The popular quote “no man is an island” is not just applicable to individuals, it can also apply to every country. It is because no country is self-sufficient. At any point, there will be goods and services that a certain country will need others for. This is made possible through importation, the reason why it is possible for us to consume foreign products and services without the need to fly to another country ourselves.
The Philippines is importing goods and services from other countries
According to Investopedia, an import is a good or service bought in one country that was produced in another. It is one of the components of international trade, export being the other one. Needless to say, there should be a balance between these two, or else there will be a deficit that can negatively affect the Philippine economy.
Things to Know about Importation
Through the importation agreement of the Philippines with other countries, people are so used to seeing foreign goods and services on their local grocery stores. It almost involves zero hassle to gain access to such products nowadays.
It is easy to spot foreign goods even in local grocery stores
For example, the world is fascinated with Korean products for the past two years such as skincare, food, and entertainment. There is a huge demand from the Philippines for such products and are known to be selling like hotcakes in huge retail shops. Many foreign-owned businesses have also put up branches in the country because of this trend.
Basically, a country with imported goods means that there is an outflow of money from that country. Companies that do business locally make payments to overseas companies who are also known as the exporters. Having a high number of importation in the country can indicate a great domestic demand and a positive economic growth. More so if the products and services being imported are assets used for productivity such as machines, equipment, and technical assistance which can indicate robust economic activities. This will create a need for more Filipino workforce that will help to alleviate poverty in the country.
However, as previously mentioned, an imbalance in the imports and exports will cause a disruption with the country’s economy. Some of the negative impacts it can cause are the distortion of the country’s trade, badly influence the Gross Domestic Product (GDP), and devalue the country’s currency. This is why maintaining a good balance between these two components of international trade is crucial for any country, the Philippines included.
Effect on Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is a popular economic term being taught in Philippine schools. It refers to the broad measurement of a country’s overall economic activity. To calculate the GDP, importation value is one of the important components in doing so.
Simply put, the equation means that when the exportation value exceed the imports, this indicates that the country has a positive net exports or a trade surplus. This will largely contribute to the overall economic growth of the country because high exports means that the output level from the exporting country is high. These exported goods mainly come from local factories and industrial facilities in the country, which is highly correlated to job creation. This will decrease the unemployment rate, a major social services concern in many developing countries in Southeast Asia such as the Philippines.
On the other hand, when the exports are falling, then the value is negative which refers to a negative net exports or a trade deficit. While this may not immediately mean that the economy is bad, it is still important to keep the balance to have a healthy economy.
Effect on Currency and Exchange Rates
Finding out the relationship of the country’s imports and exports to the exchange rate involves a complex process. There are many factors involved such as the way the country’s currency is being valued. Also, there is a high correlation between the country’s exchange rate to its international trade performance. The exchange rate affects the country’s imports and exports which in turn affects the exchange rate—it is a constant loop between these components. Although, in general, a strong domestic currency will make imports more cheap while a weak domestic currency will make them more expensive.
Currency and exchange rates are affecting importation, and vice versa
To illustrate, for example the United States dollar were to strengthen against the Philippine peso to a level of 60 Php (to one U.S. dollar). Even if the exporter from the U.S. won’t increase the price of their goods, the price would still increase because of the higher exchange rate value. This will lead the Filipino importer to look for other options in European Union or other countries that may be cheaper than the one from the U.S.
When scenarios like this happen, and there are millions of transactions happening daily, the currency and exchange rates create a huge impact on the country’s importation, and vice versa. We can observe this kind of movement from advisory services of Central Bank or other legitimate sources.
Effect on Inflation and Interest Rates
These days, the rising inflation is the hot topic in many countries. Many consumers are being crippled by high inflation rates mainly because there are no significant increase in real wages, even in Metro Manila. There have been recent efforts which are obviously not enough with the fast increase in prices of products and services in the country.
The prices of goods, local or imported, are heavily affected by the inflation rate
Exports are highly affected by a high inflation rate because of its direct impact to the prices of raw materials being used for the production of goods. A continuous increase in inflation will contribute in the disruption of the international trade balance which will ultimately affect the country’s overall economy.
When it comes to importation, the high inflation rate will lead to a higher interest rate. Subsequently, a high interest rate will negatively affecting the country’s importation value because of its influence on the exchange rate, which was previously discussed. Currency and exchange rates can be a dealbreaker when it comes to international trade.
Bottomline
Many professional in the economic field are still debating to this day about the positive and effects of imports. Some are saying that a reliance on imported goods will create a gap in the demand of locally-produced goods. This will cause local workers to suffer and might cause more unemployment especially in the private sector. This might also hamper rural development as there will be less need for factories and industrial facilities to be built.
However, some economists and analysts are arguing that imports can help in enhancing the people’s quality of life by giving the consumers more choices and possibly cheaper goods they can buy. When natural disasters hit the country and there is an issue with locally-produced goods, imports are the way to go. Lastly, having these options available can also help in battling the crippling effects of inflation in the country.
The bottomline is, there are advantages and disadvantages when it comes to importation. The key is having the perfect balance to keep a healthy economy going. At the end of the day, it is always better to have options.
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