INFLATION AND ITS IMPACT ON IMPORTS AND EXPORTS:

Inflation is important because of its dominant affect on every aspect of the economy. Such one aspect tends to be balance of payments. A country to be stable should have a balance of payments surplus. A surplus is achieved by the countries with three characteristics. They are 1) Self sufficient goods circulated in the economy without any scarcity.2) Not at all dependent on imports.3) A good export base. With those three features, the country is also said to be called a self sufficient country as it can live without any dependence on the foreign countries and their goods.

Now, inflation being a factor that affects the balance of payments, the government is as much worried to keep it in control. So, let us understand the impact briefly.

The possible end effect of inflation tends to be price rise with the increase in the money flow in the economy. Increase in the money flow, devalues the currency in a country. That means, the rupee degrades against the foreign currency such as dollar, yen, pound, euro etc. That means, if a dollar costs Rs. 50 in the normal conditions, it costs Rs. 100 when during the inflation.

So, if the export of 10 pens to the USA which costs Rs. 50 each, then it amounts to a total of Rs. 500 i.e.; $10 of the transaction. Now, due to the devaluation of the rupee, there is an increase in the price to Rs. 500 each and the dollar cost also increase to Rs.100. So, now 10 pens cost Rs. 5000 that is $50. Thus, the cost of exports increased. The increase in the cost of exports has two implications. 1) It crucially increases the profits of the exporter and therefore has got some significance in developing the balance of payments surplus. 2) The inflating costs of exports may mould the buyers to the other countries’ goods whose costs seem comparatively lower.

Coming to the first effect, the exports dump more money into the economy which indirectly bursts out the already existing inflation, which cannot be considered good either. The second effect reflects a plight of negativity already as the exports plummet due to the escalating prices. Thus, inflation in the long term has negative effects on the economy.

Imports play an important role in the developing countries like India as the technology, raw materials for the manufacturing companies, industries etc, oil and other valuable products are imported from abroad. If the rupee value devalues that means we have to pay Rs. 100 per dollar instead of Rs. 50 as before. This makes the imports costlier which makes it difficult for us to survive. This affects the manufacturing sector the most and leaves the economy in stagnation. The general needs of the public cannot be met. There would be a scarcity of everything. Thus, long term inflation brings in darkness in the economy.

Though, epidemic inflation results in the stagnation of the country, creeping inflation (slight inflation) always benefits the economy.