How does inflation affect exports & imports?

Many of us understand what inflation means. Let’s  see how it’s effecting standard of living which degrades our needs and wants and why does the ” Chinese Devaluation of the Yuan” happen in 2015?

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If the Exports of an economy are strong and promising , then the foreign assets grow. Stronger ForEx reserves appreciate the currency in the global atmosphere. After the amendment of LPG 1991, the domestic currency further spur Price stability in the economy. As exports flourish based on a good infrastructure and manufacturing base, the cost of production declines gradually. Inputs gets easily available and in turn increase profitability.

Inflation means decrease in currency value of the country. Higher the inflation, weaker will be the buying power and dip in it’s comparative value.

Exporters tends to export his goods to the foreign importers for the highest bid/price as much as possible in the duration of inflation due to decrease in currency value. For example take Indian rupee value is decreased to INR 67 from INR 63 per US dollar. Now the exporter tendency to increase his experts will be more as he can sell the goods for more cost to the foreign importers. we can say inflation is directly proportional to exports.

As far as imports are concerned, the scenario is the other way around. Importers tends to import  goods from the foreign exporters for the lowest bid/price as much as possible in the duration of inflation due to decrease in currency value. Take the same example as discussed above. Now the importer tendency to increase his imports will be less as he have to buy the goods for more cost from the foreign exporters.

Hence we can say inflation is inversely proportional to exports. This inflation incurred due to demand pull, cost push, expansion of bank credit, increase in population, over expansion of money supply, black money etc.

A positive inflation (creeping/walking inflation)  is necessary for an economy to increase GDP and maintain balance of payments. Due to positive inflation Debtors, Entrepreneurs, Farmers, Upper income class are benefited. Due to running and galloping inflation Creditors, Fixed income class, Consumers, Middle and Lower income class are getting affected.

At this moment , inflation is positive and stagnant. we have to observe how RBI reacts in future and take remedies.

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