openness contributes significantly to a country’s economic progress. It observes that there can be significant gains from specialization. A country that engages in foreign trade is expected to benefit from efficient resource allocation and specialization. Foreign trade enables a country to have new technologies and new skills which can lead to greater productivity. Additionally, foreign trade can lead to a more efficient allocation of resources, widening of knowledge, transfer of technology, and employment by jobs (Vernon, 2017). Such a foreign trade can help developing countries that could be somewhat behind in terms of economic growth.
The above analysis and theory show that there should a positive relationship between GDP and foreign trade. Several theories support this which observe that economic growth lead to a growth in exports and growth in exports can result in an improvement in economic growth. The theory of international trade also observes that foreign expansions lead to several other factors that lead to economic growth. A trendline that can be drawn in figure 1 would be a general positive trendline indicating a positive relationship between the GDP and net exports.
Additional Observations
Additional observations from the scatter plot in figure 1 also show that there were some plots which were outside the positive trendline. Some plots had positive net exports with significantly low GDP while other plots had negative net exports with significantly high GDP. Additionally, most countries were observed to be in the mid-range in the balance of net exports and GDP. The analysis of the graph thus shows that the relationship between import, exports, and the GDP is not the similar among all developing countries. While most countries experienced positive GDP and the net exports, some other countries may experience negative GDP and net exports.
The causality relationship between imports, exports, and the growth rate was also observed by Yüksel & Zengin (2016). The authors determined the relationship between imports, exports, and growth rate. 6 developing countries were studied with annual data from 1961 and 2014. The results of the analysis showed that there was no relationship between the variables of imports, exports, and GDP in Brazil and Mexico. The study also showed that there was a higher growth rate in a country like Argentina. Additional observation was also made where there was a positive relationship between import, exports, and growth in China and Turkey. The results of the study also concluded that the relationship between exports, imports, and growth rate is not similar among all emerging economies.
The implication for the above observation is that developing countries should be more willing and open to foreign markets in order to foster economic growth. Developing countries can strive to engage in practices that improve international trade such as removing restrictions on international trade. A country opens up to international trade can thus expect significant growth in both its exports and imports. These signify an increase in consumer spending and an increase in economic output which result in an improvement of the GDP.
Conclusion
The analysis of the data showed that there was generally a positive relationship between GDP and net exports. It can thus be inferred that exports lead to growth in GDP and vice versa. The observation aligns to the export-led growth theory, growth-led exports theory, and the international trade theory. The theory of international trade observes that an improvement in foreign trade will lead to an exchange in knowledge and technology which will be used to boost the economic growth of a country. The study shows a need for developing countries to strive to improve their exports and this can ultimately result in improvement in GDP.
References
Hameed, I., Iqbal, A., & Devi, K. (2012). Relationship between exports and economic growth of Pakistan. European Journal of Social Sciences , 32 (3), 453-460.
Ronit, M., & Divya, P. (2014). The relationship between the growth of exports and the growth of gross domestic product of India. International Journal of Business and Economics Research , 3 (3), 135-139.
Yüksel, S., & Zengin, S. (2016). Causality relationship between import, export and growth rate in developing countries.
Vernon, R. (2017). International investment and international trade in the product cycle. In International Business (pp. 99-116). Routledge.
World Development Indicators. (2019). Retrieved from http://databank.worldbank.org/data/source/world-development-indicators
