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Volatility of imports

Asked by essence83 | Oct 28, 2008 | University Level > Economics > Homework
essence83
essence83 asks:

Why are imports more volatile than exports?

etutor answers:

It is in fact not always the case that imports display greater volatility (largely because of forward purchasing contracts) but let us assume that they do. A distinction should be made between the VOLUME and VALUE of imports and exports; in the case of both X and M, the latter tends to show greater fluctuations, primarily because of exchange rate movements. Wherever a country (such as the UK) persistently records a current account deficit, the import value will by its very nature tend to show greater fluctuations than the export value, simply by virtue of the fact that it starts from a higher base. Export and import VOLUMES tend to adjust fairly slowly to exchange rate fluctuations, though this is eventually reflected in X and M values once they do. A study of the J-curve effect will be rewarding in this context.

The key reason for greater import volatility over time is changes in real income levels in the UK compared with the rest of the world. The major determinant of imports is real income levels. The UK has a high income elasticity of demand for imports, and so changes in UK real income levels (the result of the business cycle) have a significant impact on the volume of imports. By contrast UK exports are exported to a wide range of countries, and so the average imcome E of D for exports is rather lower, and hence the fluctuations are correspondingly less. It is also often argued that the UK's price elasticity of demand for imports is rather greater than the price E of D for its exports; if this is the case then imports will display greater volatility as prices changes over time due to exchange rate changes and other price factors such as relative rates of inflation.

Another key issue is that the UK is a net importer of oil, other energy, food and raw materials. All of these are subject to huge fluctuations in price, and so this is reflected in import volatility, as has been seen over the last two years.

I hope this is helpful.

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Zala
Zala
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